China needs the private sector to step up

May 16, 2016 09:59 AM

All pain, little gain

Government efforts since last year to stimulate the economy have been designed to cushion slowing growth and limit unemployment. Economists said the efforts naturally targeted the public sector, but they have done little to resolve the challenges facing private Chinese firms, in particular weakness in manufacturing, where much of the private sector's pain is concentrated.

Indeed, state-sector fixed-asset investment in January to April rose 23.7% from a year earlier.

"Government spending is targeting sectors that advantage SOEs," said Tim Condon, economist at ING in Singapore. "So there's less insulating, less boosting to the private sector in the face of what are pretty stiff shocks."

While investment has been flowing into services and out of manufacturing, much of the most valuable parts of the services sector - telecommunications for example, or healthcare - are either protected or heavily regulated in favor of state-linked companies.

At the same time weak global demand has taken a particular toll on private Chinese firms.

In 2016, for example, most of the export categories have declined in volume and value year to date compared with the first four months of 2015. Export volumes of ceramics, shoes, jewelry, bags, fertilisers, even Chinese medicine are all down.

The government has been encouraging private investment in infrastructure projects, but some critics complain the government is using the initiative as an excuse to foist weak assets off on private investors, offering poor returns and little protection against risk.

"(Private firms) cannot find profitable projects, and they are not confident about the future," said Zhu Baoliang, chief economist at State Information Centre, a top government think-tank.

China's cabinet this month promised "strong measures" to halt slowing private-sector investment, including relaxing market access for private firms.

The China Banking Regulatory Commission followed up with an urgent notice to commercial banks to clear bottlenecks slowing lending to private firms, sources with direct knowledge told Reuters.

More broadly, China's corporate sector is feeling the strain of the slowdown. A Reuters analysis showed Chinese companies are facing their tightest liquidity crunch in a decade.

Reflecting those strains, Xia said his company stopped raising wages in 2015 and started laying workers off in the second half of that year.

"We are currently very confused – there is no direction. We'll be lucky if we can sustain our business."

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