Private Business Sidelined by China's Stimulus

By Liu Zhaoqiong, Xi Si, Wei Liming, Li Ping
Published: 2009-03-16

From cover, issue no.409, March 9, 2009
Translated by Zhang Junting
Original article:

Chinese private businesses have complained of a lack of access to projects and loans related to the four-trillion-yuan stimulus package introduced some four months ago.

They have blamed their state-owned counterparts for unfair competition, carving up nearly the entire stimulus pie and soaking up new bank loans.

"Government investments have been mostly circulating within large state-owned companies.... Once they get projects and funding, they source for all supplies, down to the tiniest spare parts, within their own system and interest groups.

"It is impossible for the private sector to penetrate these walls," said Bao Yujun, Chairman of the China Private Economy Research Center and former vice-president of the Chinese Federation of Chamber of Commerce.

Funding channels also favored state-owned firms, which commercial banks deemed as low-risk clients who enjoyed government backing and economies of scale.

Open data revealed that in January alone, of the 1.62 trillion yuan new loans issued, some 90% had flowed to government projects won by state-owned companies through tender process.

Step-Child of the Chinese Economy
In recent years, private businesses have contributed up to 65% of China's GDP, created more than 80% of new jobs, filed 65% of all patents for new inventions, and produced more than 80% of new products.

But the private sector has been squeezed since the first quarter of last year as the government tightened credit controls to curb inflationary pressure. And after the financial crisis, a perfect storm of fallen exports and domestic demand, an investment pull-out, and deflationary pressure threatened their cash flows even further.

Despite that the Chinese government kick-started the stimulus package last November and promised to inject more new loans into the market this year, the survival outlook of private businesses remained gloomy.

Bao, who recently did a research on the impact of stimulus measures in Zhejiang province - the cradle of China's private capital, found that private firms were being sidelined, as the playing field was not even.

Not only the state-owned firms had an upper hand in bidding stimulus-related projects, they also held the power to decide which downstream businesses to patronage for supplies and sub-contracting jobs.

For the smaller - in business scale and funding - private firms, one way to gain access to bigger deals and finances was to hook up with state-owned firms' patronage system.

This strategy was acknowleged and even encouraged by Chinese leadership; for instance, Chinese vice premier Zhang Dejiang had on March 5, during the National People's Congress meeting, suggested that Zhejiang private businesses should lean on their state-owned brothers for support in time of crisis.

"As private businesses, if you want to grow big, you need to first attract the attention of state-owned firms, who are stronger and better funded.

"Once you have clenched on to the big brothers, lean on them, co-operate with them, and gain opportunities to upgrade your own business, technoloy and management," Zhang said.    

Without the foundation enjoyed by state owned firms, private firm owner Zhu Jianmin, who aspired to venture into the solar power industry, had spoken to many banks to support his dream but yet to heard any good news. 

"I actually perfectly understand the banks. If I was a bank, I would also only lend money to state-owned firms. Now that bank managers will lose their jobs if they issued loans that turned bad debts, they will definitely avoid the more risky private companies," said another private entrepreneur Wang Junjin, president of June Yao Group.

"Fairness is all we ask," said Li Shufu, president of Geely Automobile, a private player that had earned a spot in an industry dominated by state-owned companies.

The auto sector was one of the 10 industries identified for economic revival by the Chinese government recently. Eight major auto players, all state-owned ones, were shorlisted as priority for special aids for restructuring and merger. Geely was not on the list. 

"As a private company, simply getting into the industry is worth thanking God over," said Li when pressed by the media to comment on his company being sidelined by measures introduced under the industrial revival blueprint.

"Help Us Help the Economy"
During the nine-day top legislative and political advisory meets in Beijing in early March, the plight of the private sector drew the sympathies of politicians, scholars, community and business leaders alike.

Delegates to the meetings pointed out that these now-struggling private businesses contributed immensely to China's economic boom, and that their wellbeing would be critical if China was to pull itself out of the slowdown.

Many proposals on reviving the private sector were raised at the meetings, and majority of the motions called for removal of business monopoly by state-owned giants, especially in the fields of education, health care and infrastructure construction.

Wang Renzhou, director of Ningbo Development and Reform Commission, suggested to allow private businesses getting more corporate loans through fiscal subsidies and loans subsidies from the government.

On the difficulties of fund raising by private firms, many scholars and politicians at the meetings had proposed that private capital be allowed to set up private financial institutions, specialising in catering to the needs of private firms.

Shao Zhanwei, the secretary of Wenzhou Provincial Party Committee suggested that both private and community lending activities should be legalized. In his opinion, Wenzhou had abundant private capital and savings, but a vast pool of the funds turned into usury businesses for quick profits; thus, he believed the government should draft rules and regulations to tap this excess funds.

Representatives from the Federation of Industry and Commerce urged the government to help private businesses to get loans. They also requested that private businesses - especially high-tech ones -to be exempted from credit ratings.

They also proposed that special funds to be established to promote the development of private businesses; government should provide a guarantee system for private firms to access loans; and new bank loans in support of projects under the stimulus package should be distributed to private businesses at a reasonable ratio.

In addition, most private businesses sought fairer tax treatment. Sun Guibao, a delegate of the political consultative conference, said the current tax system—including the value-added-tax (VAT)—discriminated against private businesses. He said the private businesses were suffering from "double taxation" treatment.