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Creating a Fair Market to Stimulate Private Investment
Private investors can be convinced to invest only when they have equal market status
By Tan Haojun | NO. 45 NOVEMBER 10, 2016


A workshop of the Redcollar Group, a private company in Qingdao, Shandong Province (XINHUA)

The Supreme People's Court, China's highest court, recently announced that financial institutions which impose unnecessary charges or extremely high interest rates on loans will not be supported in related disputes, stressing equal protection of the non-state economy to boost private investment. The court also requires courts at all levels to properly handle cases involving borrowing, finance leasing and private lending in order to protect financial innovations and help address financing difficulties and high borrowing costs for private companies. This statement is expected to stimulate investment of private capital in the real economy.

In the first seven months of this year, private investment had been declining dramatically. With various incentive policies instituted by the government, the downward trend was reversed in August and September. However, the scale of private investment is still unable to meet the demand of economic and social development, with its potential to bolster stable growth far from being fully tapped.

The sudden decline of private investment was caused by sluggish economic growth, inadequate market demand and corporate business problems, but was more closely related to the fact that private capital has not obtained equality in market status and competition environment. Without enough market space and promising opportunities, many private investors prefer highly risky speculation to making investments.

In particular, the market statuses of private capital and public capital, as well as those of private firms and state-owned enterprises (SOEs), are still unclear. SOEs are not yet true market players because the relationship between the government and such enterprises has not yet been straightened out. As a result, SOEs are unable to operate on the basis of market rules. On the other hand, private enterprises, which are inferior in resource allocation, market access and legal services, cannot compete in the market on an equal footing. They are not allowed to enter the public service sector and monopoly industries. Therefore, the current competition is a kind of rigged game.

A reversal of the situation requires multi-pronged efforts.

First, the government must create a fair policy environment. At present, a lot of discriminative restrictions on private capital remain effective. Private investors are greatly affected if they are not treated equally in fiscal subsidies, tax reduction and exemption, and market access.

Second, the government must better protect private capital in terms of property rights. Encouragingly, the recently held 27th meeting of the Central Leading Group for Comprehensively Deepening Reform approved a document to improve the system of property rights protection. It is of great importance that the government protects the property rights of private investors in accordance with the updated system.

Third, a sound judicial environment must be created. Justice is the last resort to protect rights and interests. The Supreme People's Court document is conducive to strengthening legal protection of the interests of private investors, but the enforcement, which depends on whether courts at various levels can handle cases independently, is more critical.

Last, private investors must have an equal say in decisions that affect their rights and interests. Many private companies are reluctant to participate in the mixed-ownership reform of SOEs out of concern that they may not have the decision-making power corresponding to their investment. To stimulate private investment, therefore, it is crucial for the government to grant equal rights to private capital in making decisions.

Private investors can be convinced to invest only when they have equal market status. This has been a major objective of the various policies implemented in recent years, and is still the most urgent demand of private investors.

This article was first published in Economic Information Daily

Copyedited by Dominic James Madar

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