Liu Qiao Private Concerns
In early September 2018, former banker Wu Xiaoping posted a short essay online in which he argued that private enterprise has accomplished its mission to help the public economy develop and “should gradually step aside.” His post, since deleted, went viral and reverberated in academic and industrial circles in China, causing concern over the fate of the large number of private enterprises in the country.
Official data shows that by the end of 2017, China was home to 65 million individually-owned businesses and over 27 million private enterprises, employing 341 million people. China’s non-public sector contributes more than 60 percent of the country’s GDP growth and brings in over half of its fiscal revenue.
On November 1, 2018, Chinese President Xi Jinping presided over a symposium on the private sector which aimed to instill confidence at a time when private enterprises are struggling to make a profit and tackle growing debt.
Xi demanded the implementation of policies and measures in six aspects to create a better environment for the private sector and to help them overcome their difficulties, including easing the burden of taxes and fees, addressing the difficulties and high cost of financing and removing hidden restrictions.
“Over the past 40 years, the private sector of the economy has become an indispensable force behind China’s development,” Xi said.
“Any word or action that denies, doubts or wavers over the country’s basic economic system is not in line with the principles and policies of the Party and the country. All private companies and private entrepreneurs should feel totally reassured and devote themselves to seeking development.”
Newschina has secured an exclusive interview with Liu Qiao, Dean of the Guanghua School of Management at Peking University, to discuss the status of China’s private sector, its unique role and the challenges that loom large.
Newschina: China’s private enterprises face three main challenges of the market, financing and transformation. Do you agree?
Liu Qiao: In my view, an irksome challenge is the transformation of private enterprises. Over the past 40 years of China’s reform and opening-up, the biggest change to Chinese enterprises has been the establishment of a modern corporate system and its gradual improvement. Chinese enterprises tend to be eager to expand in scale but largely neglect the creation of value and returns on investment. When business is booming, enterprises can scale up through bank loans, but if the investment efficiency is low, it brings pressure to the financial system, leading to high leverage and overcapacity in many sectors. Banks then are afraid to provide loans to private enterprises. In short, private enterprises have to pursue value creation which is also a requirement of the high-quality development China is pursuing.
NC: Chinese President Xi Jinping said the private sector should only grow stronger instead of being weakened and march toward a broader stage. What does ‘the broader stage’ mean?
LQ: Alongside China’s drive to the market system, more business areas are expected to open to the private sector. Private enterprises will play an increasingly active and crucial role in the country’s economic system. China has 111 enterprises on the Fortune 500 list in 2018, including more than 20 private companies. Private enterprises are more flexible and market-oriented, and they have their own advantages in China’s economic transition.
NC: A highlight of the six policy measures to support the private sector was the proposal to make a new relationship between the government and business. How do you see that playing out?
LQ: The Chinese government has played a pivotal role in the making and development of China’s market system over the past 40 years. This top-level policy design, coupled with the reform and opening-up policy has revitalized the market, enabling China to become a key link in the global industrial chain. Meanwhile, China’s large population and the global market have sped up growth in the manufacturing sector, making the rise of large-scale production in China possible. China’s high-speed economic growth hinges on the government’s capability and determination to make and implement long-term strategic planning.
Along with economic growth, the relationship between the government and business is changing rapidly. The perfect relationship would be that the government tries to create a fair and transparent environment, making the market the crucial player to allocate resources. A simple binary division of government and market should be avoided. It is also crucial to increase the government’s efficiency to achieve an effective combination of market mechanisms and government regulation.
NC: How should we understand the concept of there being a level playing field for the private and State sectors?
LQ: There will be a level playing field if the six policy measures are implemented. There has long been a situation of unfair competition between China’s State-owned enterprises (SOES) and private enterprises. Private companies, for example, are constantly plagued by fi- nancing difficulties. We found in our research that private enterprises have to pay an interest rate 1.38 percent higher than SOES if they are listed companies in the same industry with the same firm size. During the symposium, financial institutions were ordered to resolve the issue of difficulties in obtaining credit and the high cost of financing for private enterprises. The private sector is supported to participate in fair competition and will be treated without discrimination.
NC: What is the biggest challenge for the six policies and measures to create a better environment for private enterprises?
LQ: In my opinion, the biggest challenge will be the implementation. To be specific, how governments at all levels can take concrete actions to make all these policies take effect and enable private enterprises to access support from the government. Meanwhile, government at all levels has to figure out the new type of relationship between the government and business and realize what the government should do, bring into full play the roles of the government and market, and aid private enterprises in their transformation.
For example, as stock-pledged loans are highly risky, local governments should try to support private enterprises. There needs to be an in-depth analysis as to what kind of support to offer, what would be the withdrawal mechanism, how to design policies and assess the effect of policies. A clear target is highly necessary in order to make private enterprises feel they have substantial backing.
NC: Just like the science and technology innovation board that will be set up with a pilot registration system in the Shanghai Stock Exchange?
LQ: The biggest problem for China’s capital market is the lack of excellent listed companies. Our research shows that from 1998 to 2017, the return on capital investment of listed companies on China’s A-share market is only three to four percent on average, far lower than companies listed on the US market which have had [returns of] 10 percent on average over the past 100 years. China needs a capital market that can recognize and cultivate excellent listed companies. It is high time to reform the listing and delisting systems for enterprises, and bring in a registration system for IPOS to build a sound market and regulation system. The science and technology innovation board in Shanghai is aimed at reforming the system of stock issuance and improving the capital market.
NC: What are private enterprises lobbying for most?
LQ: To survive and stand against the challenge of corporate transformation. It is, however, unrealistic to ensure all private enterprises survive. For those enterprises that possess key resources but lack a business model and core competitiveness to prosper, it is even more important to transform themselves. As for government support, a one-size-fits-all measure should be avoided. To sum up, it is the best policy for private enterprises to increase government efficiency and let the market play the decisive role in allocating resources.