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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In Argentina, A Visit To World's Highest Solar Energy Park

With loans and solar panels from China, the massive solar park has been opened a year and is already powering the surrounding areas. Now the Chinese supplier is pushing for an expansion.

960,000 solar panels have been installed at the Cauchari park

Silvia Naishtat

CAUCHARI — Driving across the border with Chile into the northwest Argentine department of Susques, you may spot what looks like a black mass in the distance. Arriving at a 4,000-meter altitude in the municipality of Cauchari, what comes into view instead is an assembly of 960,000 solar panels. It is the world's highest photovoltaic (PV) park, which is also the second biggest solar energy facility in Latin America, after Mexico's Aguascalientes plant.

Spread over 800 hectares in an arid landscape, the Cauchari park has been operating for a year, and has so far turned sunshine into 315 megawatts of electricity, enough to power the local provincial capital of Jujuy through the national grid.

It has also generated some $50 million for the province, which Governor Gerardo Morales has allocated to building 239 schools.

Abundant sunshine, low temperatures

The physicist Martín Albornoz says Cauchari, which means "link to the sun," is exposed to the best solar radiation anywhere. The area has 260 days of sunshine, with no smog and relatively low temperatures, which helps keep the panels in optimal conditions.

Its construction began with a loan of more than $331 million from China's Eximbank, which allowed the purchase of panels made in Shanghai. They arrived in Buenos Aires in 2,500 containers and were later trucked a considerable distance to the site in Cauchari . This was a titanic project that required 1,200 builders and 10-ton cranes, but will save some 780,000 tons of CO2 emissions a year.

It is now run by 60 technicians. Its panels, with a 25-year guarantee, follow the sun's path and are cleaned twice a year. The plant is expected to have a service life of 40 years. Its choice of location was based on power lines traced in the 1990s to export power to Chile, now fed by the park.

Chinese engineers working in an office at the Cauchari park


Chinese want to expand

The plant belongs to the public-sector firm Jemse (Jujuy Energía y Minería), created in 2011 by the province's then governor Eduardo Fellner. Jemse's president, Felipe Albornoz, says that once Chinese credits are repaid in 20 years, Cauchari will earn the province $600 million.

The Argentine Energy ministry must now decide on the park's proposed expansion. The Chinese would pay in $200 million, which will help install 400,000 additional panels and generate enough power for the entire province of Jujuy.

The park's CEO, Guillermo Hoerth, observes that state policies are key to turning Jujuy into a green province. "We must change the production model. The world is rapidly cutting fossil fuel emissions. This is a great opportunity," Hoerth says.

The province's energy chief, Mario Pizarro, says in turn that Susques and three other provincial districts are already self-sufficient with clean energy, and three other districts would soon follow.

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