SINOGRAPH True faith missing from
China's growth boost By
Francesco Sisci
BEIJING - The stimulus
package that China launched last week to boost the
economy is about China, of course, but it is also
about Europe. Beijing does not want to be
unprepared as the European dangers deepen,
creating uncertainties all over the world since
many economists believe that Greece's potential
exit from the euro could trigger a global
financial meltdown.
Weak foreign demand
for its exports, a cooling real-estate market, and
diminished bank lending have all slowed Chinese
economic expansion to a pace not seen since the
aftermath of the 2008 financial crisis. Moreover
the global outlook is dire, as the Greek crisis
has spread to Spanish banks, Europe seems unable
to find a common strategy to tackle the issues at
hand, and many do not rule out a second dip in the
financial crisis in the
coming weeks or months,
triggered by a crunch in the euro area.
Then, as with the 2009 stimulus package,
the goal is to try to relatively insulate China
from the foreign turbulence and boost domestic
demand and growth at a time when foreign trade and
exports are collapsing and internal consumption
from the rising middle class is slowing.
Yet unlike in 2009, when Beijing spent
some 9 trillion yuan (about US$1.4 trillion) in
all, today's China is being more careful. The
government wants to minimize inflation and avert
the skyrocketing public debt and asset bubbles
that came from the hasty move in 2009 and that
still bedevil the national economy.
The
package is thus designed to address this issue:
stimulate consumption where it is weakest (in the
countryside) by boosting sales of cars, press
ahead some with infrastructure projects (such as
new airports), provide subsidies for
energy-efficient household appliances, and invite
the private sector to invest in state-dominated
industries such as railways.
The
Peopleโ€™s Bank of China, the central bank, could
also reduce the amount of capital that lending
institutions must hold in reserve and lower
benchmark interest rates to spur growth.
The government intends that there will be
no blank checks to state-owned enterprises (SOEs)
or localities to build more unwanted high-rises or
projects that are useful only to the careers of
local officials - but still one can reasonably
expect that a lot of money will go awry in the
haste.
This time, as the package is coming
before possibly the biggest crisis, it could be an
occasion to address the lopsided parts of the
Chinese economy, which is being re-dominated by
state-owned enterprises. Their virtual monopolies
in large sectors of the economy are stifling
competition and thus future growth. However, SOEs
have immense clout over the economy, and it is
unlikely that their reform will be comprehensively
handled before the 18th Party Congress this
autumn.
One crucial issue in the meantime
is how to prop up private enterprises, which have
been the engine of Chinaโ€™s development in the
past 30 years. Some reform-minded commentators in
China, such as Hu Shuli, suggest cutting taxes for
private companies.
This is reasonable as a
direct measure to help them in a very difficult
time and also to solve at least partially their
problems of access to finance. Private businesses,
as they need to survive in a difficult
environment, already try to avoid paying taxes and
often have different sets of account books for
different purposes.
Their murky situation
makes it more difficult for them to ask for money
from the banks. Moreover, banks have no real
system of incentives to lend to private businesses
and conversely have many enticements to cater to
SOEs and shun difficult private lending. If a
transaction to a private company goes bad, the
official in charge will routinely be investigated
to ascertain if he received a kickback from the
private business. If a transaction with an SOE
goes bad, this will be simply considered a form of
support for another state company.
Furthermore, private companies mistrust
state banks - considered close to and transparent
to tax offices - and try to get finances through
all sorts of non-official channels. There are
loans from SOEs (who can easily and cheaply borrow
from banks and loan to private companies at a
juicy profit), from associations of private
lenders, and from small or large "pawn shops".
Here interest rates are well over 20% and
are guaranteed with collateral (houses, land) that
is often undervalued so as to guarantee an extra
profit to the lender in the case of default. These
numbers prove the extreme vitality of these
private entrepreneurs who can churn out over 30%
growth a year (the minimal amount to pay off the
debt and have some profit). But they also prove
the extreme inefficiency of the system because
private entrepreneurs are scared of the state and
its officials, who may threaten to clamp down on
them with any excuse.
A basic way to bring
back efficiency to the system must start with
providing guarantees to private businesses against
the power of local officials and authorities. This
could be provided as a form of "amnesty" for past
financial crimes (tax evasion, for instance).
The firms could pay a lump sum to cover
past misdeeds, and in return pledge they will not
misbehave. Moreover, central tribunals, with a
large degree of autonomy, could be established to
sort out controversies arising between localities
and enterprises. This will not eliminate the
possibility of overbearing local officials, but it
could limit their power.
Forms of tax
reductions could be devised if profits of private
companies are reinvested in the companies
themselves, in the fashion used in the 1980s to
encourage foreign companies to invest in China.
All these measures would help the
emergence of a vast portion of the underground
economy, which has developed with little or no
support from the local government. It would cut
the cost of access to finance and thus boost
healthier growth in China - without the
mega-investments that cause bubbles.
In a
nutshell, the strategy would be to export and
improve the growth model of Wenzhou, an area
dominated by private businesses, to the whole
country. In return, these businesses should clear
their decks. They can get tax cuts, protection
from the central government, forgiveness for past
sins, and better access to low-interest finance;
but they should from then on be clear in their
accounting. They should no longer keep messy and
different sets of account books, but provide clear
papers. Put your papers in order, invest what you
earn, start a virtuous cycle, become known to your
banks, and prepare for growth of your business and
your country.
The main obstacles in this
virtuous cycle, however, are not the many
technicalities that such a move would entail -
after all, some of these were measures China used
to draw foreign investment in the early phase of
reforms. The real hurdle is the faith private
companies may not have in the overall reliability
of the central government.
In the 1980s,
foreigners did not trust Beijing, but they had
political encouragement from America, and they
could hedge the risk by investing little by
little; this could be done and could pay off
handsomely as China's economy was small and
investments then were quite cheap. If they lost
it, this would not endanger the survival of the
company.
Now for Chinese private
companies, the risk of becoming entirely legal is
huge, as Beijing could change policy in a few
years, renege on past promises, or clamp down on
private entrepreneurs. This happened with
Chongqing for instance, where the pre-2007 party
chief Wang Yang promoted private business, and his
successor, the now disgraced Bo Xilai, branded it
mafioso and seized some of it. Now, with Bo's
political demise, political sentiment has changed
again. Real political stability and continuity in
policies is the fundamental issue to gain trust
and substantive support of the entrepreneurial and
middle classes of China.
Thus a plan for
the direction of political reforms is the key also
to trigger better-quality growth in China. Without
trust in the long-term political environment, the
model for businessmen will only be that of moving
all or part of their assets abroad, and then
reinvesting them more or less clearly as foreign
capital.
That is, Chinese entrepreneurs
feel safe in China only if they become to some
official extent not "Chinese" and are under some
form of tutelage of a foreign government. This
murky business structure creates extra costs to
the local economy because of the lack of
transparency in the market, which further impacts
the cost of finance for private businesses.
Moreover, despite official sentiments,
Chinese businessmen trust Washington more than
Beijing when it comes down to the safety of their
own money. This should be a consideration of
extreme importance China's thinking about its ties
with America. A tight alliance with America is
impossible to dismiss if, as Marxists believe,
politics walks on economic feet.
This,
perhaps, touches on the broad issues of growth and
political changes that will have to be addressed
at the 18th Party Congress this autumn to stave
off the internal and international crises that are
bound to weigh on China in the near future.
But this is also true in the longer run.
If China wants to reach the US per capita GDP, it
should keep growing at 8% for the next 30 years. A
slowdown in the growth rate could extend this
frame to 50 years or more. In either the faster or
slower model of growth, lukewarm, opportunistic
support of entrepreneurs by Chinese state
institutions will not suffice.
For
Beijing, at this crucial moment when innovation
and creativity is necessary to project the country
into the future, there must be real strong trust
between Chinese institutions and business.
Internationally, tight political cooperation with
foreign countries will be also crucial.
Patriotism (no matter how strong) and a
semi-religious faith in the destiny of China and
its "emperors" (not much different from in
imperial China) will not be enough to bind the
bets and legitimate interests of businessmen and
their country.
This de facto requires a
new political pact between the state and its
people - and given the present and future
dimensions of the Chinese economy and its impact
on the world, a pact with the people of the rest
of the planet, too.
Francesco
Sisci is the Asia Editor of La Stampa. His
e-mail is fsisci@gmail.com
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