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China economy

Can China’s leaders restore confidence to private businesses?

  • China is rolling out a nationwide initiative to help private business owners but some question whether it will be able to take the necessary steps
  • While the Communist Party has been happy to reap the benefits of burgeoning private sector, fears that ideology will trump pragmatism remain
PUBLISHED : Wednesday, 19 December, 2018, 10:04pm
UPDATED : Thursday, 20 December, 2018, 10:34am

China’s private sector, the driving force behind the country’s economic miracle over the last 40 years, is struggling amid the Chinese government’s campaign to reduce national debt and the trade war with the United States. This is the first story in a series that will detail the challenges private firms face and outline the government’s attempts to address them.

Some would say that Chinese President Xi Jinping rediscovered the private sector in his country this year out of necessity.

Facing a rapidly slowing economy because of the trade war with the United States, Xi and senior leaders of the ruling Communist Party have put on an unusually friendly face for the country’s private businesses since the summer, publicly acknowledging their struggles and promising to help.

But it remains to be seen whether the government will take the necessary steps needed to revive business confidence.

What is clear is that Xi and his government need the private sector, which accounts for about 60 per cent of country’s economic activity and 80 per cent of its jobs.

Without a strong private sector providing a stable economic foundation, Xi’s dream of a resurgent China could fade away.

Many private sector businesses were already struggling before the start of the US trade war earlier this year, weighed down by higher costs for rent, labour, raw materials and taxes. But the tit-for-tat tariff dispute made those problems more acute by hitting demand for Chinese-made products.

As the extent of the economic damage caused by the trade war became clear over the summer, the government rolled out a series of policy initiatives designed to help private sector businesses, particularly the smaller firms that have struggled the most.

So far, however, these initiatives do not appear to have had the intended effect.

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This lack of effectiveness is due, in part, to the mixed messages that previous and current government policies are sending to banks and other economic agents.

What we need is orders. Our orders are dropping drastically.
Tom Zhong, who runs a factory in Guangdong

The government’s campaign to “deleverage” the economy – that is, reduce excess debt and risky lending practices to remove a major risk to the entire financial system – has devastated China’s shadow banking sector, which many small private sector businesses relied on for credit.

Recent government efforts to revive lending to the private sector have run into bankers’ reluctance to take on additional risk.

The higher costs and lack of access to new credit has caused confidence among private sector businesses to plunge.

“Big private business owners in China feel insecure, and small business owners are looking to move wealth abroad – the foundation of the Chinese economy is shaking,” said Li Weisen, an economics professor at Fudan University in Shanghai. “It’s a lethal threat to the Chinese economy. It is a bigger threat to China than the trade war with the US. It is a life-or-death issue for the nation.”

The government sees the problem. At a special meeting on November 1, Xi assured dozens of leading private sector entrepreneurs that they were valued and protected by the party. He promised to cut taxes and social levies; provide more credit support; lower market barriers and safeguard their assets and personal security – all much needed relief for the country’s 14 million private businesses.

However, the response has been mixed.

What’s the best way to protect private property? Rule of law
Xu Xiaonian, professor

“As the founder of a tech start-up in Guangdong, I am encouraged by the recent measures released by both the central and provincial governments to help private entrepreneurs, especially market access and equal treatment for the private sector,” said Jiang Zhongyuan, founder of IHDpay Group, a fintech in the health care sector. “It helps us build up confidence to expand our investment in the region for the long term.”

But a nearby small manufacturer was near panic about the lack of orders for his products because of the trade war.

“I care little about what Xi said or promised. Market access, legal protections, support from the state banking system, these things are too far removed from saving or protecting our small factories,” said Tom Zhong, who runs a factory in Guangdong province that makes bags and suitcases for US and European brands.

“What we need is orders. Our orders are dropping drastically. I had to cut the number of workers from 250 to 100. We won’t dare borrow money or apply for subsidies to expand, if there are any. We have no orders. Not just me, you go ask other small and medium-sized factories. They are facing the same problem,” he said.

Part of the government’s problem is one of credibility, given that Xi championed the role of the state sector until recently.

In a speech in October 2016, Xi said Beijing regarded state firms as “the most reliable force for the party and the state” and “the material and political foundation for socialism with Chinese characteristics”.

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Xin Sun, a lecturer in Chinese and East Asian Business at the Lau China Institute at King’s College London, said Xi’s promotion of “stronger, better and bigger” state firms as a priority of the party had translated into a series of government policies that put private firms in disadvantageous positions.

This has led in part to an increasingly more difficult environment for the private sector, with data underscoring the dilemma facing the private sector – and the government.

According to calculations based on the latest data available, private sector investment is on a long term downtrend, while state sector investment has been relatively stable over the long run.

The perception that Xi does not truly value the private sector, and is expressing support now only out of necessity, is likely to have been overdone.

After all, his senior economic adviser, Vice-Premier Liu He, is known to be a strong proponent of reform of the Chinese economy so that it relies more on market-based principles.

Still, until the last few months, private businesses felt that the government did not take their struggles seriously enough.

“China’s private sector, above all else, is seeking clarity,” said Frederic Neumann, co-head of Asian economics at HSBC. “Amid heightened trade uncertainty, tighter funding access, and continuing state-owned enterprise reform, private companies are looking for a path through the current fog.”

The Communist Party has had a complicated relationship with the private sector. It nationalised private firms soon after it took power in 1949 and business owners faced an unfavourable climate under Mao Zedong.

But subsequent leaders sought to establish a balance between the benefits that the private sector brought to the economy with the ideological imperative of bringing those benefits to the people – all while upholding the party’s rule.

In the late 1970s, China’s private sector began to emerge from the Soviet-style planned economy after Deng Xiaoping, the late paramount leader, unleashed entrepreneurship under the famous slogan “to get rich is glorious”.

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His successor Jiang Zemin pushed further, allowing the rapid advance of the private sector so that it could absorb the millions of workers who lost their jobs when premier Zhu Rongji closed many inefficient state-owned firms.

But the next president, Hu Jintao, tacked back after the gap between wealthy private businessmen and the average worker rose to unacceptable levels and he enacted labour laws to strengthen the power of trade unions.

Xi has, above all else, sought to ensure the party’s political control over all aspects of the economy, including the requirement that companies establish party cells that would be able to influence company operations. But his about-face on the role of the private sector shows a more pragmatic side.

All the riches of China’s private business owners were accumulated in the last four decades under the party’s rule and the party has bent its ideology repeatedly to allow private sector development under the rubric of “socialism with Chinese characteristics”.

The mutually beneficial relationship between the private sector and the powerful one-party state helped launch China’s economic miracle that propelled it to become the world’s second-largest economy.

There have been numerous rags-to-riches stories over the past four decades.

Jack Ma, now China’s richest man and the founder of Alibaba, which owns the South China Morning Post, was a college tutor earning a monthly salary of 80 yuan before he started the venture; Xu Jiayin, the boss of China’s biggest property developer, was a technician at a state-owned steel mill in the early 1980s; while Zong Qinghou, the owner of the country’s biggest drinks company, started his business in 1987 with money borrowed from relatives.

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But private businessmen remain vulnerable in the face of the government’s anti-corruption campaign, which critics charge has been used to silence political rivals and punish those who do not bow to the state’s authority.

For instance, Wu Xiaohui, a former insurance tycoon, was sentenced to 18 years in prison on charges of fraudulent fundraising for his Anbang Insurance Group earlier this year.

Huang Guangyu, the richest man in China 10 years ago, is still behind bars serving a 14-year jail sentence. Xu Ming, a businessman with ties to disgraced Chongqing party boss Bo Xilai, died in prison two months before his scheduled release.

Xi’s hallmark anti-corruption campaign toppled many government officials but also frightened private business executives who had dealt with those corrupt officials.

The party’s declaration earlier this month that it had achieved a “crushing victory” in its efforts to stamp out corruption may signal an end, or at least a downgrading, of that campaign.

Since Xi launched the nationwide campaign in late 2012, more than 1.3 million party officials at various levels of government, from powerful “tigers” to low-ranking “flies”, have been caught.

But even if some of the practical issues facing the private sector can be removed, the contradiction between private ownership and the party’s basic ideology remains.

“No matter what the central authorities and top leaders say and promise to private business, they don’t touch the core problem, it’s actually lack of an institutional guarantee to protect private property rights,” said Liu Kaiming, head of the Shenzhen-based Institute of Contemporary Observation, which monitors working conditions and performance in hundreds of Chinese contract manufacturers.

“And the fears of being purged and having their assets confiscated have been soaring among business owners in the past few years, because economic and political policies have changed frequently and significantly,” he said.

Xu Xiaonian, a professor at the China Europe International Business School and a liberal economist, said in a speech that China must opt for “rule of law” instead of “rule by man” to provide effective protection for private businesses.

“What’s the best way to protect private property? Rule of law,” he said, according to the transcript of his speech published on his school’s social media account on November 5. “Rule of law … offers better protection for private property than does government promises.”

Xu also called for China to shrink the state sector, cut taxes significantly, and deregulate industries. “But what about the likelihood that my advice would be taken [by the government]? Next to zero,” he said.

Additional reporting by Xie Yu, He Huifeng and Catherine Wong