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Walk the Talk
China takes further steps to support private enterprises
By Zhang Shasha | NO.48 NOVEMBER 29, 2018
A wheat producing base run by Zhaofeng Hetao Wheat Flour Co. Ltd., a private company in north China's Inner Mongolia Autonomous Region (XINHUA)

A few weeks ago, Yan Hongzhi was worried about money. His company, Linkage Potato Co. Ltd., had plans to expand its production this year. With the demand for potatoes increasing from 70,000 tons to 120,000 tons, the supplier of potato foods in Chifeng City, north China's Inner Mongolia Autonomous Region, had to raise 200 million yuan ($28.8 million) to purchase the crop. Yan said they lacked 20 million yuan ($2.88 million).

However, the shortage of money did not concern him for long because five working days after he applied for loans from the Agricultural Development Bank of China (ADB), his company received a loan of 19 million yuan ($2.74 million) on November 6, with an interest rate of 4.35 percent. The bank is China's only rural policy lender responsible for providing financial services to agriculture and the rural economy.

In Inner Mongolia, with most of its land a 1,200-meter-high plateau offering a cooler climate and expansive terrain, potatoes and grain are the main agricultural products and private companies are the major players in the industry. To help them expand purchasing of agricultural products, the ADB has issued loans to private companies with financing difficulties.

The loan interest rate offered by the ADB is 50 percent lower than that of other financing methods, according to Li Guoliang, who runs a company in Inner Mongolia's Tongliao that purchases sorghum, green bean and buckwheat.

On November 1, President Xi Jinping reiterated the significance of the private sector in China's economic development at a symposium and demanded concrete approaches to address the difficulties it encounters in marketing, financing and restructuring. Since then, policies and measures have been announced in succession, indicating that support for private enterprises is not just a slogan, but is backed by substantial action.

Collective response

On November 6, the People's Bank of China (PBC), the country's central bank, unveiled an array of policies regarding bond issuance, bank loans and equity financing.

"There is a lot of water in the monetary 'pool' but we need to channel the funds to cash-starved private businesses," said PBC Governor Yi Gang. He disclosed that in a bond issuance pilot, the first batch of three companies raised a total of 1.9 billion yuan ($273.7 million), with their bonds oversubscribed, while another 30 private enterprises are on their way to preparing for the issuance.

Ning Jizhe, Vice Minister of the National Development and Reform Commission, said on November 10 that China will launch a series of projects in the sectors of transport, energy, ecology and environmental protection in line with national industrial policies, with a clear investment return mechanism for private businesses.

In the first 10 months of the year, China's private investment increased 8.8 percent compared to the same period in 2017, accounting for about 60 percent of the country's total fixed assets investment. Comparatively, the overall year-on-year growth rate of fixed assets investment in the country was 5.7 percent.

Since 2013, China has piloted mixed ownership reforms in the sectors of electricity, oil, gas, railway, aviation, telecommunications and defense, with the aim to diversify the equity structure of involved state-owned enterprises. Ning said the pilot will expand to more sectors in order to make better use of private capital.

Minister of Commerce Zhong Shan affirmed the positive role of private enterprises in China's commercial development, saying they contribute 90 percent of domestic trade, 48 percent of exports and 49 percent of overseas investment.

"The Ministry of Commerce will encourage private firms to participate in trade fairs, take part in projects under the Belt and Road Initiative and establish themselves in free trade zones and overseas economic and trade cooperation zones," Zhong said on November 14.

"We will also provide better policies such as export rebates and trade financing and facilitation."

In addition, the State Administration of Taxation (SAT) has issued a guideline with 26 detailed measures to facilitate the development of private businesses, including substantial tax cuts, particularly value-added taxes, tax exemptions for micro and small firms and technology startups, and the reduction of nominal rates for social security contributions.

Measures will also be taken to cope with the difficulty and high costs of financing for private firms and simplify tax payment procedures. "China's taxation authority has always treated private enterprises equal," said Huang Yun, a senior SAT official.

"Private enterprises have encountered some difficulties and obstacles in terms of production factors such as fewer financing channels, higher financing costs and increasing labor and land costs. The tightening of environmental protection standards and uncertainties in international markets also pose challenges for them," Sang Baichuan, Dean of the Institute of International Economy at the University of International Business and Economics, told Beijing Review. "The new measures are conducive to building the confidence of private businesses and their implementation will help address these difficulties."

Workers process dried fruits in a private company in Yiyuan County, east China's Shandong Province, on November 4 (XINHUA)

Top-down action

While central government departments are rolling out supporting policies for private enterprises, local authorities in many regions also have made efforts to facilitate the private sector.

"Localities should adopt more targeted measures in accordance with their own conditions," Sang said, adding that in regions such as the Pearl and Yangtze river deltas with a relatively high standard of industrialization, the private sector is stronger. The major tasks in these areas lie in industrial transformation and upgrading, making technological innovation extremely important, he suggested.

However, as the cost of labor ascends and the market environment fluctuates, the risk for innovation increases. Authorities in such regions should focus on stabilizing the market for the development of the private economy and offer support for technological innovation such as helping prevent risks in financing, Sang said.

Chen Jining, Mayor of Beijing, revealed that a fund of 35 billion yuan ($5.04 billion) has been set up to help ease liquidity risks for publicly traded firms which have pledged shares as collateral for loans, adding that authorities will support private firms in issuing bonds.

"The Beijing Municipal Government will remove investment hurdles and allow private capital in the financing of over 60 projects with a total investment of 100 billion yuan ($14.4 billion)," Chen said.

Moreover, since there is a gap in the level of development between coastal and inland regions, a dual regional structure exists. As a result, many private firms in coastal provinces seek to transfer to other regions. Sang said authorities should assist them in the course of their move to help lower their relocation costs.

As for old industrial bases such as northeast China's Heilongjiang Province where there are a large proportion of state-owned enterprises, the private sector is relatively weak. The main task for the local government is to encourage the development of private firms by creating a fair business environment for them to participate in market competition.

To stimulate the private sector in Heilongjiang, Zhang Qingwei, Secretary of the Heilongjiang Provincial Committee of the Communist Party of China, proposed four steps at a recent symposium: stabilizing the market and developing a batch of large private enterprises with distinctive core businesses and core competitiveness; cultivating micro and small companies with supporting policies; revitalizing unprofitable firms; and creating new enterprises with new business models to boost the economy, expand consumption and drive employment.

"Private enterprises have flexible operating mechanisms, are highly sensitive to market trends and pursue the maximum possible returns for their investment. They are bound to capture market opportunities and are good at understanding social needs and choosing investment and operation directions accordingly," Sang said.

He added that effective cooperation with state-owned enterprises will allow private companies to have access to more financing channels, lower business risks and costs, and acquire more resources. On the other hand, state-owned enterprises can also benefit from the team-up as private firms are more market-oriented. "Thus, to combine their advantages, it is possible to achieve a win-win situation," Sang said.

Copyedited by Rebeca Toledo

Comments to zhangshsh@bjreview.com  

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