HOW WILL PRESIDENT XI JINPING WEAVE PRIVATE
CAPITAL INTO CHINA’S ECONOMIC TRANSFORMATION TO SECURE REAL GROWTH? [scmp;
07oct2017]
Ø Beijing has begun re-engaging the private sector by
providing easier credit and reassurances ahead of the 19th Party Congress
From: SCMP - published : Xie Yu; published : Saturday, 07 October, 2017, 7:33am; updated : Saturday, 07
October, 2017, 11:21am
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Beijing
has renewed its efforts to re-engage the country’s booming private sector,
but the question for many would be, how it will weave private capital into
the country’s economic transformation to deliver real growth. Photo: Reuters
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China’s decision last weekend to selectively
free up lending of commercial banks is the latest sign of the government’s
pressing need to re-engage its robust private sector at a time when economic
growth is slowing and state firms are piled with debt.
Beijing’s revived advances are not new, but they
are critical to restoring the confidence of Chinese private entrepreneurs, who
have held back domestic investments and moved their assets abroad in the last
few years, and more recently, been rattled by government probes on some
high-profile tycoons and their overseas investments.
“The core problem with the Chinese economy is
the disappearance of private investment in the past few years ... China cannot
achieve self-sustained growth only with the state sector,” said Tao Dong,
senior adviser and economist with Credit Suisse Private Banking Asia-Pacific.
The core problem with
the Chinese economy is the disappearance of private investment in the past few
years
TAO DONG, CREDIT SUISSE
The impact from shrinking domestic private
investment and profit is worrying as the private sector contributes to more
than 60 per cent of China’s economic growth, half of the nation’s tax receipts,
and generates over 80 per cent of jobs. The sector’s growth however, peaked out
in 2011 and plunged in 2016 to a low level that has extended into 2017.
As President Xi Jinping prepares to further
consolidate his power in this month’s 19th Party Congress, analysts said he
would be closely watched on how he would weave private capital into China’s economic
transformation to deliver real growth that fosters the ruling legitimacy of the
party.
“The Communist Party realises a dynamic private
sector has become a key source of employment, economy and social stability.
Instead of playing down the private sector, the party must find a way to
incorporate them [the sector] and charter their ways, to help consolidate its
legitimacy and governing capacity,” said Dr Yu Jie, head of China Foresight
with the London School of Economics.
She said Xi was expected to make this a major
topic in the upcoming party congress, accompanied by more directives to support
the private sector, in addition to recent measures announced.
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Analysts said President XI
JINPING would be closely watched on how he would incorporate the private
sector into China’s economic transformation. Photo: Simon Song
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The PEOPLE’S BANK OF CHINA (PBOC)
announced on September 30 that it would cut the required reserve ratio, or the
amount of money it requires banks to keep at the central bank, for banks that
met the requirements to lend to small businesses and the agricultural sector.
These banks have three months to work on their target customers before the
reserve cut takes effect from 2018.
The selective cut, Tao said, was an innovative
monetary policy that intends to steer liquidity into the real economy,
particularly providing funds for private firms and start-ups, instead of
financial speculative sectors.
Easier credit aside, Beijing has also tried to
reassured its support to businessmen in an unprecedented
directive that stresses guidance and protection over
entrepreneurship on September 25.
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The directive for the first time raised the idea of setting up a
mechanism to “compensate the losses of entrepreneurs due to changes in
government planning or policies”, in addition to the usual promises to protect
their properties, legitimate rights, and ensure fair market competition.
“Beijing wants a “new/particular” type of
entrepreneurship which follows both the capital and shows loyalty to the party
... Like the PLA, [in which] the party controls the gun, for enterprises, it is
the party that controls the money,” Yu said.
Zheng Zhigang, a professor of the Financial
School of the Renmin University of China, said the directive showed “a clear
break away from the planned economy thinking pattern”.
“After such an eventful year, the authorities
knew Chinese entrepreneurs were desperate for some reassurance,” he said.
Jason Cheng, a partner with the law firm,
Dentons, said if put into practice, the mechanism would address a key concern
of businessmen, as he had seen numerous disputes in the past few years stemming
from changes in planning, policy, or personnel in the government.
Like the PLA, [in
which] the party controls the gun, for enterprises, it is the party that
controls the money
DR YU JIE, LONDON SCHOOL OF ECONOMICS
For instance, a client was recently barred from
expanding his industrial park by the local city government in eastern China as
land prices in the area have surged five times after a new line of the
high-speed railway began operation.
As a result, the client’s verbal agreement of
the plot size and the land price with the local mayor was overthrown, Cheng
said.
“This kind of thing is so common in the
mainland, that entrepreneurs have to live under a changing climate, and not to
mention, surviving the [business] environment that has actually deteriorated in
the last five years,” he said.
Instead of providing a consistent legal system
and firm enforcement of rules to protect their interests, Cheng said Beijing
had shifted between supporting and restraining the development of the private
sector, based on its own needs.
The recent reserve cut and directive come after
close to a year of government crackdown and controls to eliminate
over-leveraging and risks in the financial system, which also saw private
tycoons being taken away for investigation.
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Chairman of Anbang Insurance
Group, Wu Xiaohui has been taken away by the authorities for investigation
since June. Photo: Reuters
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Xiao Jianhua, chairman of the Beijing-based
conglomerate Tomorrow Group and Wu Xiaohui, chairman of one of China’s most
active overseas asset acquirers, Anbang Insurance Group, remain out of contact,
after being taken away by authorities in February and June respectively.
Nothing has been disclosed so far of what wrong doings they have committed, or
what kind of investigation they are assisting.
“Some people are starting to lose faith, as it
seems like a back and forth cycle,” said Cheng.
For now, it is hard to tell the extent to which
private businesses will benefit from the directive, which is nonetheless, seen
as a step forward.
“The issuance of the directive marks a
significant opening up of the mind (by the party) ... However, action speaks
louder than words, and the impact brought about by one case can be much more
profound than a thick pile of documents,” said Liu Shengjun, president of the
China Financial Reform Institute, a Shanghai-based think tank.
To date, China’s private sector has had a
lacklustre year, even though overall economic growth in the country is beating
expectations of foreign investors on the back of a strong profit rebound by
state-owned enterprises (SOEs).
Year-on-year industrial profit growth of SOEs
rose 44.2 per cent for the first seven months, while growth of privately-owned
enterprises (POEs) was at 14.2 per cent.
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The numbers contrasted with those a year ago
when profit of SOEs fell 6.1 per cent, against private firms’ 8.7 per cent
rise.
After such an
eventful year, the authorities knew Chinese entrepreneurs were desperate for
some reassurance
ZHENG ZHIGANG, RENMIN UNIVERSITY OF CHINA
UBS analysts attributed the reversal to SOEs
having benefited from macroeconomic policies on “both supply and demand side”
in a note issued in late August.
State firms dominate upstream industries such as
raw materials and energy, which makes them the biggest winners of the
“supply-side” reforms to reduce capacity and improve commodity prices.
And when the government bolsters property and
infrastructure through policy and credit support, state firms were favoured
over their private rivals in winning contracts, and securing bank loans, the
note said.
“We can see SOEs, which dominate the upstream
industries largely benefiting from the rebound of commodities’ prices, while
factories of POEs are closed down as the authority pushes for capacity
reduction or environmental protection,” Tao said.
What’s more, private companies and their
investments have been scrutinised by intrusive state agencies in the past year,
often leaving them with no available recourse but to give up the market to
SOEs.
To thrive, an increasing number of private
companies have looked abroad for opportunities in the recent years. But their
overseas ambitions have hit a wall since late 2016 when Beijing began to curb
capital outflows.
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The PBOC has cut the required reserve ratio for
selective banks that lend to private firms and the agricultural sector from
2018. Photo: Bloomberg
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Wanda Group and its chairman Wang Jianlin have
shifted their focus from overseas acquisitions to poverty alleviation and
investing in the home market. Photo: Reuters
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Entrepreneurs were told to suspend “irrational” asset acquisitions in overseas
markets, and instead invest in the domestic market, and join party-led missions
including buying stakes in SOEs to help them reform.
In June, China’s banking regulator ordered banks
to assess their exposure to offshore acquisitions by the most active private
acquirers including Dalian Wanda Group
Co, Anbang Insurance Group, HNA Group and Fosun International.
Two months later, authorities including the
State Council – China’s cabinet – issued a guideline that classified outbound
investments in property, film industry and other forms of entertainment under
the “restricted” category.
In response, firms such as Wanda, the property
giant controlled by China’s former richest man, Wang Jianlin, scrapped several
outbound deals and shifted its focus to poverty alleviation and investing in
the home market, in line with the party’s prescription.
With private companies scaling back their
overseas ventures amid the crackdown on capital outflows, the sovereign wealth
fund China Investment Corporation (CIC) has emerged as the country’s champion
of overseas real estate investment.
According to figures from data provider Real
Capital Analytics (RCA), Chinese investors are involved in 11 acquisitions of
investment property assets. The deals total around US$16.5 billion.
CIC’s acquisition of Blackstone’s Logicor portfolio alone accounts for US$13.8 billion, or about 83.4 per cent of
the outstanding total value.
“Trump may have been wrong in many things. But
he is right about “animal spirits” ... It is the only way that all economies
including the US and China can get out of the trouble ...,” said Credit
Suisse’s Tao.
“Hopefully, after the party congress, President
Xi will face a very different political environment from Trump, with bigger
space to exert himself, to restore confidence of businessmen, and to start a
new cycle,” he said.
Published by the South
China Morning Post.
Editado por Ronald
Almeida para o BLOG RONALD.ARQUITETO
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