China's Leaders Weigh Private Sector Opening as Investment Slows

  • China commissioned study to boost weak private investment
  • Implementation of recommendations would accelerate reforms

Xi Jinping.

Photographer: Gallo Images/Getty Images

After weak first-quarter investment figures added to concerns about the outlook for China’s economy, one of the government’s most powerful policy-making bodies commissioned a study of private businesses to discover how to turn it around.

That report, seen by Bloomberg, contained a slew of policy proposals that altogether would amount to one of the biggest openings to private businesses in China since the 1990s. Recommendations include allowing private companies greater access to restricted industries, introducing rules to protect the rights of private investors, reducing official meddling and encouraging business people to participate in the policy-making process.

Not long after the report was submitted in the summer, the Communist Party’s top committee on economic reform chaired by President Xi Jinping released a little-noticed guideline on Aug. 30 that echoed the language used in the study. The government would offer “comprehensive and equal protection for public and private owners of property," the statement said, including equities and intellectual property rights.

If other recommendations are implemented, they would mark a sharp acceleration of reforms as Xi’s government seeks to bolster an economy set for its slowest expansion in more than two decades. Private business in China currently only have limited access to industries related to national security, natural resources and industries for public welfare.

‘Stave Off Damage’

Xi got a political boost this week when China’s Communist Party declared him as its “core” after the end of a four-day conclave in Beijing. The designation, which wasn’t bestowed on his predecessor, Hu Jintao, strengthens Xi’s hand ahead of a twice-a-decade power reshuffle next year.

Details of the study were shared by people familiar with the situation who asked not to be identified because the information is sensitive and hasn’t been officially released. The State Council’s Information Office and the National Development and Reform Commission didn’t reply to faxed questions about the findings.

On Thursday, an editorial in the Economic Daily -- a newspaper overseen by China’s cabinet -- also said the government should be “fair and just” when dealing with the private sector in order to “unleash economic vitality and creativity.”

“There is a growing belief that China is going to have to adjust its policies toward the private sector as its economy continues to shrink,” said Hu Xingdou, an economics professor at the Beijing Institute of Technology. “The guidelines were made to shore up confidence among private business owners and to help stave off damage to the broader economy.”

The latest economic data released this month showed public-sector firms fueling investment with a 21 percent jump in the nine months through September, compared with 2.5 percent for private companies. In 2012, when Xi took power, private investment was growing at more than 20 percent.

Chinese officials had previously raised concerns about the slowdown. In May, the party’s official newspaper People’s Daily quoted an unidentified “authoritative person” stressing that the "sharp drop" of the private investment is becoming a "risk point" that can’t be ignored. The government is also preparing 1 trillion yuan ($150 billion) in projects open to private-sector companies, Bloomberg reported in September.

The government study, which didn’t lay out specific details of the policy proposals, reflected the concerns of business owners about the protection of personal and property rights, and whether private companies would have the same opportunities as state-owned enterprises. It cited dozens of examples over the past five years where local governments have abused their power in dealings with private businesses, including illegal detentions, breaking contracts arbitrarily or altering agreements when new officials took charge.

To address the issue, the research called for the government to facilitate a transparent market environment and ensure that private and public companies enjoy equal treatment in bidding for contracts. It also urged leaders to be careful in conducting corruption investigations, and to wait until a court verdict is delivered before confiscating the assets of private businesses or citizens.

State-Enterprise Reform

Xi’s anti-corruption campaign has expanded over the past few years, with official statistics showing that more than 1 million officials have been punished for crimes that normally involved bribes. The policy also snared many business people, including prestigious ones, according to an April study conducted by Peking University’s National Development Institute.

During Xi’s first four years, the party had increased its control over state-run enterprises, making them stronger and more efficient through both mergers and stimulus efforts aimed at rebuilding railroads, highways and airports. Still, the pace of reform has come under criticism, including by the International Monetary Fund.

“Rapid credit expansion, revamped real-estate sector driven growth and slow SOE sector reform are raising vulnerabilities,” Changyong Rhee, the IMF’s Asia-Pacific director, said at a briefing in Washington this month.

Encouraging private enterprise remains a controversial topic among some members of the Communist Party even though China has long used pragmatic measures to boost growth. China began implementing market-oriented reforms in the 1980s, and in the following decade it expanded the scope for private businesses by reducing the number of sectors reserved for state-owned enterprises.

"The government should reduce its direct intervention against the markets," said Hu from Beijing Institute of Technology. "Confidence can only be restored after the central leadership sends a clear message to private investors with actual actions that China will uphold its market-oriented reforms."

— With assistance by Keith Zhai, and Xiaoqing Pi

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