China needs the private sector to step up

May 16, 2016 09:59 AM

Xia Xiaokang and Bruno Chen, who both run private-sector companies, are the sort of businessmen that Chinese leaders are increasingly concerned about as economic growth slows.

Beijing is counting on the private sector to invest more in the economy and take up the slack as the government tries to engineer a shift away from largely state-run heavy industry to more entrepreneurial and services-led growth.

Unfortunately, just when China needs the private sector to step up, they look to be stepping back.

"We plan to downsize our business rather than expand," said Chen, who runs Ningbo Tengsheng Garments Co in the coastal export hub of Zhejiang province in eastern China.

"We cannot feel any improvement in the economy," he said.

Xia, general manager of Wenzhou Kingsdom Sanitary Ware Co some 400 km (250 miles) from Shanghai, similarly lacks confidence in the economy.

"We have hardly made any fixed-asset investment since last year and we now plan to rent out part of our factory building because it's too big,” he said.

After March data suggested that economic activity was finally picking up after a long slowdown, April figures released at the weekend suggested otherwise. Overall investment, factory output and retail sales all grew more slowly than expected.

Private-sector investment for January to April grew just 5.2%, its weakest pace since the National Bureau of Statistics (NBS) started recording the data in 2012. More worrying, private-sector investment is decelerating sharply from rates near 25% in 2013, to just 10% last year and now just over 5%.

The reason policymakers are so concerned is that private-sector fixed-asset investment, which includes land, equipment and buildings, accounted for more than 60% of overall investment in January to April. The sector provides a third of all jobs in China and creates 90% of new urban jobs, state media have reported.

"Because the total amount of private investment is relatively large, its continued slowdown could restrain stable growth, and requires a high degree of attention," the NBS said on Saturday after it released the latest economic data.

The private sector is key to China's economic future, economists say.

Big Chinese state-owned enterprises (SOEs) hog bank loans and hold most of the country's fixed assets, but economists say the swarm of mid-sized private companies are the primary source of investment, innovation and productivity growth.

They are crucial for Beijing because such firms are seen as more efficient users of capital, in sharp contrast with the inefficient state-owned sector.

"Weak private investment is a fundamental problem," said a researcher at the National Development and Reform Commission, the top planning agency. He declined to be identified as he was not authorized to speak publicly to the media.

"We still need to unleash vitality of enterprises and manufacturers to help stabilize the economy."

Private surveys show downward pressure on wages as factories shed workers.

Chen said his company, with a workforce of 160, exports mostly to Europe. China's textiles industry has been hard hit by slackening global demand, which has not been offset by rising domestic demand.

Xia said his clients in Russia and Venezuela have been impacted by falls in their local currencies and conflict in parts of the Middle East have left his customers in that region very cautious. Europe is steady and he was optimistic about Southeast Asia, he said.

"Interest rates are low, but investment is declining, which shows that the overall market - domestic and overseas market - is not good," he said.

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