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Wang Xiangwei
SCMP Columnist
China Briefing
by Wang Xiangwei
China Briefing
by Wang Xiangwei

China must take urgent action to push its private sector past a crisis of confidence

A firestorm of criticism following a social media post advocating that the private sector should be phased out has exposed how it is still treated as a second-class player

For people seeking internet fame or infamy, making shocking claims is one of the surest routes to generate eyeball traffic.

In that sense, Wu Xiaoping, who was until recently an obscure investment banker turned internet entrepreneur, achieved instant notoriety last week when he posted a short essay on Chinese social media arguing that China’s private sector had played its historical role in assisting the leap forward of the public sector and should be phased out.

In its stead, a brand-new, more focused, and more united state-private mixed ownership sector with greater economies of scale would gain more prominence in the socialist market economy, Wu said in the post.

His post went viral before it was eventually deleted, as it appeared to strike a raw nerve in the ongoing debate about the current state and future of China’s private economy, at a time when President Xi Jinping has strengthened the Communist Party’s controls at all levels of society and placed more emphasis on the role of the state sector.

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Wu’s post was mostly met with criticism and scorn from online users who dismissed it as odd or ludicrous.

More interestingly, several influential Chinese newspapers – including party mouthpiece the People’s Daily, The Beijing News and the Economic Daily – treated Wu’s post as more than an attention-seeking stunt and ran sharply worded commentaries to rebuke him.

All have pointed out that Wu’s post represented a wrong way of thinking that is gathering steam in China.

The People’s Daily said in a social media post on Thursday that the private sector would not be phased out, but would only get bigger and stronger.

However, it acknowledged that the sector was under great pressure, with small enterprises facing a life-or-death test because of economic headwinds.

It said the negative comments on the private sector were aimed at creating market panic.

Indeed, Wu’s post has reminded many people of the party’s ruthless nationalisation of private businesses in the 1950s, which first started through introduction of the so-called state-private joint ownership.

Wu, who used to be an investment banker at the China International Capital Corporation – the country’s first Sino-foreign joint venture investment bank – confirmed to official media he was the author of the post but declined to elaborate further.

His former colleagues at CICC and media reports have described him as someone keen to make shocking comments to get exposure.

Curiously, since 2015, the Chinese government has accelerated its so-called mixed ownership reform, allowing private capital to invest in state-owned enterprises. But that reform is aimed at revitalising the state sector, and private businesses are not allowed to take a controlling stake in state-owned enterprises. Apparently, Wu was not referring to this reform, as his arguments were aimed in the other direction.

If nothing else, he certainly picked the right time to stir up the debate, as the Chinese government is gearing up to mark the 40th anniversary of reform and opening up amid rising concerns over the country’s direction.

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In December 1978, Deng Xiaoping launched China’s transition to a market economy by opening up to private and foreign investment, paving the way for the country’s economic lift-off.

Since then, China’s private businessmen, who first started off as small-time vendors or street hawkers, have come a long way.

Nowadays, the scale and influence of China’s private economy can be summarised by the figure 56789 – the private sector contributes 50 per cent of tax revenue, 60 per cent of gross domestic product, 70 per cent of industrial upgrades and innovation, 80 per cent of total employment, and 90 per cent of the total number of enterprises.

In the first decade of the 21st century, the party further embraced the private sector and elevated its political status by opening up membership and promoting a select group of businessmen to party and government positions.

Despite its rising economic and political influence, however, the private sector, much like overseas investors, is still largely treated as a second-class player next to the state sector.

Like foreign investors who have long cried out for an even playing field, Chinese private firms have also largely been shut out of strategic and potentially lucrative sectors such as banking, health care, energy, television and broadcasting.

Chinese President Xi Jinping’s anti-corruption crackdown has put many private businesses in its crosshairs. Photo: Reuters

But private businesses have long had it even worse than foreign investors, in terms of difficulties securing financing and land for development, or incurring much higher costs to obtain loans than the state sector.

With the government firmly in charge of factors of production including land and capital, many private businessmen had no choice but to bribe and collude with officials to get approvals and permits.

Since Xi came to power in late 2012 and launched an unprecedented anti-corruption campaign, many private businessmen found themselves in the campaign’s crosshairs because of their collusion with corrupt officials. While the campaign also targets leading executives at state-owned firms, their removals have zero impact on the operations of those firms.

But the arresting or jailing of private businessmen often leads to the immediate freezing of their firms’ bank accounts and assets, which makes business operations difficult to sustain.

In some cases, the businesses are forced into liquidation or sold, sometimes to the state sector.

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Meanwhile, public sentiment towards the private sector has also shifted because of the lavish lifestyles of tycoons and the unscrupulous nature of certain private businesses, which has helped contribute to a number of high-profile food and health scandals.

To be sure, over the past few years Xi and other Chinese leaders have repeatedly tried to reassure the private sector and promised to better protect property rights and cut taxes and fees.

But private investment is still facing a crisis of confidence, with its growth rate on a downward trend in recent years.

To make matters even worse, the Chinese economy is slowing down from its hectic recent double-digit growth, and the government is strengthening regulatory controls, including taking measures to force businesses to comply with stricter but costly environmental standards.

In this context, the fact that Wu’s post – albeit an isolated event – could cause such a big reaction speaks a lot to the anxiety and worries of the private sector.

Restoring the confidence of the private sector should become a top priority for the government.

As it is under rising pressure to open up further and to create an even playing field for foreign investors, the government should start by doing the same for private businesses.

Wang Xiangwei is the former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper

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