Private firms deserve to benefit in financial stimulus

A picture of a Chinese mayor kissing an official document has recently set cyberspace abuzz.

Wang Zhongbing, mayor of Zhanjiang City in southern Guangdong Province, was photographed kissing a piece of paper, the ink barely dry, as he walked out of the headquarters of the National Development and Reform Commission (NDRC), the country's top economic planning body, on May 24.

Wang acted emotionally - something out of character for Chinese officials who are usually stiff in public - because the document gave his city a go-ahead to construct a coveted steel plant.

Wang may be the only mayor who publicly expressed excitement, but he's not alone in feeling elated at the abundant good news coming out of the NDRC. Xinhua reported on May 28 that the planning authorities have notably facilitated the approval process of local projects under consideration.

On May 21 alone, the NDRC gave the green light to more than 100 projects. The acceleration of official paperwork has induced both delight and worries. Talk of a new stimulus package is rife among observers.

The 4 trillion yuan (US$628 billion) stimulus package, implemented in late 2008 following the financial tsunami, helped China significantly in tiding over the crisis that's battered many Western economies. But one of its less-positive side effects is obvious.

As it has turned out, the recipients of the favors -- the stimulus projects - were mostly, if not entirely, state-owned enterprises that enjoy political patronage. Meanwhile, the private sector has been stifled by a shortage of policy support and funds. Wenzhou, once a freewheeling financial hub, is going to the dogs after its recent debt debacle.

It is reported that of the 4 trillion yuan in stimulus funds allocated nationwide, 1.8 trillion yuan went to the roads and railways. The stimulus package has since been criticized for encouraging the trend of "state on the march, society on the retreat." Hence, the renewed worries about another possible package and its likely state recipients. In fact, there are more profound concerns about why the facilitated paperwork and reduced red tape could be bad for the economy beyond who gets the patronage.

Although its double-digit growth rate is the envy of the world, China cannot rest on its laurels. Its growth has slowed over the past few months, amid fears that a declining property market and diminishing exports will spell grave troubles for the general economy.

Investment-oriented

Besides, the country is in the throes of transition from an investment-oriented economy to a consumption-driven one. Some experts therefore believe it is risky to authorize more investment at this time.

While the country has earmarked 170 billion yuan for raising energy efficiency and reducing emissions this year, there is a possibility that some traditionally highly polluting industries that have been phased out might stage a comeback, said Liu Yuanchun, professor of economics at Renmin University in Beijing.

Which means if China is to invest more in its infrastructure anyway, it will have to set limits.

Bai Chong'en of Tsinghua University told the People's Daily on Wednesday that the 4 trillion yuan stimulus has left behind many projects still under construction. So if more infrastructure stimulus is approved now, it will be difficult to wean ourselves off investment.

In addition, investment in China, according to Bai, is increasingly less lucrative than in the past. In the mid-1990s, post-tax investment could generate returns of more than 15 percent. From that time on, they began to fall and by 2011 returns had dropped to slightly more than 5 percent.

A more dire consequence of eased project authorization is that debt-laden localities will saddle themselves with more debts incurred by a building binge.

In order to enhance the efficiency of investment, the country ought to better support private enterprises, said Sun Lijian of Fudan University. That support should come in the form of a lowered tax burden, he said.

Interestingly, however hard the NDRC denies that the recent spike in approved new projects presages a stimulus package, their efforts are still dubbed "stimulus 2.0" online.

This signifies public misgivings about the distortions such a plan would cause to an economy in which the state already has a disproportionate presence.