August 07,2009

China Stimulus Plan Criticized for "Crowding Out" Private Sector

By CSC staff, Shanghai

Chinese private companies are no longer maintaining their silence as the government crows over the effect of its economic stimulus, and have begun to criticize stimulus policies as reinforcing the dominance of state-owned enterprises. Private companies are claiming that they too require financing opportunities, open markets, and tax cuts.

The All-China Federation of Industry & Commerce (ACFIC), a nationwide organization of private enterprises, points out, in a blue book published recently, the negative effects the financial crisis has had on China's private economy.

The governments' 4 trillion yuan investment has not effectively stimulated private investment. Instead, it is harming the development of the private economy. Most of the investment has only boosted local government- and state-owned enterprises (SOEs). Small and medium-sized enterprises (SMEs) seldom have the chance to participate.

Private companies have become mere observers at the 4 trillion yuan banquet. ACFIC expert Chen Yongjie, who authored the blue book, says financing was and is still the crucial problem for private companies, and that central government policies have brought no relief. Instead, the problem has actually become more serious as, despite government urging, banks continue not to lend to SMEs. 

While monetary policy was loosened in 2008, private companies face financing difficulties however tight or loose it is. At the end of 2008, the percentage of loans to private companies among banks' total short-term lending was only 3.37%, and this number fell even lower in January and February of 2009.

The blue book says that the government's effort to boost the economy by increasing its investment is not sustainable, and that it needs to stimulate private investment. The lack of openness in high-profit industries such as electricity, telecoms, and petrochemicals, as well as industries such as education, medicine, and culture, stifles creativity and discourages private investment.

The government's investment should focus on people's welfare, the upgrading of industries and support of SMEs. The government needs to stimulate private investment and prevent state-owned capital from crowding out private capital.

Although the environment for the private economy did not improve a bit in 2008, its indicators were much better than those of other economic sectors.

While SOEs were commonly suffering losses in 2008, the private economy maintained positive growth. Although tax payments fell at the beginning of the year, other indicators were rising.

Besides financing difficulties, the heavy tax burden is another problem for private companies. According to an ACFIC survey, 85% of firms surveyed, all big private companies, say their taxes are too high, and situation is even worse for small companies.

In 2008, China's private economy contributed 786.2 billion yuan in taxes, up 25.7%, year on year, and accounting for 13.6% of China's total tax revenue. The blue book suggests the government should cut value-added tax by 5 percentage points.


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