How will Xi weave private capital into China’s economic transformation to secure real growth?
Beijing has begun re-engaging the private sector by providing easier credit and reassurances ahead of the 19th Party Congress
China’s decision last weekend to selectively free up lending of commercial banks is the latest sign of the government’s pressing need to re-engage its robust private sector at a time when economic growth is slowing and state firms are piled with debt.
Beijing’s revived advances are not new, but they are critical to restoring the confidence of Chinese private entrepreneurs, who have held back domestic investments and moved their assets abroad in the last few years, and more recently, been rattled by government probes on some high-profile tycoons and their overseas investments.
“The core problem with the Chinese economy is the disappearance of private investment in the past few years ... China cannot achieve self-sustained growth only with the state sector,” said Tao Dong, senior adviser and economist with Credit Suisse Private Banking Asia-Pacific.
The impact from shrinking domestic private investment and profit is worrying as the private sector contributes to more than 60 per cent of China’s economic growth, half of the nation’s tax receipts, and generates over 80 per cent of jobs. The sector’s growth however, peaked out in 2011 and plunged in 2016 to a low level that has extended into 2017.
As President Xi Jinping prepares to further consolidate his power in this month’s 19th Party Congress, analysts said he would be closely watched on how he would weave private capital into China’s economic transformation to deliver real growth that fosters the ruling legitimacy of the party.
“The Communist Party realises a dynamic private sector has become a key source of employment, economy and social stability. Instead of playing down the private sector, the party must find a way to incorporate them [the sector] and charter their ways, to help consolidate its legitimacy and governing capacity,” said Dr Yu Jie, head of China Foresight with the London School of Economics.
She said Xi was expected to make this a major topic in the upcoming party congress, accompanied by more directives to support the private sector, in addition to recent measures announced.
The People’s Bank of China (PBOC) announced on September 30 that it would cut the required reserve ratio, or the amount of money it requires banks to keep at the central bank, for banks that met the requirements to lend to small businesses and the agricultural sector. These banks have three months to work on their target customers before the reserve cut takes effect from 2018.
The selective cut, Tao said, was an innovative monetary policy that intends to steer liquidity into the real economy, particularly providing funds for private firms and start-ups, instead of financial speculative sectors.
Easier credit aside, Beijing has also tried to reassured its support to businessmen in an unprecedented directive that stresses guidance and protection over entrepreneurship on September 25.
The directive for the first time raised the idea of setting up a mechanism to “compensate the losses of entrepreneurs due to changes in government planning or policies”, in addition to the usual promises to protect their properties, legitimate rights, and ensure fair market competition.
“Beijing wants a “new/particular” type of entrepreneurship which follows both the capital and shows loyalty to the party ... Like the PLA, [in which] the party controls the gun, for enterprises, it is the party that controls the money,” Yu said.
Zheng Zhigang, a professor of the Financial School of the Renmin University of China, said the directive showed “a clear break away from the planned economy thinking pattern”.
“After such an eventful year, the authorities knew Chinese entrepreneurs were desperate for some reassurance,” he said.
Jason Cheng, a partner with the law firm, Dentons, said if put into practice, the mechanism would address a key concern of businessmen, as he had seen numerous disputes in the past few years stemming from changes in planning, policy, or personnel in the government.
For instance, a client was recently barred from expanding his industrial park by the local city government in eastern China as land prices in the area have surged five times after a new line of the high-speed railway began operation.
As a result, the client’s verbal agreement of the plot size and the land price with the local mayor was overthrown, Cheng said.
“This kind of thing is so common in the mainland, that entrepreneurs have to live under a changing climate, and not to mention, surviving the [business] environment that has actually deteriorated in the last five years,” he said.
Instead of providing a consistent legal system and firm enforcement of rules to protect their interests, Cheng said Beijing had shifted between supporting and restraining the development of the private sector, based on its own needs.
The recent reserve cut and directive come after close to a year of government crackdown and controls to eliminate over-leveraging and risks in the financial system, which also saw private tycoons being taken away for investigation.
Xiao Jianhua, chairman of the Beijing-based conglomerate Tomorrow Group and Wu Xiaohui, chairman of one of China’s most active overseas asset acquirers, Anbang Insurance Group, remain out of contact, after being taken away by authorities in February and June respectively. Nothing has been disclosed so far of what wrong doings they have committed, or what kind of investigation they are assisting.
“Some people are starting to lose faith, as it seems like a back and forth cycle,” said Cheng.
For now, it is hard to tell the extent to which private businesses will benefit from the directive, which is nonetheless, seen as a step forward.
“The issuance of the directive marks a significant opening up of the mind (by the party) ... However, action speaks louder than words, and the impact brought about by one case can be much more profound than a thick pile of documents,” said Liu Shengjun, president of the China Financial Reform Institute, a Shanghai-based think tank.
To date, China’s private sector has had a lacklustre year, even though overall economic growth in the country is beating expectations of foreign investors on the back of a strong profit rebound by state-owned enterprises (SOEs).
Year-on-year industrial profit growth of SOEs rose 44.2 per cent for the first seven months, while growth of privately-owned enterprises (POEs) was at 14.2 per cent.
UBS analysts attributed the reversal to SOEs having benefited from macroeconomic policies on “both supply and demand side” in a note issued in late August.
State firms dominate upstream industries such as raw materials and energy, which makes them the biggest winners of the “supply-side” reforms to reduce capacity and improve commodity prices.
And when the government bolsters property and infrastructure through policy and credit support, state firms were favoured over their private rivals in winning contracts, and securing bank loans, the note said.
“We can see SOEs, which dominate the upstream industries largely benefiting from the rebound of commodities’ prices, while factories of POEs are closed down as the authority pushes for capacity reduction or environmental protection,” Tao said.
What’s more, private companies and their investments have been scrutinised by intrusive state agencies in the past year, often leaving them with no available recourse but to give up the market to SOEs.
To thrive, an increasing number of private companies have looked abroad for opportunities in the recent years. But their overseas ambitions have hit a wall since late 2016 when Beijing began to curb capital outflows.
Entrepreneurs were told to suspend “irrational” asset acquisitions in overseas markets, and instead invest in the domestic market, and join party-led missions including buying stakes in SOEs to help them reform.
In June, China’s banking regulator ordered banks to assess their exposure to offshore acquisitions by the most active private acquirers including Dalian Wanda Group Co, Anbang Insurance Group, HNA Group and Fosun International.
Two months later, authorities including the State Council – China’s cabinet – issued a guideline that classified outbound investments in property, film industry and other forms of entertainment under the “restricted” category.
In response, firms such as Wanda, the property giant controlled by China’s former richest man, Wang Jianlin, scrapped several outbound deals and shifted its focus to poverty alleviation and investing in the home market, in line with the party’s prescription.
With private companies scaling back their overseas ventures amid the crackdown on capital outflows, the sovereign wealth fund China Investment Corporation (CIC) has emerged as the country’s champion of overseas real estate investment.
According to figures from data provider Real Capital Analytics (RCA), Chinese investors are involved in 11 acquisitions of investment property assets. The deals total around US$16.5 billion.
CIC’s acquisition of Blackstone’s Logicor portfolio alone accounts for US$13.8 billion, or about 83.4 per cent of the outstanding total value.
“Trump may have been wrong in many things. But he is right about “animal spirits” ... It is the only way that all economies including the US and China can get out of the trouble ...,” said Credit Suisse’s Tao.
“Hopefully, after the party congress, President Xi will face a very different political environment from Trump, with bigger space to exert himself, to restore confidence of businessmen, and to start a new cycle,” he said.