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Economy

Competitive Neutrality to Further Energize the Private Economy

Mar 21 , 2019
  • He Weiwen

    Senior Fellow, Chongyang Institute for Financial Studies

Strong Signal from the NPC Session

The just-concluded 2nd Session of the 13th National People’s Congress (NPC) sent an explicit signal of stronger support for private industry. Premier Li Keqiang announced a series of policies and measures for boosting China’s private economy in his Government Work Report to the NPC Session which opened on March 5, 2019.

The Premier stressed that all Chinese citizens should make great efforts to improve the business environment for the private economy.

The cornerstone of this support for the private economy is the government’s principle of competitive neutrality: providing equal treatment to all businesses — whether state-owned enterprises (SOEs), private, or foreign companies — regarding production factors, acquisitions, market access, operations, government procurement, and open bidding. There will be no special privileges for SOEs.

The sweeping simplification promised in the Government Work Report will reform government approval and administrative procedures, cutting down tremendously on the burdens and costs borne by small and micro businesses.

The government will thus step back and give the private economy, especially small and micro businesses, more leeway to compete equally in an open market.

Based on competitive neutrality, the government will provide more support to business, especially across-the-board tax and duty cuts. The industrial VAT will be cut from 16% to 13%, and the tax exemption base for small and micro businesses will be raised from ¥30,000 to ¥100,000 per month.

Effective financial help will also be coming down the pipeline. Leading state-owned commercial banks will be required to allocate 30% of their total bank loans to private, small, and micro businesses. Furthermore, the added liquidity released from targeted cuts in the required reserve rate (RRR) will be mandated for use by small and micro businesses.

All the above changes will result in lower costs and more financial resources, creating a friendlier and more liberal competitive environment. Support and facilitation for private firms, particularly small and micro businesses, are crucial for the sustainability of Chinese economic growth.

Private Economy Plays a Vital Role in China’s High-Quality Growth

Contrary to the general impression in America that China has a SOE-dominated economy, 60% of Chinese GDP is produced by the private sector. The state-owned economy accounts for roughly 33% of the total economy, far lower than that of Norway (72%) or Sweden (68%), and only slightly higher than France’s (31%).

China has set its goal for the 2019 GDP growth rate at 6.0-6.5%. Of this, 3.5 to 4.0 percentage points (i.e. 60% of total growth) must come from the private sector. Economic growth is shifting towards a high-quality, innovation-driven foundation. Over 80% of new patents come from the private sector. China needs to add 11 million jobs in 2019 and once again, 80% of the total gains are expected to be private sector jobs. China is moving towards a consumption-driven economy. The private sector provides 80% of consumer goods production, 75% of daily consumer services and 75% of all housing construction.

China’s high-quality growth depends on a strong, high-end industrial base. Private industry has been growing faster and more profitably than SOEs. According to the State Statistics Bureau, from 1998 to 2017, total industrial assets of SOEs grew from 7.49 trillion yuan to 43.96 trillion yuan, up 4.87 times. That of the private sector shot from a tiny 148.7 billion yuan to 24.26 trillion yuan, up 162 times. The share of SOEs fell from 76.7% to 48.9%, and the private sector increased from 1.5% to 27.0%. During the same period, the share of industrial assets held by foreign investors, including joint ventures, rose moderately from 21.8% to 24.0%. Sales revenue of SOEs grew by 6.9 times during this period, while that of private industry increased by 225.4 times! In 2017, total private industrial sales revenue reached 38.1 trillion, 44% larger than the SOE sector, as compared to only 5.5% of the latter in 1998. The profit/asset rate in 2017 was 9.50% in the private sector, considerably higher than 3.92% in the SOE sector. Over 19 years, SOEs shed 21.51 million jobs, while the private industry added 30.69 million jobs.

High-end industrial development relies on a series of innovations and applications of big data, artificial intelligence (AI), industrial internet, industrial robots, etc., where emerging unicorns are essential. The largest 29 unicorns in China combined have a total value of US$211 billion. The largest four — Ant Financial, Didi, Meituan and Toutiao — together account for 67.1% of the total. All of the four largest unicorns are private companies.

Encouraging Implications for Global Investors

These new policies and measures will undoubtedly boost private business. We can expect that private investment will grow faster in 2019 than last year (8.7% year-over-year). Its share in total non-farm investment will further increase (up from 62.0% in 2018). New technology innovation, new models, new products, and new services will undoubtedly sprout up across the country.

The significance of these reforms will even go beyond the private economy’s revitalization. They show the fundamental advance of the open market and fair competition in fueling China’s high-quality growth.

The government has made clear that SOEs and private firms alike will enjoy equal legal status, equal market access, equal competition and equal protection by law.

This reform package coincides with the NPC’s adoption of the new Foreign Investment Law. The law stipulates equal treatment for foreign businesses in China. In fact, both the new private sector policies and the new law on foreign investment have the same anchor — the WTO’s core principles of non-discrimination and national treatment. In concrete terms, these reforms follow pre-establishment national treatment (PNT) and a negative list (NL) approach. Under this law, all businesses in China - SOEs, private, or foreign - can receive access to a certain business line with the same national treatment. The government publishes a checklist, or “negative list,” of specific sectors prohibited or restricted for investors. All other sectors not listed are open to all businesses equally. The WTO’s core principles aim at free, fair, open operation and competition on a level field, within and among nations — and these are the values guiding China’s recent reforms.

Accordingly, all government support and incentives must be applied equally to all businesses. China can thus dispel private and foreign businesses’ worries about lacking access to government support, or receiving unfair government treatment as compared to domestic SOEs.

With the gradual implementation of the policies laid out in the Government Work Report, as well as the new Foreign Investment Law, private and foreign companies will see the truth with their own eyes: equal treatment for all companies, and tremendous business opportunities on the horizon. Private-foreign cooperation in business investment, innovation, and production will likely expand to many new areas. The healthcare and aging industry, education, and financial services, among others, look most likely to see a flood of investment from private and foreign companies.

With all this in mind, we have every reason to predict that 2019 may one day be remembered as a year when China took decisive steps to strengthen its market-oriented business environment — part of the country’s irreversible process of opening up to the world.

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