China’s private sector needs reform of state lenders

  • Businesses may have modernised the economy, but they now face a perfect storm amid the US trade war and President Xi Jinping has reached out to them
PUBLISHED : Wednesday, 24 October, 2018, 6:55pm
UPDATED : Thursday, 08 November, 2018, 3:58pm

The private sector has played a crucial role in modernising China’s economy. Yet, businesses continue to be treated like second-class citizens. That state-run lenders have usually favoured lending to government-owned enterprises over private firms has been a long-standing issue. The problem has been made worse in recent years with the tightening of credit by the central government in its attempts to deleverage risks within the financial system.

Now, with the US-launched trade war against China, the private sector is especially squeezed. Faced with this perfect storm, Beijing is taking a more proactive role in promoting and protecting the sector. That, at least, is the message from President Xi Jinping in a letter to business owners published by state media that contains some of his most encouraging words about the private sector.

Xi’s letter follows a high-profile interview by state media with his economic policy tsar, Liu He, who explicitly criticised state lenders for refusing to take on credit risks by giving preferential treatment to state-owned enterprises at the expense of private firms. Interestingly, while on a tour of the northeastern rust-belt region last month, Xi offered similar support to state-owned enterprises, saying those who “badmouthed” the state sector were wrong.

Xi urges China to become more self-reliant amid US trade war

Beijing is trying to achieve a difficult balancing act – to accommodate both the state and private sectors in a slowing economy, and to encourage equitable lending without over-leveraging. To borrow an analogy made by a US economist, it’s like trying to overhaul the engineering of a jet in mid-air; surely not an enviable job. Of course, it is far better for Beijing to acknowledge such systemic problems confronting the private sector, but it remains to be seen how far it is willing to put its money where its mouth is.

Credit is the lifeblood of businesses. This means reforming state lenders to adopt professional risk assessment and loan-making. At the start of the decade, there was a boom in private lending. More recently, the authorities have closed regulatory loopholes and cracked down on it. But there is a role for such lending, which needs proper regulation, not elimination. Does Beijing have the will to reform economically in the face of US hostilities on multiple fronts?