China economy

Call for action to back up China’s words of support for private enterprise

  • Academics say Beijing must spend less time placating state enterprises and oil the real engine of its economy
  • Entrepreneurs need rule of law, not ‘ruled by law’
PUBLISHED : Wednesday, 14 November, 2018, 6:33pm
UPDATED : Wednesday, 14 November, 2018, 11:06pm

Chinese leaders’ efforts to restore private sector confidence in their policies are faltering and some observers remain sceptical about the long-term outlook unless the Communist Party can deliver on its commitments to the enterprises.

A University of Hong Kong academic has urged the Chinese government to relax its control of the economy and rein in its power. Otherwise, he warned, the private sector would continue to “face difficulty”.

Professor Chen Zhiwu, director of the university’s Asia Global Institute, said the conclusion was clear from his studies on the relationship between state-owned enterprises and China’s rule of law.

“The higher the proportion of the state-owned economy, the more impossible the rule of law,” he said.

“The rationale is simple. If state-owned enterprises were to frequently lose their cases against private complaints, there would be allegations of a loss of state-owned assets.

“So, will the law treat the interests of state-owned enterprises and private enterprises equally? State-owned enterprises are always favoured.”

Independent political commentator Deng Yuwen agreed, saying that although China’s Constitution recognised the private sector as a component of its economy, it had not been fully embodied in specific regulations.

“This has led to insufficient protection for the private sector in law enforcement,” he said.

“Even with the existing regulations, due to the arbitrary nature of law enforcement, politics, and government will, law enforcement can become selective, often damaging the interests of the private sector.”

Deng said China should correct previous unfair judgments in cases relating to private entrepreneurs to shore up confidence in the sector.

“We must implement the protection of private entrepreneurs’ property rights and personal rights in the Constitution and specific laws, and strengthen legislation in this area,” he said.

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Chinese President Xi Jinping has promised capitalists that their businesses will be protected and that Beijing will try to find ways, such as tax cuts and bailouts, to help.

At a national symposium on the private sector on November 1, Xi identified six ways of aiding private enterprise, including easing taxation and administration costs, and helping private firms to source financial help.

He also promised to level the playing field for public and private enterprises; improve policy implementation; improve the relationship between government and business, and ensure entrepreneurs’ personal wealth and property were unmolested.

Zhu Haibin, chief China economist at US investment bank J.P. Morgan, also stressed the importance of “rule of law”, not “ruled by law”, in the Chinese government’s efforts to bolster the confidence of the private sector in its policies.

At a forum on Tuesday organised by HKU and Fudan University, Zhu warned the Chinese government of the Tacitus Trap, named after the Roman historian born in AD57 who said that when a government lacked credibility, its actions – good or bad – would be resented by the people.

Chinese leaders have been busy trying to assuage the fears of private companies this month and last. Two weeks before the symposium on the private sector, Xi issued an open letter that said China would continue to value and protect business.

Zhu sounded a word of caution on the effectiveness of the latest policy by the banking and insurance regulator which states that at least a third of big banks’ new loans to companies should go to the private sector.

The policy also requires at least two-thirds of small and medium-sized banks’ new loans to companies should go to private businesses, and at least half of new loans by the banking sector should go to private firms after three years.

“The market dropped 3 per cent on that day because people are worried about potential bad loans,” Zhu said.

A source familiar with the policies on the private sector told the Post that: “If you look back, such episodes repeat themselves many times.

“The latest was when Guo Guangchang, one of China’s highest profile investors, went missing at the end of 2015. The Chinese business community was shocked and full of fear. ‘If Guo can be taken away, then what about us?’ At that time, Beijing had sent similar comforting signals [to the private sector] too.”

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In a state media interview last month,Vice-Premier Liu He stressed the importance of the private sector to China’s economy.

Liu said private companies contributed more than half of the nation’s tax revenues, 60 per cent of its gross domestic product and fuelled 70 per cent of China’s technological innovation.

He added that the private sector provided 80 per cent of the country’s urban employment and 90 per cent of its business and job creation.

Bankers were unwilling to loan money to private companies, he said. “This kind of understanding and practice is completely wrong,” Liu said.