Those Who Don’t Support Development of Private Enterprises Must Be Corrected: Liu He
Translation of China Vice Premier Liu He's interview after the press conference he gave Friday morning, as published by Caixin Global. He took several questions from reporters of the People's Daily, Xinhua News and CC tv.
Media: What do you think of China’s recent stock fluctuations?
Liu: Recently, China’s stock market has experienced significant fluctuations and declines, which are caused by many factors. The first is external factors. After the central banks of some major countries raised interest rates, the global stock markets began to fluctuate and fall. The U.S. stock market also experienced a significant fall. The process is still ongoing. Sino-U.S. trade frictions have also affected the market, but frankly speaking, the market fluctuation is caused more by psychological factors than by the actual facts. Negotiations between China and the United States are currently ongoing. Second, China’s economic structure is in the process of establishing new orders, and inevitably, that will affect the stock market. Third, market expectations have changed. The uncertainties of the future economic environment have affected investors’ behavior. Investors are very concerned about issues like the development of China’s private sector and the protection of property rights. In addition, there have been some technical factors in the market in recent days, such as the forced selling in margin accounts during the decline of the stock market. These factors together caused the stock market to fluctuate.
Recently, I have paid close attention to China’s stock market assessments made by international investment institutions and market analysis from domestic institutions. The consensus is that from the perspective of global asset allocation, China is becoming the most valuable market in terms of investment returns. The bubble has been greatly reduced, and the quality of listed companies is improving with their valuations at historic lows. Therefore, many institutions recommend paying close attention to the Chinese stock markets, which they think have high investment values. I believe investors will make reasonable judgments about these suggestions. It can be said that the correction and clearing of the stock market is creating good investment opportunities for the long-term healthy development of the stock market.
What new measures will the government implement to promote the healthy development of the stock market?
The government attaches great importance to the healthy and stable development of the stock markets. The psychological characteristic of current stock investors is that there is a strong expectation of institutional innovation and reform policies, and there is a strong positive correlation between market performance and this expectation. Therefore, to promote the healthy development of the stock markets, we must launch targeted new reform measures. Recently, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and other relevant departments have been studying new reform measures, and they already have some new institutional arrangements and policy tools.
These policies have been announced since this morning, including at least the following aspects.
First, in terms of stabilizing the market, the wealth management subsidiaries of the banks are allowed to invest in the capital market. This would require financial institutions to scientifically and reasonably manage the risk of equity-pledged lending, and encourage funds managed by the local government and private equities to help promising companies ease the difficulty of equity-pledged lending.
Second, in the aspect of fundamental system reforms of the market, (the regulators will) formulate the “Administrative Measures for Securities and Futures Firms and Private Equities’ Asset Management Operatives,” improve the share-buyback procedure for listed companies, deepen the market-oriented reforms of mergers and acquisitions, promote the reform of the National Equities Exchange and Quotations, increase the support for the initial public offerings for technological innovation enterprises, and so on.
Third, in terms of encouraging long-term funding in the market, we will increase the financial and strategic investments from insurance companies to quality listed companies, strength institutional investors, and fortify the fundamentals of long-term investment.
Fourth, to accelerate the reform of state-owned enterprises (SOEs) and the development of private enterprises, we will accelerate our speed of launching new measures, including promoting state-owned enterprises to carry out mixed-ownership reform in the capital market, supporting industry-leading private enterprises to carry out industrial mergers and acquisitions, and supporting bond and equity issuance of private enterprises’ support plans.
Fifth, in terms of expanding opening-up, we will continue to expand and open up in all directions. In accordance with the spirit of General Secretary Xi Jinping’s speech at Bo’ao, we will speed up the opening of banking, securities, insurance and other industries. This year marks the 40-year anniversary of the reform and opening-up. The fundamental direction of reform and opening-up has been settled, and the key is implementation. The present time is a crucial moment in which actions mean more than policies. All aspects must be implemented with greater intensity, a stronger sense of responsibility, courage to act and quick action, and effectively introduce some specific policies to promote the healthy development of the stock market.
At present, private enterprises feel some anxiety about implementing the basic economic policies. What do you think of this?
First of all, I want to emphasize in particular that we must unswervingly implement the basic economic policies and adhere to the “two unwavering” efforts. One is, we will unswervingly consolidate and develop the public sector of the economy, and the other is that we will unswervingly encourage, support and guide the development of the nonpublic sectors of the economy.
At present, there are some misunderstandings and deviations in the actual implementation. For example, some organizations believe that it is safe to provide loans to state-owned enterprises, but it is politically risky to provide loans to private enterprises, and they can avoid making political mistakes by not acting. This kind of understanding and practice is completely wrong. We must understand this issue from the height of politics and the overall situation. The private sector plays an important role in the entire economic system, contributing more than 50% of tax revenue, more than 60% of gross domestic product, more than 70% of technological innovation, more than 80% of urban labor employment, and more than 90% of the number of new employment opportunities and newly founded enterprises. Without the development of private enterprises, there will be no stable development of the entire economy; if there is no high-quality private-enterprise system, there will be no modern industrial system. Supporting the development of private enterprises is to support the development of the entire national economy. Those who do not support the development of private enterprises for reasons of so-called “personal safety” have great problems in their political orientation and must be resolutely corrected.
For the private sector, we must emphasize “four musts”:
First, we must adhere to the basic economic system and unleash the potentials of small, midsize and micro enterprises and the private economy to better aid China’s economic and social development.
Second, we must attach great importance to the temporary difficulties faced by small and midsize enterprises, and take precise and effective measures to support the development of small and midsize enterprises.
Third, it is necessary to further carry on with the research and policy measures to support the development of small and midsize enterprises in reducing the burden of taxes and fees, solving financing problems, improving environmental protection, and improving technological innovation capabilities.
Fourth, it is necessary to improve the capacity of small and midsize enterprises and the private sector, constantly adapt to changes in the market environment, and strive to achieve high-quality development.
Recently, the State Council’s Office of the Leading Group for Promoting the Development of Small and Medium-sized Enterprises and the National Federation of Industry and Commerce will go to various places to learn the implementation of the basic economic policies and the business situations of small and midsize enterprises. I hope everyone can support them.
What do you think of the ongoing discussions about “the state advances, the private sector retreats” (国进民退) in Chinese society?
The so-called “the state advances, the private sector retreats” discussion is both one-sided and wrong. Recently, some private enterprises that have expanded rapidly through heavy debt have experienced liquidity problems. State-owned banks and SOEs have offered support to these private enterprises, and even helped them with restructuring to overcome their difficulties. This shows the relationship of dependence and mutual cooperation between state-owned and private enterprises. I think it is a good thing; it shows that there is no such problem as “the state advances, the private sector retreats.” Once private enterprises are in good operational condition, state-owned capital can withdraw. Conversely, if SOEs encounter difficulties, they can improve their efficiency by having more participations from private enterprises. We also encourage qualified private enterprises to play an active role in industrial restructuring. They can merge and restructure some small and midsize enterprises that have great potential but are having difficulties at the moment.
It must be noted that China’s SOEs and private enterprises have formed a complete industrial chain. SOEs are mostly in the upper stream of the industrial chain, playing a leading role in the fields of basic industries and heavy manufacturing. Private enterprises are increasingly providing manufactured products, especially consumer goods. These two are highly complementary, cooperative and mutually supportive. In the future, the Chinese economy will continue to improve in this direction and move toward high-quality development.
What do you think of the current economic and financial situation and changes in industrial structure?
I believe that the Chinese economy has generally maintained a stable and positive trend. Seen from the main indicators ― economic growth, employment, prices, international payments, corporate profits, fiscal revenue, labor productivity, etc. ― China’s economic operations are in a reasonable range. Compared with the major international economies, China’s economy has performed relatively well. The International Monetary Fund and the World Bank have highly valued China’s sustained economic development. From the perspective of the financial sector, monetary policy has been operating steadily, the financial structural de-leveraging has been steadily implemented, and the impulses of various institutions to blindly expand have been contained. Investment behaviors have become more rational. At the same time, the various risks and problems accumulated in history are inevitably emerging. This is an inevitable process and must be treated rationally.
In response to the marginal changes that have occurred in economic operations, the Party Central Committee and the State Council have vowed to achieve stability in employment, finance, foreign trade, foreign investment, investment and expectations. We must balance the relationship among stable growth, structural adjustment, and risk prevention. On the one hand, we must maintain stable economic growth. On the other hand, we must control financial risks and maintain relatively stable leverage ratios in the macro economy. The key to the balance between the two is to implement a policy system with supply-side structural reform as the core. In the past three years, we have achieved some procedural results in the “three cut, one lower and one make-up.” (Editor’s note: Cut capacity, inventory and leverage. Lower costs. Make up shortcomings.) The international community generally believes that through “destructive innovation,” the price levels of some surplus areas in the Chinese economy have returned to equilibrium, and the relationship between supply and demand has improved significantly. This has stimulated economic growth and promoted the global economic recovery.
The task of China’s economic restructuring has not yet been completed, and the supply-side structural reform needs to be deepened. The next step should be to enhance the vitality, resilience and innovation at the micro level, thereby promoting economic transformation and a virtuous cycle of the national economy. We must do a good job in three things. First, support the development of private enterprises, improve financial accessibility, and alleviate various burdens. Second, we must deepen the reform of SOEs, especially deepening the reform of mixed ownership, establishing a more-complete corporate governance structure, strengthening the construction of internal incentive mechanisms, and improving core competitiveness. Third, the financial system should improve its adaptability and enhance its ability to serve the real economy. Under the current situation, it is especially necessary to speed up system construction and to let the capital market play a key role. To make it happen, we will continue to implement a proactive fiscal policy, a prudent monetary policy, a clear industrial investment policy, and a more-inclusive and sustainable social policy, so that the supply-side structural reform can be further deepened.
The Chinese economy is undergoing a structural change. The market is very concerned about which direction this change is heading to. It is complicated to describe clearly this transformation process because it is an exploratory and trial process of marketization. But from the perspective of demand, there are several points that are clear. First, China’s huge middle-income groups are rising; they are creating huge diversified needs. Second, the aging population is also forming huge demand. Third, a new round of technological and industrial revolution is emerging, characterized by a combination of biotechnology and information technology. This will create huge demand, which requires us to propose supply-side solutions. Fourth, green development creates new opportunities. We must identify and seize new opportunities in this great historical process of industrialization, informatization, urbanization, marketization, and internationalization. We will strive to transform traditional industries, vigorously develop new industries, and accelerate the building of a modern economic system.
Translated by Liu Jiefei and Charlotte Yang of Caixin. Please find the article here