THE China Banking Regula- tory Commission (CBRC) released on May 26 the Implementation Opinions on Encouraging and Guiding the Private Capital to Enter into the Banking Sector (Opinions). The document stipulates that private capital can gain access to the banking sector as long as it abides by the same conditions as other categories of capital. The Opinions encourages private enterprises to invest in banks and financial institutions, stressing that no restrictive or auxiliary requirements will be imposed on such investment upon its entry into the banking sector. China’s banking industry appears bent on opening its door to private capital. Shortly before the release of the Opinions, China’s Ministry of Transport, Ministry of Railways, Ministry of Health, State-owned Assets Supervision and Administration Commission of the State Council (SASAC) and China Securities Regulatory Commission introduced similar guidelines on encouraging the entry of private capital into these respective sectors. These opinions are also geared to lifting limitations on private capital, expanding the scope of private investment and creating a favorable environment for private capital.
　　The SASAC clearly proposes to encourage private firms’ investment in restructuring state-owned enterprises (SOEs) in a bid to promote mixed ownership and to establish a modern system of property rights that will propel transformation of the SOE operating mechanisms and modes of development. The new policy will spur the impetus of state-owned enterprise reform in a market-oriented direction and so contribute to improvements in China’s basic economic system.
　　 Government support Fuels Development of non-public economy
　　Earlier higher-level documents had also proposed breaking the state-owned monopoly on the economy and supporting development of the private sector. In February 2005, the State Council promulgated the Several Opinions of the State Council on Encouraging, Supporting and Guiding the Development of Individual, Private and Non-Public Enterprises (commonly known as the 36 Guidelines for non-public sectors of the economy). This was the first-ever central government document themed on promoting development of China’s nonpublic economy. In May, 2010, the State Council promulgated the Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment (36 New Guidelines), which expanded the scope of private capital investment to include infrastructure, financial services, telecommunications, transport, public utilities and lowincome housing construction.
　　Successive laws guaranteeing the rights and interests of the non-public economy, such as the Law on Promotion of Small and Medium-sized Enterprises, the Company Law, the Law of Administrative Licensing and the Real Rights Law, have also been introduced. They ensure the equal status of non-public and state-owned enterprises on the market.
　　Problems stemming from the global financial crisis have to some degree impaired both China’s public and private economy. With the support of governmental policies, however, China’s non-public economy has on the whole maintained its development momentum. Statistics quoted by Xinhua News Agency show that in 2011, non-public economy accounted for 60 percent of China’s 47-trillion-yuan GDP; also that in 2010, 80 percent of the 346.7 million working population in China’s urban areas was employed in the non-public sector. As for revenue, that in tax from private enterprises for the period January to April 2012 accounted for more than 60 percent of all national tax revenues, and in 2011 private enterprises contributed 75 percent of China’s total profits from industrial enterprises.
　　Since 2006, China’s private investment has maintained an average annual growth of more than 30 percent, accord- ing to the National Bureau of Statistics. During the first five months of 2012, private investment in fixed assets reached RMB 6.7743 trillion – a nominal yearon-year increase of 26.7 percent, accounting for 62.2 percent of China’s total investment in fixed assets.
　　At present, China’s state-owned and non-public economies are developing and prospering side by side, to which the country’s rapid, stable and sound economic growth is largely attributable.
　　
　　 Accelerating Market-oriented soe Reform
　　State-owned enterprises constitute one of the cores of China’s economic reform, as reflected in the central gov- ernment work focus in 2012. The State Council has given priority in economic restructuring to “pushing forward sideby-side development of the multiple ownership economy.” The SASAC’s promulgation of the Guiding Opinions on Actively Absorbing Private Investment during State-owned Enterprise Restructuring (14 Opinions on State-owned Assets) signified the restart of SOE reform under a new framework.
　　Although the participation of private capital in SOE restructuring is nothing new, this is the first time a state supervisory department has issued a document specifically encouraging private participation. In the past, private investment in state-owned enterprises, and participation of private investors in corporate governance and their seat quota on the board of shareholders entailed restrictive requirements. The 14 Opinions on Stateowned Assets clearly stipulates that no auxiliary requirements are to be imposed on private investment upon its entry into state-owned enterprises. “The 14 Opinions is of great significance in two aspects. First, it encourages the participation of private capital in SOE reform and promotes fair competition on equal grounds among economic entities and various ownerships. This will take SOE reform a big step further in a marketoriented direction. Second, it emphasizes the importance of developing a mixed ownership economy, which will contribute to improvement of the country’ basic economic system,” chief economist at the China Business Research Center Li Jin said.
　　China’s auto manufacturing industry highlights the constructive role of private capital in boosting economic development. After China’s entry into the WTO, private enterprises such as the Great Wall, BYD and Geely successively entered the industry. This broke the monopoly of state-owned enterprises in the whole-auto manufacturing field and helped form a competitive industry. The resulting fall in automobile prices in the Chinese market fueled an impressive rise in China’s auto sales. DFSK Auto Co., Ltd, which combined state-owned resources with private capital, is an example of mixed ownership economy. In less than 10 years, DFSK has risen from a new entity to the third biggest player in China’s mini-van market.
　　Deputy chief of the SASAC Shao Ning said in his speech at the 2012 Boao Forum for Asia that cutting the financial connection between the government and SOEs and putting an end to SOE govern- mental subsidies was a critical step in China’s SOE reform. Shao emphasized that China’s SOE reform should be completely market-oriented.
　　 Breaking Down the three“Doors”
　　China’s private capital has been in an anomalous plight for some years. Certain state policies encourage its entry into national key industries but an absence of detailed implementation procedures denies it access to state-controlled industries like telecommunications, banking and power industries. The three doors blocking private capital’s entry comprise the so-called “iron door” – a direct block with a high entry threshold; the “glass door” – an invisible block by the absence of specific implementation rules in otherwise favorable state policies that seem to offer private capital a way-in; and the“swing door,” wherein certain lucky private investors gain entrance but often do not survive and make a rapid exit.
　　The multiple measures that these state departments have recently introduced are interpreted as rules for implementation of the 36 New Guidelines. If thoroughly executed, they would be of great benefit to private investors. But compared to the enthusiasm state departments have shown for these proposals, private investors appear to be less enthusiastic.
　　“Small loan companies should be permitted to be re-organized into rural banks” – a much lauded highlight among the opinions contained in the New 36 Guidelines that has elicited a cool response from small loan business entrepreneurs.“The significance of the identity change from a small loan company to a rural bank lies in that we’re permitted to absorb deposits. But compared with state-owned banks that have good credit, we’re in an obviously disadvantaged position,”president of Wenzhou Ruian Huafeng Small Loan Company Weng Yifeng said. Moreover, in the past, small loan companies could set a loan interest rate five-to-six-fold higher than the national benchmark interest rate. On becoming rural banks they will be obliged to lower their loan interest rate to the benchmark rate, and not be entitled to a slice of the credit card business that would bring them returns as sizable as those of commercial banks.
　　The CBRC Opinions encourage private capital to participate in the setting up or capital increase of rural banks, having lowered the minimum equity holding requirement from 20 percent to 15 percent. But private capital still does not qualify as a primary founder of rural banks, and cannot be used to set up a wholly private bank. As former vice director of the Policy Research Office of the CPC Central Committee Zheng Xinli pointed out, there still exists a “glass door” to the entry of private capital into the banking industry.
　　
　　The railway sector has long been notorious for its absolute state control. In May the Ministry of Railways released the Implementation Opinions of the Ministry of Railways on Encouraging and Guiding Private Capital to Invest in Railways, but compared with the 36 New Guidelines it does not constitute any essential breakthrough. “The Ministry of Railways Opinions does not specify investment models, such as equity holding, equity control, joint venture or wholly private equity, of private capital investment in railways. Rules that thus intentionally blur certain issues represent real and systematic barriers to the entry of private capital into state-monopolized fields,” economist Ma Guangyuan remarked. “Unless a radical change occurs in the railway industry, in the context of the participation of private capital in the construction of railway projects, there is still no way of guaranteeing the legitimate rights and interests and investment returns of private investors,” Ma concluded.
　　Deputy director of the research center for transportation economic theories and policies of Beijing Jiaotong University Li Hongchang endorsed Ma’s opinion.“This round of support policies for private capital to enter the national key industries consists of little more than statements of principles. Although they represent breakthroughs, they do not include specific rules applicable to certain key issues. Multiple barriers still exist to the entry of private capital into the field of highway construction,” Li observed. Since 2009, with the aggresssive expansion of government investment in infrastructure to stimulate the national economy, the participation of private investors in the construction of railways and highways has been basically phased out, according to media reports.
　　“Private investors have specific expectations. One is that of status equal to state-owned enterprises. They expect to be allowed to hold equity, and also to control equity or have acquisition rights– radical reforms indeed. Second is the maintenance of stable and consistent policy. Private investors can feel confident about state policies only after they have witnessed their actually execution,”president of the Wenzhou Small and Medium Enterprises Development Association Zhou Dewen said. In his view, policies encouraging private investment will obtain results only after coming into effect and being seen to guarantee the legitimate rights and interests of private investors.
　　 opening: an Inevitable trend
　　In spite of their different wordings, the specific implementation rules on encouraging and guiding private investment that these ministries and commissions have laid down nonetheless signify a clear stance by the central authorities on welcoming greater participation of private capital in SOE reform, in Li Jin’s opinion.
　　In the 1990s, the main aim of China’s small-and-medium SOE reform was to marketize those enterprises through market competition, according to Shao Ning. Nowadays, SOE reform is mainly undertaken by listing them on the stock market and thus taking advantage of the capital market, so making them autonomous market entities able to independently assume their civil obligations.
　　Research fellow of the Development Research Center of the State Council Liang Yangchun believes that the partici- pation of private capital in state-owned enterprises will help optimize the rational allocation of state-owned assets and improve liquidity. “With state-owned capital low in liquidity and irrational in allocation, China’s SOEs are usually low on efficiency and flagging in vitality. The introduction of private capital could be conducive to the restructuring of SOEs and the breaking of state monopolies in certain key industries,” Liang said.
　　China’s reform experience proves that industries with a high degree of competitiveness through the involvement of private enterprises can make impressive, sustainable progress. Owing to the absence of competition in monopolized industries, on the other hand, the prices of products usually stay high and business stagnates. Certain observers have pointed out that the opening-up of monopolized industries is a practical channel through which China can avoid excessive government involvement in business. They maintain that the separation of governmental power from economic operation constitutes the foundation of evenly distributed social wealth, whereas the close bonding of the two results in uneven distribution of wealth and an abnormal economy. At present, private enterprises have a small niche in social service fields such as infrastructure construction, finance and insurance industries, scientific research, education, and cultural and health industries, while state-owned enterprises monopolize key industries like power, petrochemicals, telecommunications and civil aviation. The entry of private capital will strengthen and revitalize industries, stimulate competition and promote industrial development. This will enable both SOEs and private enterprises to achieve greater growth, creating employment and generating more profits.
　　Liang Yangchun nevertheless stresses the importance of state control over such key fields as the power grid, highspeed railway network, large and critical infrastructure, military industry and those concerning people’s livelihood and national security. “Although private capital can be introduced to some of those industries, state control must be maintained because they are critical to the country’s stability and people’s overall livelihood,” Liang said.
　　Wang Xiaotao, chief of the Fixed Asset Investment Department of the National Development and Reform Commission, holds that private investment, endowed as it is with inexhaustible innovative capacity, will drive economic growth and vitalize the national economy. He believes that to develop the mixed ownership economy, the country should bring the initiative of private enterprises into full play and make them a main driving force for national economic development. Wang sees this as the sole means through which China can achieve economic transformation and sustainable development. Li Jin perceives moderate opening-up of monopolized industries as an inevitable trend in China’s economic development. In his view, the 14 Opinions represent guidelines only. Relevant state supervisory departments should introduce specific implementation rules that are applicable to those industries.