Pri­vate cap­i­tal is key to suc­cess of tran­si­tion

China Daily (Canada) - - ANALYSIS -

So, there is good news: the Chi­nese econ­omy is sta­bi­liz­ing. But by na­ture, “sta­bi­liz­ing” is not a lon­glast­ing state.

A process, from its sta­bi­liz­ing point (or the point where it be­comes less crit­i­cal), must move on — ei­ther to present a bet­ter state or re­treat into old prob­lems.

While say­ing the econ­omy is sta­bi­liz­ing, no econ­o­mist is say­ing China is at the thresh­old of a re­cov­ery, even less the be­gin­ning of a re­turn to the kind of dou­ble-digit or near dou­ble-digit growth seen a few years ago.

See­ing the sta­bi­liz­ing ef­fect, ev­ery China busi­ness watcher may be ask­ing: Then what? Now that the cen­tral govern­ment has proven its skill, and its fi­nan­cial power, to pre­vent the slow­down from be­com­ing a free fall, what can it do to nur­ture a more bal­anced growth, prefer­ably by re­leas­ing less easy credit?

If China al­ways has to rely, as it did in the first quar­ter of the year, on con­tin­u­ing in­creases in cap­i­tal spend­ing for just a mod­er­ate level of growth, it would get stuck in a costly sta­bi­liz­ing process, which is in­evitably hard to sus­tain.

Banks can­not af­ford to con­vert a lot of their loans into eq­ui­ties. The debtors who have dif­fi­culty pay­ing back their loans and in­ter­est don’t usu­ally have high-qual­ity eq­ui­ties to of­fer af­ter all.

In the mean­time, zom­bie en­ter­prises from the state sec­tor can­not be al­lowed to sit idle for very long to just waste the govern­ment’s bailout money, even though their work­ers have to be prop­erly taken care of.

A good thing for China to do is to take ad­van­tage of its suc­cess from sta­bi­liz­ing the econ­omy to launch some more mean­ing­ful re­form ini­tia­tives — be­fore the task of keep­ing the state-owned en­ter­prises afloat drains pre­cious pub­lic funds and de­stroys po­ten­tial pri­vate in­vestors’ en­thu­si­asm — and not al­low scorn­ful ob­servers to laugh at what they see as China’s “stalled re­form”.

The real chal­lenge, there­fore, is not whether 6-plus per­cent GDP growth can con­tinue, or whether the zom­bie en­ter­prises can be put to sleep with their la­bor and as­sets be­ing redi­rected to bet­ter uses.

Nei­ther is it in­vest­ment. There is waste­ful in­vest­ment, ad­mit­tedly. But in a country with ex­ten­sive ter­ri­tory and re­cent mem­ory of un­der­de­vel­op­ment, large cap­i­tal in­put is still needed in many ar­eas and many in­dus­tries. Build­ing un­der­ground util­ity tun­nels in newly de­vel­oped cities, in­dus­try spe­cial­ists say, would take up to 1 tril­lion yuan ($155 bil­lion) dur­ing the 13th Five-Year Plan (2016-20).

The point is that so much growth and de­vel­op­ment is un­likely to hap­pen if it is up to the govern­ment to act as the sole fi­nancer of China’s large projects.

In fact, room is in­creas­ingly limited for China to go on fi­nanc­ing its GDP growth and de­vel­op­ment while de­sign­ing in­cen­tives for its com­pa­nies, large and small, in­clud­ing tax in­cen­tives.

All China busi­ness watch­ers seem to be talk­ing about is China’s large debt bur­den, es­pe­cially the more than 30 tril­lion yuan in lo­cal govern­ment debt. But the country will be un­able to re­duce its over­all debt level un­less the govern­ment can work in con­cert with pri­vate cap­i­tal.

So the real chal­lenge is whether China can de­sign and spread var­i­ous plans of pub­lic-pri­vate part­ner­ship in its in­vest­ment un­der­tak­ings.

Such part­ner­ships also can be in­cluded in SOE re­form. But it is the new in­vest­ment projects that are more im­por­tant. Although SOEs and state-sec­tor in­sti­tu­tions still pro­vide jobs to mil­lions of work­ers, their profit and con­tri­bu­tion to over­all GDP have be­come small. Many of them, by the na­ture of their in­dus­tries and the tech­nolo­gies they use, have al­ready lost their fu­ture com­pet­i­tive­ness.

The key to the suc­cess of China’s in­tended tran­si­tion is how much pri­vate cap­i­tal can be mo­bi­lized to sup­port the in­no­va­tion of its consumer in­dus­tries and ser­vices.

This is the only think­able sce­nario for China to keep fund­ing large in­vest­ment projects while shed­ding its over­all debt bur­den.

It re­ally is high time that some ma­jor ef­forts were made in this di­rec­tion.

In a country with ex­ten­sive ter­ri­tory and re­cent mem­ory of un­der­de­vel­op­ment, large cap­i­tal in­put is still needed in many ar­eas and many in­dus­tries.”

The author is ed­i­tor- at-large of China Daily. Con­tact the writer at edzhang@chi­nadaily.com.cn

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