Policy support for private sector

Lower taxes and greater financial access would sustain vigor of smaller enterprises and boost manufacturing sector

With a 7.4 percent growth year-on-year in its gross domestic product in the third quarter, the lowest quarterly growth over the past 14 quarters, China's economy has begun warming up again in the fourth quarter.

However, signs that the economy is bottoming out have not completely eliminated uncertainties about whether the struggling manufacturing sector can extricate itself from a lingering crisis.

In September the HSBC Purchasing Managers' Index was below 50 for the 11th consecutive month. It was even 47.6 in August, a record low over the last 41 months. In August, goods stockpiled by domestic enterprises rose to their highest level since China began publishing its PMI data in April 2004. And alongside China's contracting factory activity is a continuous decline in its export orders and jobs. All these, together with its lower-than-expected industrial output and fixed-asset investment growth, mean China's manufacturing sector now faces a challenge of unprecedented magnitude.

A rapid rise in labor costs, high tax burdens and financing difficulties are the direct factors underlying China's manufacturing crisis. The ever-tightening resource bottleneck, environmental concerns, the rise in the prices of bulk commodities and the yuan's appreciation have also played a role. Besides, some imperfections in the country's economic institutions and policy, which have resulted in the private sector being squeezed by the State-owned sector in some fields, have dampened domestic entrepreneurship and fueled capital outflows from the real economy.

The private sector is playing an increasingly important role in China's economy. In 2011, more than 75 percent of the country's industrial profits were created by private enterprises. That means boosting the private sector will be an effective way to raise the country's manufacturing productivity and help create more industrial added value.

As the main drivers of China's private economy, the performance of its small and medium-sized private enterprises will directly influence the prospects for its whole manufacturing sector. But there have been no obvious improvements in the worrisome situation they face. In the context of the global financial crisis, the number of private enterprises forced to reduce or suspend production has been growing, especially among export-oriented ones.

At a time when China is striving to shift from low-end to high-end manufacturing and from "made in China" to "created by China", developing the private sector will provide a driving force for innovation and the upgrading of its manufacturing sector. The core technologies possessed by many of its private enterprises, if effectively utilized, will help facilitate and accelerate the transformation of the country's development mode. Private enterprises' technological levels, innovation capabilities and increasing research funding will also help China advance toward the target of being a manufacturing power. So China should extend more policy support to small and medium-sized enterprises.

To boost the private sector, China should first take some practical measures to lighten the tax burden on private enterprises, especially the smaller ones. Following the nine measures adopted by the State Council in November 2011 to extend financial support to the development of small enterprises, many local governments have taken corresponding measures to reduce and suspend taxes. However, the high tax burden on private enterprises has not fundamentally changed, as alongside the tax reductions there has been the creation of new measures to increase local fiscal revenues.

To change this situation, the country should work out specific tax policies targeted at small enterprises to reduce their tax burden. For example, the government can extend its current preferential tax policies to a wider range of small enterprises and cancel or considerably reduce some administrative fees.

Effective measures should also be taken to improve the financing environment for private enterprises. The loans issued by the country's major commercial banks have mainly gone to State-owned or large and medium-sized enterprises. Small private enterprises have received only 20 percent of the loans. Some small manufacturers have no access to preferential interest rates and have to pay higher rates to gain loans, which considerably increases their financing costs.

Besides, effective measures should be taken to encourage private investment in some monopolistic sectors. The country's energy, financing, transportation, water conservancy and urban utilities have long been closed to private capital. Financially weaker private enterprises also find it hard to engage in sectors that have a high demand for capital, such as ports and aviation. So a large proportion of private capital goes into the housing and stock markets, rather than manufacturing.

In its efforts to implement the 36 articles that were promulgated in 2010 with the aim of promoting the development of private investment, China should break the "glass door" and open more monopolistic industries to nongovernmental capital, in a bid to create an equitable and fair environment for the participation of private players.

Zhao Xiao is a professor with the School of Economics and Management, Beijing University of Science and Technology, and Shi Guicun is a member of the university's Research Section of China's Economy.