How to Stimulate Financial Demand in the Private Sector

06 Dec 2023

Chinese authorities have recently released a document that outlines 25 measures aimed at bolstering the private sector that includes increased allocation of credit resources, facilitating financing channels for private enterprises’ bonds, expanding the scope of high-quality private equity financing, and enhancing foreign exchange facilitation policies and service provisions.

The Notice on Strengthening Financial Support Measures to Boost the Development and Growth of the Private Economy, issued by the People’s Bank of China, along with seven other government departments, clearly demonstrates the government’s concern regarding the current challenges faced by private companies. Its implementation is eagerly anticipated in the private sector. However, it is essential to acknowledge that in recent years, private companies have encountered operational difficulties, and private investment has been tepid. The root of these issues does not solely lie in the supply side of financial resources. While guiding financial institutions to improve services for private enterprises is important, what is crucial is to reinvigorate the vitality of private enterprises and stimulate their financial demand.

For quite some time, the issues of “difficult financing” and “expensive financing” have been persistent challenges plaguing a multitude of private enterprises. The recently issued directive aims squarely at addressing this formidable conundrum. While many of the provisions within the document may not be entirely novel, their meticulous and pragmatic nature is certainly noteworthy.

For instance, the directive mandates a clear definition of the objectives and priorities of financial services for private enterprises. It explicitly states: “Banking financial institutions must establish annual service goals for private enterprises, increase the weight of services related to private enterprises in performance assessments, enhance financial support for private enterprises, and gradually increase the proportion of loans granted to private enterprises.”

Furthermore, it proposes targeted measures, such as “reasonably increasing the tolerance for non-performing loans of private enterprises, establishing and improving a due diligence exemption mechanism for loans to private enterprises, and fully protecting the enthusiasm of grassroots business personnel.” These measures are thoughtfully crafted and well-intentioned.

The directive also encourages lead banks in syndicated loans to proactively play their coordinating roles. For private companies facing temporary difficulties but with marketable products, promising project prospects and competitive technologies, the directive suggests early engagement in financing needs based on market principles, rather than blindly suspending, restricting, withdrawing or cutting off loans. It emphasizes the implementation of policies such as the Notice on Doing a Good Job in the Stable and Healthy Development of Financial Support for the Real Estate Market at Present (Yinfa [2022] No. 254), ensuring the stable operation of key financing channels such as credit and bonds, and reasonably meeting the financial needs of private real estate enterprises. Against the backdrop of a sluggish real estate market and a series of defaults by both large and small real estate enterprises, if these measures are effectively implemented, they can, at the very least, provide timely relief and assistance in times of crisis.

In recent years, several key indicators, including investment volume, industrial revenue and tax contributions from private enterprises, have been signaling a gradual decline in the annual growth rate of China’s private economy. Over the past three years, the average growth rate was lower than that of the previous five. And last year, the average growth rate lagged behind that of the past three years. This trend has continued into this year, with the figure for the first 10 months of this year falling short of last year’s performance.

This concerning trend, especially the sluggish private investment, has inevitably dampened the demand for finance. In recent years, private investment in China has steadily decreased from double-digit growth rates. According to National Bureau of Statistics data, private fixed-asset investment decreased by 0.5% year-on-year in the first 10 months of this year, marking six straight months of decline. Apart from the challenging macroeconomic recovery and a lack of attractive investment projects, many non-economic factors have eroded the confidence and stability of private entrepreneurs, leading to a prevalent phenomenon where private capital is hesitant or unwilling to invest.

In response to this situation, relevant authorities have convened multiple discussions with private enterprises, seeking input from financial institutions and private businesses to understand their financing challenges. The most recent notice comes at an opportune time. However, revitalizing private investment requires more than just policy directives. It demands fundamental strategies to bolster the confidence of private enterprises and stabilize their expectations.

Indeed, the growth and prosperity of private enterprises necessitate increased financial support, and the financial sector’s shift toward tangible support and high-quality development should better serve these businesses. While the government can play a role in guiding financial institutions to serve private enterprises more effectively, it’s crucial to remember that investment and financing are ultimately market-driven activities. “You can lead a horse to water, but you can’t make it drink.” Both financial institutions and private companies are market participants who operate based on their judgments of risk and reward, and the specific allocation of financial resources should be determined by market dynamics. In reality, the dilemma of financial institutions holding vast sums of capital while simultaneously tightening lending practices cannot be easily resolved by a few government documents. The path to overcoming this challenge requires a more comprehensive approach.

Inefficiency in meeting the financial demands of private enterprises can be attributed to their overall lack of vitality. Recently, the uproar surrounding the case of a “Bun Stall Fined 15,000 Yuan for Selling Tofu Pudding” vividly illustrates the extent to which regulations have tightened their grip on small and midsize private enterprises. The constraints imposed on these businesses have reached such an extreme that seeking a spark of entrepreneurial spirit has become akin to chasing shadows. In certain regions and sectors, the reinforcement of regulations has become a thoughtless, non-negotiable and consequence-ignoring endeavor. To rejuvenate the dynamism of private enterprises, it is imperative to firmly rectify the “contractive policies” that have prevailed in some industries over the past few years and to reflect upon the underlying principles of governance. To truly achieve “competitive neutrality,” barriers to private enterprise in areas such as resource acquisition, access permits, loan acquisition, and government procurement and bidding must be eliminated.

To revitalize private enterprises, it is essential to make theoretical breakthroughs, ensure institutional safeguards and create a conducive environment. It should be acknowledged that there are indeed some discrepancies in the current theoretical framework concerning the private economy. People have been drawing on several different interpretations, and even some “inaccurate arguments” have found theoretical justification. Therefore, it is necessary to delve deeply into major questions such as why we should develop the private economy and how to develop it from a theoretical perspective, rectifying the coarseness of theory, expediency and inconsistency, and manifesting ownership neutrality through institutional and legal means.

Over the past two decades, there has been no shortage of policy documents aimed at promoting the development of the private economy in China. At the central level alone, significant documents such as the 36 Policies for the Non-Public Economy” have been successively introduced to specifically address the development of the private economy. Countless supporting documents have also been rolled out by various departments and local governments. While it is not fair to generalize, the phenomenon of “implementing one document with more” has become quite prominent, leading to diminishing marginal effects. Today, essential documents like the most recent notice should certainly follow suit. At the same time, government departments should carefully and accurately assess the implementation effects of previously issued policy documents — determining which ones have been successfully put into practice and which ones have fallen by the wayside — and reflect on the reasons behind these outcomes. For policymakers, the principle of “just toil without questioning the harvest” is not appropriate.