Why do many private enterprises feel it’s difficult right now?
In the past few years, we have experienced the impact of the pandemic, uncertainties in international relations, and various structural contradictions both domestically and internationally. For the development of China’s private enterprises, this is both a challenge and an opportunity.
We see that, under the internal competition and overcapacity in various industries domestically, private enterprises are actively planning overseas investments and extending their industrial chains outward. At the same time, affected by the ‘two-faced’ nature of internal and external circulation, the barriers between domestic sales and foreign trade still exist.
We see that private enterprises are brave in innovation, with continuous increases in R&D investment, personnel, projects, and patents. China is already the second-largest country in the world for innovation investment. However, the expected cost of enterprise innovation is becoming increasingly high, and the efficiency of converting patents and new technologies into productivity still needs to be improved.
We also see that, in supporting the private economy and boosting the confidence of private enterprises, the government and various departments have successively introduced the ’31 Articles’ and ’25 Articles’ this year. At the same time, some institutional barriers still exist.
Regarding the current difficulties, innovation, prospects, institutional gaps, and the withdrawal of foreign investment faced by private enterprises, recently, four economists—Huang Qifan, Academic Advisor of the China Finance 40 Forum and Executive Vice Chairman of the Academic Committee of the National Innovation and Development Strategy Research Association; Liu Shijin, Deputy Director of the Economic Committee of the 13th National Committee of the CPPCC and former Deputy Director of the Development Research Center of the State Council; Shi Jinchuan, Chairman of the Private Economy Research Center of Zhejiang University and Dean of the Institute of Finance; and Zhang Jun, Dean of the School of Economics of Fudan University and Director of the China Economic Research Center—participated in a seminar on ‘The Survival and Innovation of the Private Economy’ jointly organized by The Paper, the School of Economics of Fudan University, and Wenhui Newspaper Wenhui Lecture Hall, and conducted in-depth discussions.
Caijing Eleven has compiled ten topics of greatest concern to the market, enterprises, and capital based on the speeches, dialogues, and exclusive interviews of the four economists:
1. Why do many private enterprises feel it’s difficult right now?
2. Why does ‘involution’ and overcapacity occur in various industries?
3. How should private enterprises adapt to the changes of this stage?
4. What are the institutional dilemmas in the development of the private economy?
5. How can the government give enterprises a real sense of security and confidence?
6. How to eliminate the unfairness caused by the issue of private enterprises’ origins?
7. Is it still necessary to classify enterprises based on their ownership?
8. What kind of relationship should the government and enterprises have?
9. What roles should the government and different types of enterprises play in the correct understanding of innovation?
10. How to view the withdrawal of foreign investment from mainland China?
Why do many private enterprises feel it’s difficult right now?
Huang Qifan: Actually, all enterprises, whether private or state-owned, including foreign-funded ones, generally face difficulties in China. This kind of difficulty is sometimes unrelated to the system; it’s a difficulty that everyone commonly encounters. Don’t turn this kind of difficulty into a difficulty caused by the government’s discrimination against private enterprises.
Zhang Jun: I think from 2015 to now, in the past seven or eight years, the Chinese economy has continuously revealed the problems left over from the period of high growth in the past. We can say that these problems are structural problems. In other words, we still have to pay off the debts from before.
The central government realized in 2015 that it wanted the economy to digest those things (problems) from the previous period. The Chinese economy is unlikely to have a U-shaped or V-shaped rebound in the future; it can only be L-shaped. And the L-shape is a stage, not something that can be overcome in one or two years. Because the central government has this judgment, it has gradually weakened the intensity of economic stimulus in macroeconomic management and shifted to supply-side reform, and the overall trend of economic slowdown has formed.
In the past five years, we have actually been in a stage of maladjustment syndrome, and private enterprises are the least adaptable. So now, wherever you go, everyone feels it’s difficult.
Liu Shijin: The Chinese economy has actually entered a bottoming-out period in the past two years. The operating conditions of many enterprises are not like before; business is not as easy to do, demand is shrinking, and life is relatively difficult. In fact, it’s a matter of transformation. In addition, some labor-intensive industries in the past may now need to focus on knowledge-intensive and technology-intensive industries, but the reserves in this area are insufficient, and the overall operating difficulty of enterprises is increasing.
‘Involution’ and Overcapacity
Why does it occur in various industries?
Huang Qifan: The report of the 20th National Congress of the Communist Party of China mentioned a problem: China has entered a new development pattern with internal circulation as the main body and domestic and international dual circulation promoting each other. However, China’s external circulation management and internal circulation management are two separate systems. The inconsistent institutional rules for going out and coming in make it impossible for Chinese enterprises to do external business and internal business, which in itself has lost a lot of production capacity. If this aspect is not broken, then our traditional trade for domestic sales and for foreign sales will have the same line, different quality, and different standards.
In the next stage, whether online or offline, in short, we must work hard on the integration of internal and external trade and carry out institutional reforms.
Zhang Jun: The system of economic development in recent years has led to excessive entry, excessive investment, and excessive production capacity in any industry as long as it receives government policy support and is open. Therefore, everyone is now talking about involution.
However, at the same time, we also have a large number of markets that are protected and not open to the outside world. For example, the modern service industry, in which a considerable number of areas are actually not open.
How should private enterprises adapt to the changes of this stage?
Zhang Jun: At this time, we need to have a global perspective. China has developed to today and needs to have a more global investment layout. Therefore, Chinese private enterprises, especially those that have reached a certain scale and already have huge competitiveness in certain fields, need to consider transferring more production capacity overseas.
Now, countries along the Belt and Road, the Middle East, Central and Eastern Europe, Southeast Asia, and Latin America, many enterprises have already gone there to make arrangements. Many bosses in Zhejiang have moved their factories to Southeast Asia and then exported to the United States. China’s investment in Mexico, Vietnam, and even India is now increasing significantly. Enterprises that can survive well in twenty years must be these internationalized enterprises.
When enterprises go out, don’t understand it as ‘running away’. I think it’s a good thing. China needs to deploy a large amount of production capacity overseas at this time so that those high value-added productive service industries can stay in the country. Otherwise, everyone will be congested in the Chinese market.
The characteristics of a major country’s economy, how many multinational companies it can produce, this is also a very important manifestation of economic development. In the future, China must gradually transform from an export-oriented economy to an import-oriented economy through overseas direct investment. (This way) your internal market can rise, and your RMB can become an international currency.
What are the institutional dilemmas in the development of the private economy?
Shi Jinchuan: First, the lack and overreach of the system in the protection of private enterprises’ property rights coexist. We lack institutional constraints on administrative power, and our government often uses politics instead of law. There is institutional overreach and cognitive bias in this regard.
Second, in the development process of private enterprises in recent years, institutional barriers do exist. I have listed three aspects here: 1. The access to some industrial fields is actually permitted in name but prohibited in practice. It is said to be access, but in fact, you cannot enter; 2. In terms of the handling of some access, it is said that it is enough to file a record, but it may not be approved even after a long time of acceptance; 3. The scope of bidding is broad in name but narrow in practice. The segmentation of institutional systems across regions has the problem of new and old overlapping. Local priority, closed operation, regulatory differences, and other such problems exist.
Third, the reform of the mixed-ownership system is actually a kind of institutional insertion, and this kind of institutional insertion is actually nominal in many fields and difficult to truly implement.
Fourth, there are corresponding problems in the introduction, design, implementation, and execution of our policies. The government has not well understood and responded to the conflict between the new technologies and new models of private enterprises and the old system.
How can the government give enterprises a real sense of security and confidence?
Huang Qifan: We have all kinds of preferential policies. The twenty-odd articles and thirty-odd articles issued now are almost the same as every version in the past ten years. This is a good thing, indicating that the government’s attitude towards private enterprises has always been unchanged.
But the most important thing is to help private enterprises solve specific problems when they are in difficulty, such as their high debt ratio, high bad debt ratio, difficulty in financing, high financing costs, or other various specific problems. Truly help enterprises solve specific difficulties and enable these enterprises to develop in difficulty.
Liu Shijin: In theory and some specific measures, we should take a two-pronged approach. I think we can do some exploration in theory. The first point is to clarify that whether it is state-owned enterprises, private enterprises, or even foreign-funded enterprises, they are all indispensable economic foundations in the process of Chinese-style modernization development. This is the basis of equal treatment.
Second, all types of enterprises should emphasize the need to promote the talents and spirit of entrepreneurs, because this thing is in a leading position, so that enterprises will have vitality, innovation, and competitiveness.
Third, I think we now need to have a correct understanding and correct positioning of the nature of capital, including the nature of ownership in capital, or its status and role.
Fourth, whether it is state-owned enterprises or private enterprises, the equity structure behind them will be diversified and mutually integrated in the future. This is the general trend, and this trend still needs to be promoted.
The last point is, can we break some unspoken rules? Like the current project bidding, including the entry of some industries, some areas involving safety, in fact, private enterprises cannot enter. Can we adopt some policies with higher transparency in this regard, so that everyone feels that the measures taken by the government are indeed giving private enterprises a fair right.
How to eliminate the unfairness caused by the issue of private enterprises’ origins?
Huang Qifan: The inertia accumulated by our country’s planned economy sometimes leads to various discriminations or different national treatment when private enterprises encounter problems. Because of this, the internationalization, rule of law, and marketization of the business environment, pre-entry national treatment, various intellectual property rights or labor rights, and equal protection in all aspects, whether it is free trade or the requirements of our domestic business environment, should be treated equally for all enterprises.
Liu Shijin: In correcting ownership discrimination, substantive progress should be made. We must change the unspoken rules of unequal treatment between state-owned enterprises and private enterprises in industry access, project bidding, fund acquisition, and national security.
As an important content of business environment construction, we should form relevant administrative supervision, social supervision, and legal litigation systems, and allow and encourage platform enterprises, especially large-scale technology backbone enterprises, to boldly invest, actively innovate, and participate in the construction of national key projects, and achieve normalized management with a negative list as the main focus.
Shi Jinchuan: We must improve the legislative environment for private enterprises. I advocate that the differences in the expression of economic components of enterprises with different ownership systems should be diluted in the Constitution. We must create a public opinion environment for the development of private enterprises. I think we should let them (private entrepreneurs) speak out, and their voices are also a necessary and beneficial part of the public opinion environment for the development of private enterprises.
Is it still necessary to classify enterprises based on their ownership?
Liu Shijin: With the development and maturity of the market economy, the diversification and mutual integration of capital equity with different ownership systems have become the norm. For example, large state-owned enterprises are listed overseas, and there are a large number of overseas individual and institutional investors, while the shareholders of private enterprises also include direct or indirect state-owned shareholders. It is becoming increasingly difficult for us to find purely state-owned enterprises or private enterprises. Then, classifying enterprises based on their ownership (practice) is increasingly deviating from the actual situation of enterprises and the market.
We suggest that we no longer distinguish between state-owned enterprises and private enterprises, but classify them according to the characteristics of the enterprise’s scale, technology, employment, etc., and issue corresponding policies. At the same time, investors should be classified according to their ownership, and enterprises should not be classified.
Shi Jinchuan: Why have so many private enterprises developed? Our Wenzhou model, these do not seem to be public ownership, it has promoted productivity and developed productivity. We must dilute public and non-public ownership. We look at ownership, as long as we look at one thing, whether this ownership promotes the development of productivity or hinders the development of productivity.
Zhang Jun: I personally think that most industries do not need to be state-owned. Everyone is put into the market for fair competition. Theoretically, as long as everyone can achieve fair competition, it doesn’t matter who the owner is. I think in the Chinese scenario, the problem of state-owned enterprises and private enterprises is actually that state-owned enterprises are not market-oriented. As long as they are market-oriented, they have to survive in the market, and the state does not need to treat them as a public welfare undertaking. I think for state-owned enterprises, we really need to jump out of the existing understanding. It is just an enterprise, but it has government investment.
What kind of relationship should the government and enterprises have?
Liu Shijin: The discussion some time ago was about the issue of traffic lights for enterprise investment. Traffic lights are a popular way to guide and regulate capital behavior some time ago. In fact, the typical way to set red lights is to set a negative list, which is what things cannot be done, where the bottom line is, you make it clear. Then how to set green lights, we say that if we must set them, it is also to put forward the general direction and goals, and at the same time, we must prevent returning to the old road of the government telling you what you can do.
On the issue of what to produce and how to produce, the government is usually not smarter than the enterprise, does not understand the market situation better, and will not bear the responsibility for decision-making errors. It is not uncommon in recent years that the government advocates (industries), and enterprises often rush in, misallocating resources, and overcapacity. More importantly, innovation is doing things that have never been done before. You think our relevant departments approve something that has never been done before. I think the requirements for it are too high, and in fact, it may not be responsible even if it is approved.
But if you must approve it, the door to innovation will actually be closed. Therefore, we still need to correct the relationship between the government and enterprises. The government can remove the negative list and can also provide valuable information on the current situation and trends of industrial development. Under this premise, we still leave the choice to enterprises and the market. In this way, we can promote the full play of innovation and growth potential.
What roles should the government and different types of enterprises play in the correct understanding of innovation?
Huang Qifan: We do have progress in technological innovation. Now our country’s R&D investment in GDP has reached 2.7% last year, almost 3 trillion, and it is already the second-largest country in the world for innovation investment. But our shortcoming is how to transform scientific research results into productivity. We have first, second, and third prizes for technological progress, first, second, and third prizes for innovation and invention. Tens of thousands of people are awarded each year. How many of these tens of thousands of people have become millionaires, ten-millionaires, and billionaires in the past 10 years? It seems not.
Our country currently has no clear regulations on the transformation of intellectual property rights, and there are no laws. What can I get if I help you transform? In this sense, the conversion rate is low, which is our current shortcoming, and unicorns are also decreasing in all aspects.
Shi Jinchuan: The innovation of private enterprises includes technological innovation, business model innovation, and also institutional innovation. We must sort out the relationship between these three. From the government’s point of view, we especially need to handle the relationship between business model innovation and institutional innovation.
For example, mobile payment, it actually, to some extent, breaks through the original government’s control over the financial field and enters the financial field. When enterprises use the latest technology, including mobile Internet technology, to do business model innovation, it is easy to touch the original system and mechanism of this field. In this case, how the government correctly views this matter is very important.
Zhang Jun: There are many industries in this market, and their technology requires long-term, large-scale R&D investment. For example, the pharmaceutical industry, like Pfizer, Novartis, etc., it requires a large amount of R&D investment, which is hundreds of billions of dollars every year, and we cannot do this.
First, you must have sufficient profitability to support it, which means that your R&D patents must be well protected, so that you can monopolize this market in a few years, so that your profits are large enough to support your continuous investment in this field in the future.
In addition, this kind of innovation requires ‘patient capital’. China’s state-owned capital is the most impatient, and it cannot support this kind of capital, and it still has to rely on private enterprises. Private enterprises can truly become patient capital, and the capital they accumulate can see three or four generations.
How to view the withdrawal of foreign investment from mainland China?
Zhang Jun: These foreign-funded enterprises, which have been deeply involved in China for ten years, twenty years, or even longer, have not withdrawn on a large scale. On the contrary, they are still increasing their investment in China. Due to the development and growth of domestic local enterprises, especially private enterprises, they have become competitors of foreign-funded enterprises in China. Some (foreign-funded enterprises) have to consider leaving China strategically and looking for new destinations. When they leave, it happens that the Chinese economy has encountered a cold winter in the three years of the pandemic, so it may have accelerated their decision-making.
Even at the best of times in our entire fixed asset investment, the share of foreign investment does not exceed 10%, and the relative proportion is still very low. Foreign investment has the importance of technology diffusion. Its technology is more advanced than that of domestic enterprises. After it cooperates with Chinese enterprises, it is helpful for the growth of Chinese enterprises, but this stage has also generally passed.
But does China need foreign investment? I think it needs it. I think that in attracting foreign investment, we should focus on the productive service industry. China’s manufacturing industry now needs to go out, but in the high-end modern service industry, we need to bring it in, such as medical care and elderly care. Developed countries have accumulated longer than us, and they have good management experience and good models in these fields. We need to have experience in these things.
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