Since 2006, China’s private investment has maintained an average annual growth of more than 30 percent, according 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 year-on-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 government work focus in 2012. The State Council has given priority in economic restructuring to “pushing forward side-by-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 State-owned 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 market-oriented 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 governmental 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.