China urged to stay consistent with policies to prevent confusion, ensure private-sector growth
- Despite repeated pledges to support the private sector, the Chinese government has had trouble convincing firms regulatory chill has ended
- Analysts say consistent, decisive action will go a long way to persuade enterprises to resume normal activity and spur growth
Advisers and economists have repeatedly underscored the importance of stabilising business expectations in China, as policy inconsistency and disparities between words and action have prevented the dispersal of clouds of doubt casting a shadow on the country’s economic recovery.
“When expectations are weak, the market pays close attention to policy orientation … and whether it can be done,” Ji Min, director of the People’s Bank of China counsellor’s office, said in an article published in the January issue of China Finance magazine.
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“The market is more concerned about specific measures, and judges whether they can be executed. Therefore, in addition to improving the transparency of policy details, it is necessary to issue guidance on midterm policies to enhance their predictability.”
Beijing has repeatedly affirmed its support for the private sector since last summer to prevent the economy from sliding off track. Regulatory crackdowns on several industries in recent years, such as internet platform companies and tutoring, was broadly perceived to have created a chilling effect.
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Private investment declined by 0.5 per cent, year on year, in the first 11 months of 2023, in contrast with a rise of 6.5 per cent in the state-owned sector.
Xu Tianchen, senior economist at the Economist Intelligence Unit, warned that the lack of consistent policy coordination across bureaucracies has been a major issue and “decisive and drastic action” should be preferred.
We sometimes joke that if you offer someone candy and then slap him in his face, he will only remember the slap
“This protracted slump in confidence is unheard of,” he said. “The economy can’t afford successive years of a confidence crisis.”
In the long run, Xu argued that legislative support such as a private enterprise protection law will be more effective than the issuance of individual government documents, which do not often specify the scope or “shelf life” of policies.
“Some government bodies took bold steps to encourage business investment, only to find that their positive effects were nullified by excessive enforcement by others. We sometimes joke that if you offer someone candy and then slap him in his face, he will only remember the slap,” Xu said.
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On Sunday, Gao Peiyong, former vice-president of the Chinese Academy of Social Sciences, said at a forum at Peking University that stabilising expectations should be treated as the focal point in implementing economic policies in 2024.
Peng Peng, executive chairman of the Guangdong Society of Reform – a think tank connected to the provincial government – pointed out that financial services remain practically inaccessible to private firms, preventing supportive policies from having real heft. It also means, he said, that persistent problems such as high financing costs and credit rating challenges have not been solved.
Loans are often rejected by banks who have also been downgrading the credit ratings of private enterprises. These banks are following a credit “joint liability” system, wherein if one bank downgrades a credit rating, it triggers a chain reaction as other banks follow suit. This, Peng said, is a double blow to those already grappling with the slowdown in the aftermath of the pandemic.
Another factor diminishing the confidence and future expectations of enterprises is a substantial decline in property valuations.
Some shops in Guangzhou, valued at over 70,000 yuan (US$9,792) per square metre before the pandemic, have recently been appraised at just over 20,000 yuan per square metre. Such drastic reductions in asset valuation are common.
“This widespread panic could lead to businesses being unable to mortgage loans and abandoning production capabilities and assets, seriously hampering prospects for economic recovery and investment confidence,” Peng said.
