Private capital is the key to success

Beijing has shown it has the smarts and resources to stabilize a slide, but it must wisely use the time it has bought

So, there is good news: the Chinese economy is stabilizing. But by nature, "stabilizing" is not a long-lasting state.

A process, from its stabilizing point (or the point where it becomes less critical), must move on - either to present a better state or retreat into old problems.

While saying the economy is stabilizing, no economist is saying China is at the threshold of a recovery, even less the beginning of a return to the kind of double-digit or near double-digit growth seen a few years ago.

Seeing the stabilizing effect, every China business watcher may be asking: Then what? Now that the central government has proven its skill, and its financial power, to prevent the slowdown from becoming a free fall, what can it do to nurture more balanced growth, preferably by releasing less easy credit?

If China always has to rely, as it did in the first quarter of the year, on continuing increases in capital spending for just a moderate level of growth, it would get stuck in a costly stabilizing process, which is inevitably hard to sustain.

Banks cannot afford to convert a lot of their loans into equities. The debtors who have difficulty paying back their loans and interest don't usually have high-quality equities to offer after all.

In the meantime, zombie enterprises from the state sector cannot be allowed to sit idle for very long to just waste the government's bailout money, even though their workers have to be properly taken care of.

A good thing for China to do is to take advantage of its success from stabilizing the economy to launch some more meaningful reform initiatives - before the task of keeping the state-owned enterprises afloat drains precious public funds and destroys potential private investors' enthusiasm - and not allow scornful observers to laugh at what they see as China's "stalled reform".

The real challenge, therefore, is not whether 6-plus percent GDP growth can continue, or whether the zombie enterprises can be put to sleep with their labor and assets being redirected to better uses.

Neither is it investment. There is wasteful investment, admittedly. But in a country with extensive territory and recent memory of underdevelopment, large capital input is still needed in many areas and many industries. Building underground utility tunnels in newly developed cities, industry specialists say, would take up to 1 trillion yuan ($154 billion; 136 billion euros) during the 13th Five-Year Plan (2016-2020).

The point is that so much growth and development is unlikely to happen if it is up to the government to act as the sole financer of China's large projects.

In fact, room is increasingly limited for China to go on financing its GDP growth and development while designing incentives for its companies, large and small, including tax incentives.

All China business watchers seem to be talking about China's large debt burden, especially the more than 30 trillion yuan in local government debt. But the country will not be able to reduce its overall debt level unless the government can work in concert with private capital.

So the real challenge is whether China can design and spread various plans of public-private partnership in its investment undertakings.

Such partnerships also can be included in SOE reform. But it is the new investment projects that are more important. Although SOEs and state-sector institutions still provide jobs to millions of workers, their profits and contribution to overall GDP have become small. Many of them, by the nature of their industries and the technologies they use, have already lost their future competitiveness.

The key to the success of China's intended transition is how much private capital can be mobilized to support the innovation of its consumer industries and services.

This is the only thinkable scenario for China to keep funding large investment projects while shedding its overall debt burden.

It's about time that some major efforts took place in this direction.

The author is editor-at-large of China Daily. Contact the writer at edzhang@chinadaily.com.cn