Cover editorial, issue 396 Dec. 1, 2008
Original article [Chinese]

After China announced its RMB 4 trillion stimulus package, central and local governments moved quickly to approve several significant investment projects. The central government would contribute RMB 1.18 trillion, with local governments and other sources taking up the rest.

With non-governmental investments making up some 60% of fixed asset investment in China, they will be a key factor in whether the grand stimulus package will achieve its desired effect.

But despite this important fact, state-owned companies, especially ones at the national level, have enjoyed a bigger share of projects so far, be they railway, highway, airport, and energy.

In response, we hereby call for more importance to be attached to private businesses in stimulating the economy.

The private economy is the major driving force behind China's economic growth today. Private businesses not only contribute over 60% of China's GDP, but also create the most new jobs. We are ignoring reality if private businesses are marginalized in any effort to stimulate the economy or spur investment.

Even if state-owned investment could prop economic growth at 8% or above, what can drive the economy in the long term if private companies are not given corresponding opportunities to develop?

The experience of 1998 shows well what happens when the private economy is overlooked, and the investment fervor then caused tough problems that have yet to be solved today. One reason was that the government squeezed out room for private investment. Besides that, market barriers and strict regulations made it impossible for private capital to act. This is also why China had to continue with active fiscal policies in the following seven years.

Most private companies work in manufacturing or the service industry and thus absorb large sections of China's labor force. Thus, increasing domestic consumption is the fundamental solution to stimulating the economy. If we can't prevent the private economy from faltering, the resulting higher unemployment will harm the stimulus package's effectiveness.

We agree with what Ms. Wu Xiaoling has said, that since the private economy is already strong, what the government should do now is putting smaller investment to better use. In other words, instead of guaranteeing funds for entire projects, the government should only provide a small sum of money. If we rush into too many projects like last time, there will be consequences for future economic development.

Alongside rushing to Beijing for sharing the 4 trillion apple pies, local governments should also spend more time to understand how private companies are faring, listen to their opinions and support their development with practical policy.

In the medium term, the government should finally solve the financing problems which have been plaguing these private companies. The banking system ought to change its credit policy because loosening monetary policy should be fair and available not only to state-owned companies but also private ones.

And furthermore, the government should accelerate the launch of the growth enterprise board in the capital market, which enables private companies to directly raise money, and encourage private equity and venture capital investment in China.

After solving the issue of financing for private companies, hurdles to their investment must be cleared. Therefore, it is time to change the present policy which has been widely criticized for excluding private companies.

Despite that three years ago the State Council carried out a series of measures to allow private companies to invest in a broader range of sectors, there remain invisible barriers of entry for private firms in sectors such as public infrastructure and energy. If the government can take advantage of this stimulus plan to solve bottlenecks for private business development, it may be enough to pave a solid and long-term foundation for China's future growth.