July Insight - When will the private sector be back?

Lying beneath the polemics of the Bo Xilai incident and the standard racing sheet predictions of who will land the key leadership positions are real policy debates that will impact the economy and also international participation in that economy.

Certainly, once the changes in leadership are confirmed this November then what is now conjecture will transmute quickly next year into new policy directions.

A priority for the International companies that operate in China should be to monitor whether not there will be a new spirit of partnership and liberalization of the economy to provide additional bandwidth for the private sector to participate in.

For example, recent announcements that private sector firms can bid on Ministry of Railways contracts and the new guidelines by the Ministry of Industry and Information Technology to further “open up to private companies and broaden their investment channels” are symbolic presages of a revived commitment to reduce the role of the state sector. On the other hand, they could be merely lip service by two powerful ministries to defect growing criticism of their monopolistic positions.

Corporate leadership in China in the international community is for the most part now under the rightful domain of qualified executives who are not China hands.  The natural instinct of experienced executives from headquarters is to ignore a leadership change. This is understandable as by and large in most liberal democracies in the G-8 or G-20 there is after an election no significant impact on the operating environment for business because of a change of President or Prime Minister.  In, China this may not be the case, especially, given the new challenges of managing people’s expectations in a slowing economy.

A key barometer to watch will be whether there is a refocus to foment the private sector in China after the National People’s Congress of 2013. Foreign companies are a surrogate private sector and their operating framework is expanded when and if the private sector in China’s role is expanded.  If the state commits to reduce the state sector’s percentage of GDP and liberalizes further a number of key sectors to reduce regulatory arbitrage, that if mismanaged is one source of corruption, and aggressively commits to reinvigorating its commitment to the existing administrative laws, then international companies will be able to ride on this wave and make further inroads within China. If the government restricts the private sector’s access to capital, goes after its “0.1 percent-ers” politically and places China’s economic future in the hands of the SOE cement lobby, then foreign companies will continue to face written and unwritten barriers in China.

To monitor this next stage of reform, Intercedent predicts Caijing, China’s version of The Economist, will construct a government efficiency index equivalent to the Big Mac Index. A key part of this index will be to determine whether private market forces have replaced government lobbying efforts as a source of business growth.

This new index to monitor administrative reform, as a joke might be labelled, the Maotai Index. Maotai is China’s Johnny Walker or White Liquor.  The premise behind the nick name for the index is that a slowdown in the sale of hard spirits will signal that the private sector is moving forward again.

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