Faculty & Research


From tax cuts to cheaper,easier financing,a string of measures have been gradually transforming the market environment for China’s private businesses. However,with the current downward pressure and persistence of multiple problems such as excessive red tape,private businesses in the country have yet to see their spring in full swing.

Liu Qiao,professor and dean of Peking University’s Guanghua School of Management,said in an interview with Chinese business magazine Caijing that police changes should take effect in small,steady doses in order to help China’s private economy truly thrive.

Q: How do you evaluate China’s economic performance in 2019?

L: Caught between multiple disadvantages at home and aboard,the Chinese economy achieved hard-earned growth that actually did not disappoint. However,low GDP growth,lackluster industrial performances and inadequate investment combined to give privately-owned,medium- and small-sized businesses in the country a really hard time,and the downward pressure in the near future will be even greater.

Q: Service spending actually grew faster amid a general slowdown last year. Should business runners adapt to this trend?

L: China’s consumer spending structure is changing as service spending takes up increasingly a greater share,but our firms are not well prepared to cope with this change yet.

Q: What is your evaluation of the performance of China’s private economy in 2019?

L: Private businesses have been a crucial force driving the Chinese economy,but the downward pressure resulted in a lot of issues for them. In short,it was a confidence problem that led to inadequate investment. From a long-term point of view,they were a series of structural problems that need to be addressed with pertinent policies.

Q: Governments at all levels have been carrying out various policies to facilitate private businesses’financing since 2018. Do you think the financing issue has actually got better so far?

L: Our researches showed that this financing issue has not been effectively addressed. Loans to private sector in China accounted for only 5.9 percent of the total social financing in 2017,14.5 percent in 2018. It is estimated that the gap between loans to China’s private sector and state-owned enterprises was at least 250 basis points. Even private businesses whose applications have been approved by banks might risk their loans being cut off or revoked for various reasons,and are forced to seek higher-interest lending to fulfill the rest. Financing difficulties lead to liquidity problems,forcing some firms to halt operations and even bankrupt.

Meanwhile,the country’s private economy also suffers shrinking social credits. Debt risks harm borrowing abilities and willingness. Figures show that in the first three quarters bond defaults in China totaled 99.8 billion yuan(14.4 billion U.S. dollars),including 50.75 billion yuan that was newly-added in the third quarter,up 10.4 percent from the previous quarter.

Q: How do you look at the total cost of private businesses?

L: With rent,labor force,taxes and other factors taken into account,the total cost for Chinese private businesses’operations are high and might grow even higher. By the end of 2018,a total of 140 million people were employed in urban private sector,accounting for 32.13 percent of all urban hires. Their annual income rose from 17,071 yuan in 2008 to 42,833 yuan in 2016 up 150.91 percent.

Tax-wise,tax contribution from private businesses among the country’s top 500 contributors having been rising much faster than other types of firms. It means that private businesses are shouldering a increasingly bigger role in China’s economic transition,but also reveals that tax burdens on them are huge.

Q: Are there other issues plaguing private businesses’operation environment?

L: Despite improvements in recent years,related policies are still not flexible and subtle enough to not affect confidence and investment ability and willingness in the private sector. Take the real estate market. Price and financial risk controls led to a situation where large real estate firms took advantage of high leverage to continue expanding while medium- and small-size firms suffered financing hardships and many defaulted and went bankrupt. From 2018 to July 2019,750 real estate firms declared bankrupt. Market entry controls and supervision are also too strict for some other industries such as medical services,entertainment and education.

Q: How to solve these long-term,structural issues for our private economy?

L: Above all,we need to understand the deeper logic behind these problems and does not mistake these long-term,structural issues for short-term policy problems.

As total factor productivity(TFP)growth slows and China is in urgent need of seeking new growth drivers and ways to boost TFP,many private businesses risk continuing their usual expansion-oriented strategies and failing to give adequate attention to value creation and return on investment. They might also be ill-prepared to adapt to the country’s changes in industrial structure and employment structure. In other word,a supply-side inadequacy to cope with rising service spending.

Meanwhile,with rising incomes and an aging population,emerging industries(high-end manufacturing,clean energy),Internet(e-commerce,gaming and fin-tech)and health(medical services and insurance)might become new growth drivers,leaving behind those private firms that have yet to transform their businesses accordingly.

From a global point of view,a huge number of Chinese private businesses still rank in the middle and low end of the industrial chain,heavily relying on other countries for key manufacturing technologies and fields. This makes them vulnerable to sudden changes in the exterior environment. Despite greater opening up efforts in the service sector,private businesses need to strive for bold innovations so as to achieve gain an edge in market competition. A better business environment is also needed. However,all these take time.

Q: Any specific advices to boost our private economy?

L: I have four short-term suggestions. First,the China-U.S. trade dispute has been doing a lot of damage to private firms’investment prospect. It’d be helpful if the two countries can reach some agreements.

Second,we should step up efforts to implement large-scale infrastructure projects as they will help greatly boost economic growth and private businesses’development. Based on infrastructure,rentals and commercial properties,it is time for China to push forward real estate investment trust(REITs)so as to guide long-term funds and boost investment rates. In particular,we should focus on investment efficiency and realize resource distribution in a market-oriented fashion.

Thirdly,with the absence of new growth drivers yet,real estate will continue to play a key role in boosting the country’s economy,so some level of flexibility is recommended when it comes to property market control. Relaxed entries to the markets of fund management,health care,education and entertainment should also do private businesses good.

Policy-wise,as the marginal effect of monetary tools are weakening,a bigger role should be handed to fiscal policy. In addition to local government bonds,more treasury bonds are recommended to give room for the cutting of taxes and fees while offering fund support for key infrastructure projects.

Q: What are the new growth drivers for China in the coming years? How to set up a long-term mechanism for private businesses’healthy development and take advantage of the market to guide them on a road to reform?

L: The health of private economy closely reflects the country’s reform measures. In order to unleash their growth,we must address structural issues and try to solve them through deeper,market-oriented reforms.

First of all,we should effectively integrate national strategies into the market and exert huge efforts to accelerate industrial structure upgrades. Key TFP-boosting forces include industrial digitisation,infrastructure for the Industrial Internet,mega-industries such as civil aviation,resource redistribution and efficiency enhancement. Private businesses should have a role to play in all these fields.

Meanwhile,the government should further streamline its functions and keep intervention to the minimum so as to ensure the market’s decisive role in resource distribution. What it should do is to create a fair and just environment for competition. Stop favoritism,break administrative monopoly,and relax entries to the basic industries.

In particular,unremitting reform efforts should see to the market assume its decisive role in all aspects from resource distribution,rates-setting,financing to delisting. The residential registration system(hukou)should be further reformed to ease the flow of labor forces and take into account migrant workers’individual contributions when determining their benefits in education,healthcare and social insurance. More opening up attitude in recruiting overseas talents is also recommended.

More funds and efforts should also go into research and development,especially in basic sciences. China’s R&D input takes up a sound 2.18 percent of its GDP,but that still lags behind Japan’s three percent and 2.7 percent in the U.S. In addition,only six percent of that fund goes to basic sciences,far lower than the 17.2 percent in the U.S. and 25 percent in France. China should push its R&D input to more than three percent of GDP,striving for a fully-independent industrial supply chain and encouraging long-term,high-risk researches and innovations. Meanwhile,intellectual property rights should be better protected.

It is a long-term undertaking to restore the status of China’s private economy,and further cutting of taxes and fees will eventually help unleash their vigor and establish a sound environment for consumer spending,business start-ups and innovations.

© 2019 Guanghua School of Management Peking University