Breaking down the walls strangling China’s private sector
Reformists join the fray as State-owned giants continue to dominate economic landscape and funding
Drowned out by the US-Sino trade war of words, a quiet battle is being waged by China’s reformists. At stake is the future landscape of the country’s economy.
Last month, the influential pro-market economist, Wu Jinglian, talked about the need to revitalize the process of “reform” at a time when Beijing’s economic model is coming under heavy scrutiny at home and abroad.
Among the guests at the 20th anniversary of the Chinese Economists 50 Forum was Vice-Premier Liu He, who helped get this club for ‘bean counters’ up and running.
“What we learned from the past 40 years is that we must insist on a market-oriented and law-based direction of reform,” Wu told Liu and a room full of economists, entrepreneurs and government officials at the Diaoyutai State Guesthouse in Beijing.
The 88-year-old is considered one of the preeminent economists in China and is a passionate supporter of the pro-business policies which have helped transform the country.
But those reforms are starting to stall, he pointed out.
Known as Wu Shichang, or “Market Wu,” he warned against “disharmonious voices” or those that have called for an end to private ownership in China.
“[The government has to] build a consensus [on reforms] through debate and then implement them one by one,” Wu said.
After the speech, Liu reportedly left the gathering. Yet President Xi Jinping’s economic tsar would have agreed with the sentiments along with the majority of the audience and speakers.
Lack of progress
During the past few months, there have been concerns about China’s lack of progress in economic liberalization.
Moreover, the private sector has been hit hard by the trade war, as well as the squeeze on financing and excess production, Li Yang, the former deputy head of the Chinese Academy of Social Sciences, stressed.
“Many cannot survive amid this de facto discrimination,” Li told the Chinese Economists 50 Forum.
The clampdown on credit as part of the broader onslaught against rising local government and corporate debt has been particularly severe for small companies struggling to obtain funding.
To underline the problems, Ma Jiantang, a senior Communist Party official at the Development Research Center of the powerful State Council, has been quoted as saying in the Chinese media that private companies are plagued by “dissatisfaction.”
His comments will resonate with the All-China Federation of Industry and Commerce.
In May, the ACFIC reported that more than 90% of new jobs were created by private enterprises last year, as well as 60% of GDP growth.
“At the end of 2017, there were 65.79 million individually-owned businesses and 27.26 million private enterprises in China, which employed some 340 million people,” Gao Yunlong, the head of the ACFIC, told the official state-run Xinhua news agency.
Yet there have been calls from more left-wing scholars, economists and government officials to dump the private sector “experiment.”
“Communists can sum up their theory in one sentence – eliminate private ownership,” Zhou Xincheng, a professor of Marxism at the Renmin University of China, wrote in Qizhi, a leading policy journal of the CCP, back in January.
Beijing has already set-up CCP committees, which are common among state-owned enterprises, throughout the private sector.
Qiu Xiaoping, the deputy director of the Ministry of Human Resources and Social Security, has floated the idea that employees should “participate in the management” of corporations.
“Chinese Communist Party officials are increasingly calling on companies to support the creation of party organizations among their employees,” China Business Review, the official magazine of the US-China Business Council, reported. “The potential for party groups to influence corporate decision making has raised concern among some US company executives.”
Three weeks ago, Professor Cao Xihua went even further in an online article entitled China Is in its Second Wave of Socialist Transformation, the China Media Project highlighted.
“The Chinese Communist Party has never deigned to disguise its viewpoint and intention – the annihilation of the private ownership,” the author, who teaches at the CCP school in Changsha, the capital of central China’s Hunan province, wrote. “The time is ripe for [the country] to enter its second era of socialist transformation.”
It was a view echoed by Wu Xiaoping, a former investment banker at the China International Capital Corporation.
‘Leave the stage’
He suggested in a blog that “China’s private sector has already done its job in aiding the development of the state economy, and it should now leave the stage,” or be rolled into the SOE sector.
“If we fail to concentrate the power of the state but instead allow the market to dictate and move toward a path of of complete economic liberalization, China’s economic and social reform and opening would face unimaginable pressure and resistence, and the advantage and results we have gained could be gradually lost,” Wu added.
Naturally, his post went viral before being condemned by sections of the state-owned press. On social media, it was highly praised after he confirmed to the Beijing News that he had written the article.
To say it created a storm would be an understatement with Xi wading into the debate during a visit last week to the China National Petroleum Corporation, one of the ‘big beasts’ of the SOE jungle.
While he praised the role of the private sector, he made it clear that the state behemoths were here to stay, despite draining corporate investment.
“Such statements [as] there should be no state-owned enterprises [and] we should have smaller-scale state-owned enterprises are wrong and slanted,” Xi told China’s state-run media.
Still, the obsession with SOEs is in danger of derailing small- and medium-sized private companies, which have already been hit by the trade war.
“The problem facing the Chinese economy is not deleveraging, but rather more funds flowing into SOEs, leaving less money for private enterprises,” Jiang Chao, the chief economist at Haitong Securities in Shanghai, wrote in a research note.
As tariffs start to kick in on Chinese imports to the US worth US$260 billion, the private sector will need the zeal of the reformists if it is to survive unscathed.