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Editorial: Commitment is Key to Boosting Real Economy

By Hu Shuli

Top policymakers at the 2017 plenary session of China’s legislature have vowed to boost the “real economy.” China’s cash has been disappearing down credit black holes in recent years. Premier Li Keqiang stressed efforts to tackle these issues seven times during his 100-minute speech to the National People’s Congress last week is a sign that the central government is serious about plugging loopholes that draw investment dollars away from productive development.

Declining investment returns, rising production costs and a weak impetus to innovate have plagued the Chinese economy for years, driving capital to more-speculative ventures promising high returns.

There have been heated debates in recent years over the relationship between the real economy and the so-called virtual economy that, for example, includes its volatile stock market. The two are interdependent because this virtual economy is built on the basis of real economic activities and should serve the latter. But China’s problem is that money being created isn’t being used to consume or invest. Instead, it is being funneled into short-term, higher-yielding investments such as wealth management products and peer-to-peer lending services, or being used to create speculative bubbles in commodities or real estate. The 2008 global financial crisis was a lesson in the dangers of allowing such unruly bubbles.

Boosting the real economy has been the main focus of Chinese policymakers since 2012, when the first signs of a domestic economic slowdown emerged. In the latest annual report on the government’s achievements, the premier emphasized that “the real economy has always been the foundation for development” and vowed to strengthen it by directing more financial resources into productive activities and encouraging innovation.

China will use multiple policy tools to maintain liquidity at reasonable levels and guide market interest rates in order to promote more capital to flow into the real economy, especially into agriculture and small businesses, the premier said. He also warned financial institutions not to channel funds to toxic assets through shadow-lending activities.

Money from insurance, securities and fund companies has flooded the stock market since regulatory controls on their investment activities were eased in 2012. Some have been tussling for a controlling stake in well-run listed companies with the obvious intention of turning them into fundraising vehicles. Such deals usually don’t usually bode well for the entities that are acquired and end up disturbing the companies’ management and normal operations.

Liu Shiyu, chairman of the China Securities Regulatory Commission, recently pointed an angry finger at some insurers that have undertaken leveraged buyouts, calling them “barbarians” and “bandits.” Insurance and banking regulators have also announced measures to rein in financial institutions’ risky investments. These measures should be codified and institutionalized in the long run.

But the real economy can attract capital only when it is strong and efficient. Otherwise, money will continue to flow into high-risk or wasteful ventures.

The Chinese economy has been struggling with weakening profitability among industrial companies, a slump in private investment and a loss of talent. In 2016, manufacturers that make up over half of China’s top 500 companies contributed to just 17% of the aggregate net profit among this group. In contrast, 33 financial institutions in the list generated over 56% of the total net profit. Total investment in fixed-assets increased 7.9% last year, but industrial investment edged up only 3.6%. More worryingly, private investment declined sharply to 3.2% last year from over 10% in 2015.

Private businesses have accounted for nearly two-thirds of China’s fixed-asset investments and over 90% of capital going into manufacturing. Therefore, boosting the confidence of private investors is the key to economic revival.

Healing the real economy requires reforms, especially a change in the government’s role to reduce interference with market forces and to improve the business environment. Reforms that can cut companies’ tax burdens, financing and other costs are also important. The guidelines issued late last year to better safeguard property rights must be implemented as soon as possible to enhance private entrepreneurs’ confidence in their asset security and to boost their desire to invest.

China should also speed up the reform of state-owned enterprises, allowing private capital to flow into sectors monopolized by state players. It should also revise laws regulating company operations, commercial banks and insurers, improve oversight and build multilayer financial markets.

The premier pledged to support economic transformation through innovation, which requires moving away from traditional heavy industries to more value-added sectors, enhancing efficiency and encouraging companies to embrace technology. China’s economy has shown signs of stabilizing, but the manufacturing sector is still on shaky grounds. Revitalizing the real economy is a test of lawmaker’s ability to steer the country in the right direction with the right policies and their commitment to reform. The government work report has stressed on this commitment. The next step is to put these good proposals into practice.

Hu Shuli is the chief editor of Caixin Media.

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