China encourages private investment across industry sector

May 28, 2012 12:00 AM

by Yang Lina, Bi Mingxin and Chen Zhi

China is making all-out efforts to encourage private investment in more heavily state-controlled and monopolized sectors amid concerns that its economy might slow further in the coming months.
Since China's transport, railway and health ministries issued guidelines last month to permit private capital to develop those sectors energetically, the banking sector and the State-Owned Enterprises (SOEs) have joined in the drive. The move came in line with other recent measures announced by the central government to open state-controlled and monopolized sectors wider to private investment, in a bid to stimulate tepid economic growth.

Being drafted are detailed rules concerning private investment in more monopolized industries, such as electricity, oil and natural gas, said an official with the National Development and Reform Commission (NDRC), the country's top economic planner. The NDRC will also release a series of rules in May or June regarding better monitoring and analysis of private investment and improving engineering consulting services for private investment, the official said.
These efforts are considered by experts as the greatest push made by the Chinese government to bolster its private sector in recent years.

Encouraging private investment in previously state-controlled sectors was made a priority by the State Council, or China's cabinet, at the beginning of this year. These sectors include railways, municipal administration, finance, energy, telecommunications, education and health care.
As a matter of fact, this is not the first time China vowed to bolster private investment, as the Chinese government formulated policies in support of private capital in 2005 and in 2010, respectively. However, progress has been relatively slow, especially in the financial and energy sectors.

But this time, as the guidelines are more specific and detailed, experts agree that they will inject new vitality into China's economic growth.
"If these policies are implemented, they will greatly energize the private sector and boost economic efficiency," said Li Xunlei, chief economist at Haitong Securities.

Effective lever to stabilize growth
Analysts say that allowing private investment in the state-controlled and monopolized industries will not only advance the development of these sectors, but also shore up the economic weakness.
Previously, since people often complained about the high charges and poor services of electricity, banking and telecommunications industries, the government considered inviting private capital to break monopoly and improve services. But now as China faces increasing downward risks and inflation pressure, the Chinese government has to achieve a balance between controlling inflation and maintaining growth.

Given this situation, “The government can vitalize the economy and maintain growth by encouraging and guiding private investment in monopolized sectors without taking expansionary policies,” said Zhou Yean, professor with the School of Economics of Renmin University of China.
He added that the healthy development of private investment will also be conducive to the regulation on the real estate market, as property bubbles were caused partly by excessive private capital that did not have other better way out.

China's private investment has enjoyed leapfrog development in recent year, said Wang Xiaotao, head of fixed-asset investment at the NDRC. Private investment jumped by 28.9 % in the first quarter of this year, compared to the same period of last year, accounting for 61.9 % of China's total fixed-asset investment, up 4.6 percentage points, according to Wang.
Nonetheless, private investment still confronts various development bottlenecks. For major private enterprises, their shares in primary sectors, such as electricity, education, health care, finance, transport and water conservancy, have to be increased.

Statistics showed that private investment in the electricity and thermal power sector accounts for just 13.6 %, and only 9.6 % in the financial industry. Moreover, small- and medium-sized private enterprises have long been baffled by financing difficulties due to limited financing channels, Wang noted.
Lu Zhongyuan, vice president of the Development Research Centre of the State Council, said, “Amid the economic downturn, if the government could relax the entry criteria for private investment in financial, health care and service industries while effectively reducing tax burdens for small- and medium-sized firms, it will be good news for the next phase of development.”

It has been an agreed view that developing and supporting private investment can make it a major force in bolstering economic development, adjusting the country’s economic structure, increasing tax revenues, increasing employment and improving people's livelihood. In addition, private investment faces pressing tasks in transforming the economic development model, Wang Xiaotao said.
Private investment, most of which went to the manufacturing and service industries, remained in the lower end of industrial chains.

As China is at a critical stage in economic restructuring, efforts to contain blind expansion of certain industries and close down outdated production facilities will add pressure to private enterprise, but at the same time provide a rare opportunity for their transformation.
Therefore, private investment is shifting from “quantitative expansion” to “qualitative improvement”, and pressing ahead with its structural adjustment is a pivotal task for the sustainable development of the private sector.

The initiative to support private investment came at a time when people are worrying that China's economic slowdown may continue to accelerate in the coming months.
Dampened export growth affected by economic weakness in Europe, Japan and the United States, together with the transformation of China’s economic growth pattern, dragged China's GDP growth to an almost three-year low of 8.1 % in the first quarter of the 2012.

The World Bank cut its growth estimate for China to 8.2 % from 8.4 % in April, worrying that a cooling economy may cause both a regional slowdown and plunging commodity prices. At an executive meeting of the State Council earlier, Premier Wen Jiabao pledged to place greater priority to maintaining steady growth.
"Some contradictions and problems still exist in the economy. Downward pressure is increasing," the premier said. Efforts should be taken to improve flexibility and vision and domestic demand must be boosted, he said.

China's Cabinet afterwards pledged in a statement closer attention to "stabilizing economic growth." The Cabinet urged the implementation of structural tax reduction measures to relax the tax burden for businesses while maintaining a prudent monetary policy.
The statement called for optimizing the credit structure to focus more on meeting the needs of the real economy and keep social financing at a reasonable level.

The Cabinet also pressed for early construction of major projects in the fields of railways, energy-saving and environmental protection, as well as infrastructure, educational and health care facilities in rural and western areas.
Allowing more private investment to flow into public sectors is considered part of the efforts to unlock new sources for economic growth so as to keep the economy on the right track.

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