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Original Sin: Why China Still Discriminates Against The Private Sector

Analysis: Much has been made about China's move toward a market economy. But seen from up close, the private sector is still a second-class player in the face of state-run economic interests.

In Shanghai, old and new ways of operating do constant battle (phogel)
In Shanghai, old and new ways of operating do constant battle (phogel)
Fu Weikang

BEIJING – Whether measured in terms of GDP, tax contributions to the government or job creation, the private economy is playing a crucial role in China's overall economy. In developed areas, the total private economy accounts for more than 90% of GDP, taking into account all the jobs and taxes it brings in.

However, even as the proportion of private business output has risen substantially, the sector has yet to obtain an equal footing with the state-owned economy. Both hidden and overt discrimination against the private economy exist almost everywhere.

Such discrimination can be found both in the government's attitude and in its regulations. State-owned companies are heralded as "the leading force of the national economy," to be "consolidated and developed." Private companies are instead still distinguished as "the non-public economy such as the individual economy and private-owned businesses which make up an important part of the socialist market economy."

In other words, while state-owned companies are promoted by authorities, private businesses are not even allowed to exist in many sectors according to the law. It would be possible to eliminate the different treatment of the public and the private, but it's a lot more difficult to erase the discrimination of public companies against private ones.

So what's the reasoning behind this discrimination against private businesses? It lies mainly in three concepts: original sin, moral hazard and lack of macro-view.

The theory of original of sin.

In the early development stages of China's private economy, many businesses did not comply with the law and regulations. These wrongful acts are generally split into two types: being illegal simply because the law of that time didn't allow the existence of any private economy, and active indulging in tax evasion and speculation. Even today private companies are metaphorically forced to wear dunce caps.

These accusations do not make much sense. The fact that private businesses existed illegally is not the fault of the private sector. It's rather the problem of the system of that time. China's failed attempts at a planned economy at the end of Cultural Revolution forced farmers to reform the way they produced to survive. So if there is an original sin, it should be attributed to the system rather than to the private economy.

As for the errors of the past, if the businesses were punished, that's well and good. If they escaped punishment, consider that to be in the past. If they were punished in the past, they have the right to start again. In a society with the rule of law, most crimes have a statute of limitations. We can't say that a company that committed some minor fault 20 years ago still bears original sin.

The moral hazard.

Second is the moral hazard that private business carries. This refers to the possibility that in economic activities people try to gain advantage over others.

The moral hazard lays in private companies' dealings with governmental agencies, as well as other state-owned commercial institutions that take additional precautions towards them.

For instance, in agreeing to grant a loan to a public-owned company, the relevant agents of a state-owned commercial bank don't have to be responsible for additional risks as long as the process went through normal risk controls -- even if the loan is not eventually recovered. However, loans to private companies require additional procedures. This has resulted in a reluctance to grant loans to small and medium-sized businesses. This largely restricts their development.

This extra caution also exacerbates private business operational costs and undoubtedly reduces the our society's efficiency. Many of China's economic problems today can be attributed to the existence of this moral hazard.

Lack of a wider picture (the macro-view)of private business.

Third is the vision of the overall situation. Many officials regard private companies as a mercenary bunch unconcerned about the wider situation. They welcome the private economy from the perspective of GDP and employment, but deep in their heart they have always resisted the private economy.

Moreover, in their view, many of these private businesses are not as obedient as state-owned companies. This probably explains why the latest privatization of public utilities has broadly dissipated.

It should be understood that companies pursue profits, and that beyond paying taxes, they also bear some additional social responsibility. Unfortunately, such simple reasoning is taken by many public officials as evidence that private companies lack any view of the bigger picture.

This may be due to the fact that during the process of privatization of public utilities, many unfinished details remained unresolved in contracts. After all, the privatization of public utilities is a relatively new phenomenon in China. However this imperfection has become a major excuse for inhibiting the privatization of public utilities. It is rather a sad consequence.

The past examples have shown us that China's central macro-economic control policy has preferred to sacrifice private entrepreneurs and their businesses. Given the same violations of the authority's regulations, a state-owned company would have received a much less harsh punishment.

The law clearly defines the relationship between a private company's legal representative, its shareholders and the corporate structure. But in practice, many people, in particular law enforcement agencies, often confuse them.

For example, when the culprits are shareholders of a company, the company is held to bear the civil liability. And when companies have committed offenses they also involve the shareholders. Were they leaders of state-owned companies committing the same offenses, such punishments would have not have been imposed. This is the selective enforcement of the law.

The market itself bears risks, and a "free lunch" doesn't exist. No kind of ownership is ever perfect. Look for the lesser evil. The market economy in China has been established as the basic method for allocating resources. Fair market competition will continue to be judged among the different forms of ownership. And now is the time for the discrimination to stop!

Read the original article in Chinese on Caixin.

Photo - phogel

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