China's Third Economic Transformation: The Rise of the Private Economy by Ross Garnaut & Ligang Song

Author:Ross Garnaut & Ligang Song [Garnaut, Ross & Song, Ligang]
Language: eng
Format: epub
Tags: China, Economics, Asia, Business & Economics, History, General
ISBN: 9780415309448
Google: 2nCwAAAAIAAJ
Goodreads: 3468901
Publisher: Routledge
Published: 2003-11-27T00:00:00+00:00

CONCLUSION

The private sector is playing an increasingly important role in China’s economy, but the predominantly state-owned financial and banking system has lagged behind in supporting its development. Despite the emergence of non-state banks and non-bank financial institutions, the state banks continue to dominate the financial system. The state banks have long served only the state industrial sector, leaving China’s private enterprises and individual businesses to find other sources of finance. As a result self-finance and informal credit have been the major sources of funds for private firms.

Discriminatory constraints and policy biases against the development of the private sector have eased over the past decade, but the rationalisation and restructuring of the financial system has unwittingly reduced the financing options available to the private sector. In order to participate fully in the growth of China’s modern economy, private firms must be able to access funds from the financial and capital markets.

Bank finance is the principal source of non-equity finance for small businesses in mature market economies. A primary form of bank finance is an overdraft facility, but private firms, particularly sole proprietorships, do not have close enough relationships with banks to be offered this service. Although the creditworthiness of such firms is part of the problem, there is considerable scope for China’s financial institutions to develop more innovative products to serve this increasingly important sector of the economy. At the same time, the Chinese government needs to create a regulatory and policy environment that allows private firms to operate on the basis of non-discrimination and market competition.

Recent decisions by the Chinese government to abandon the quota system for bank loans and the restriction on the number of companies that can be listed on the stock exchanges are positive signs pointing to a more market-compatible approach to private sector development. It is equally important that foreign direct investment be allowed into the private sector. This would mean that private sector firms must not be excluded from participating in international trade and investment.

The considerable achievements and contributions the private sector has made to China’s economic reform and development can only be sustained if firms are able to access finance through an efficient financial system. As long as the country’s financial and corporate systems remain underdeveloped and burdened with distortions and government interventions, the private sector cannot be expected to play its full and vital role in China’s modernisation and growth. Since most the financing problems are well known to policymakers, there is hope that appropriate measures will be taken to resolve them.

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