A Core Problem: Getting Access to Capital
A major obstacle to private sector development is a severe shortage of investment capital. Particularly in times of economic crisis, banks are rather reluctant to lend credits to enterprises; and if they do, they would rather serve state-owned companies which can rely on official collateral or big private conglomerates who usually meet their loan performance targets more quickly than small- and medium-scale enterprises. Even if the government demands that banks lower their lending standards to support private enterprises, change is unlikely as long as the state does not back up credits for the private sector in some way — for instance, by loosening capital requirements for banks or providing guarantees on private sector loans to reduce the lending risk (Orange Wang, 2018). Moreover, the granting of loans is selective. As Quan and Leng (2018) have shown, in many places local governments decide which company is qualified to receive a loan and which is not, giving priority to high-tech businesses and obstructing loans to small- and medium-sized firms of the manufacturing sector which have been the principle driving force of economic development in recent decades (Chan and He, 2019). On top of this, if an enterprise is unable to win contracts from public offers it might be unable to get any credit at all.
A large number of private enterprises, acting as guarantors for other firms, are also facing insolvency. Since private entrepreneurs as a rule need proper collateral or guarantors in order to acquire a bank loan, private enterprises frequently act as mutual guarantors for other businesses. This ‘cross-guaranteeing of debt’ is dangerous for financial systems and new lending (Shu, 2019). In addition, delayed payments of government authorities and SOEs to private enterprises (for completed tasks) are a further issue which negatively impacts cash flow of enterprises (Hu, 2019).
Due to the above-mentioned significance of small- and medium-sized firms, the central government seems determined to undertake efforts to find a solution for all these problems. Accordingly, in February 2019, the CCP’s Central Committee and the State Council ordered that all Chinese banks increase lending to private enterprises in order to support the private sector and to avoid a further slowdown of the economy. Also in 2019, large commercial banks are expected to increase the number of loans offered to small- and medium-sized enterprises by more than 30 percent (Jinrong fuwu 18tiao, 2019). Since banks have still been reluctant to provide loans to small- and medium-private enterprises due to higher credit risks, China’s Banking and Insurance Regulatory Commission (CBIRC) in February 2019 again urged state-owned commercial banks to facilitate and increase lending to these enterprises and reduce lending rates in order to avert an economic slowdown.61
Although the central government repeatedly promised to provide more loans to private enterprises, in reality no major change was observed until the end of 2018 (Yao, 2018). However, due to the importance of the private sector, the central government has, historically, at least endeavored to find further solutions for these recurring problems. For example, in 2008, soon after the central government had launched the ‘4 trillion economic package’ in response to the outbreak of the world financial crisis, the People’s Bank of China (PBOC) released credits through China’s banking system. It also encouraged the sub-branches of commercial banks to increase their lending by administrative incentives such as promotions or demotions. This induced the banks to draw up so-called ‘implicit contracts’ with local enterprises, i.e. establishing a system of mutual guarantees between local enterprises to extend their ability to apply for loans and then force the banks into lending, so that official targets for overall credit expansion could be met. However, when inflation and unsustainable investments reached unbearable levels, the government soon turned to fiscal contraction, leading to a severe credit crunch in the private sector beginning in the late 2000s without an end in sight so far (Chen Ye and Guan, 2018; see also Wang and Tong, 2018). To this day, a relaxation of lending policies on the part of China’s banks is hampered by high levels of public and private debt, making it politically risky for the People’s Bank of China — or the central government, for that matter — to force the banking system to expand its credit lines for private enterprises.62
In reality, there is contradictory information on solving the credit issue. In April 2019, it was reported that state-owned commercial banks such as the Bank of Communication had increased the credit volume for private enterprises and concurrently reduced interest rates.63 Moreover, in June 2019, China’s State Council decided to further reduce real interest rates on loans for small and medium enterprises, cap lending surcharges, support corporate finance, facilitate intellectual property pledge financing, and improve financial services in general for the private sector.64 A report of the Standing Committee of the National People’s Congress, however, revealed that the effects of these policies have been far from being satisfactory. Banks are still risk-averse, set high thresholds for loans, are hesitant to grant them to small and medium enterprises, and demand high interests.65 Obviously, it is difficult for the central government to implement private sector policies on a national scale since local banks are reluctant to support them. One major reason is related to conflicting bank policies. On the one hand, the central bank has several times cut banks’ reserve requirement ratios in order to facilitate liquidity and loan provision for private enterprises. On the other hand, the central government has requested that banks reduce lending risks, thus strengthening the banks’ perception of small private firms as the riskiest group of borrowers.
In order to counterbalance this dilemma, Chinese banks introduced a worldwide accepted measure of lending: discounting of bankers’ acceptances. When a company buys something from a supplier, it can pay using a so-called bankers’ acceptance, which is issued by a bank on behalf of the buyer. When the acceptance matures, the supplier exchanges it for cash from the bank for the amount of the sale. The bank then seeks payment from the company on whose behalf it issued the acceptance. If the company needs money before the acceptance is due, it can go to any bank and exchange the acceptance for cash, albeit at a discount to the value of the acceptance which is cashed in by the bank. That’s the reason why many private businessmen are reluctant to turn to this method as it reduces further the already small profit margins of private businesses.66
Discourses on Private Entrepreneurship
As mentioned earlier, self-employed individuals reemerged with the onset of economic reforms at the end of the 1970s, which were followed by the gradual legalization of private entrepreneurship in the 1980s. Since then, the term ‘entrepreneur’, which has always been ideologically problematic in a socialist system, has been hotly debated in China. Figure 2 summarizes the change in the official assessment and terminology of entrepreneurship until its reinterpretation as ‘traditional Chinese’ or ‘socialist’ in the 1990s. In the early 1990s, the term ‘peasant entrepreneurs’ (nongmin qiyejia) was employed to describe successful managers of rural enterprises who were seen as ‘representatives of the advanced productive forces in the countryside’ (e.g. Wang and Chen, 1985). Since the mid-1990s, Chinese academics have discussed the Schumpeterian idea of the entrepreneur. Not only them, even Chinese officials later admitted that an entrepreneurial stratum had once again come to the fore in China (Xu, 1997; Zhang and Li, 1998).
Figure 2 illustrates the change in the assessment and official conceptualization of ‘entrepreneurs’ up until the 1990s. In the 1950s, the characterization as ‘capitalists’ or ‘bourgeois’ attributed an anti-socialist character to entrepreneurship and thus placed them outside society. As of the mid-1950s, entrepreneurs effectively ceased to exist. The leading personnel of (state-owned) enterprises were officially nominated SOE directors, often acting as party secretaries at the same time. With the beginning of the reform policies in the late 1970s ‘individual businesses’