SCMP: Trade war or not, China’s pivot to the private sector and return to infrastructure spending are worth watching

Christine Loh says having seen results from its crackdown on shadow banking, China is taking steps to address the private sector’s need for financing. Meanwhile, more funds are also expected to be allocated to infrastructure

While the US-China trade war has yet to be resolved, Beijing is pumping iron to make sure the domestic economy can achieve gross domestic product growth of around 6.5 per cent this year. Keep your eyes on the private sector and infrastructure investments.

China’s private sector is being given a long-awaited shot in the arm. The authorities have asked banks to allocate half of their new loans to private businesses by 2021. This addresses Chinese businesspeople’s long-standing gripe that they are unable to get financing from mainstream banks, as state-controlled commercial banks largely serve state-owned enterprises and local governments.

Private businesses have had to resort to non-bank institutions for funding – the so-called “shadow banks” – and many have no option but to use high-interest short-term funds to finance long-term commitments. Worse still, these sources of funding began to dry up with the authorities’ curbs on shadow banking over the past 30 months.

Regulators had to find aggressive ways to fix China’s runaway credit boom that began in 2008. They capped credit expansion as a percentage of GDP by stopping off-balance-sheet lending, which also affected the finances of SOEs and local governments.

The build-up of debt not only put public and private institutions at risk but also became a threat to China’s financial stability, making it necessary to rein in shadow lending. The Chinese leadership is now confident its deleveraging measures have worked and the country’s overall debt-to-GDP ratio, which has stabilised at around 250 per cent, is manageable.

Having averted a potential debt crisis, China is in a better position to address private-sector financing. After all, the private sector employs some 340 million people, contributes more than 60 per cent of China’s GDP growth, brings in over half of the country’s fiscal revenue, makes 60 per cent of fixed asset and outbound investments, and contributes 70 per cent of technological innovation and new products. It makes no sense to marginalise private businesses and favour SOEs and local governments any more.

The string of announcements from the Central Economic Work Conference at the end of 2018 made the priority to boost the private sector loud and clear. Bank branches are expected to work with local chambers of commerce and industry associations to extend their outreach to private businesses throughout the country. Banks will also set aside lending quotas to very small businesses. A new five-year tax policy to ease the tax burden on partners in venture capital firms and help boost innovation came into effect on January 1, and more tax concessions to businesses can be expected.

A related problem for individuals and private companies seeking credit is China’s property rights system. In a socialist state, property title belongs to the state while the right to use the property can be in private hands. Those wishing to use property as a form of security in China have to jump through many hoops. The authorities could consider using insurance as a bridging tool for creditors for the time between enforcement in case of a loan default and recovery of the use of the property.

There is a symbiotic relationship between SOEs and local governments, as most of China’s SOEs are controlled by local governments. In mid-January, the government announced it had already removed 1,900 “zombie” SOEs – unprofitable enterprises that could not survive without government support or loans – and more will face the guillotine. It seems the stage is now set for the long-awaited major consolidation and restructuring of SOEs.

Strong fixed-asset investments can be expected in 2019. The Ministry of Finance expects large-scale local government bond issuance to meet key infrastructure needs and prevent debt risks. What is noteworthy is that the Chinese government has advanced bond issuance quotas from April 2019 to the first quarter of the year – a move that aims to boost economic activity from the get-go. More funds can be expected to be allocated to infrastructure during the National People’s Congress meetings in March.