A commitment to support the private sector’s growth, issued jointly by China’s State Council and the Central Committee of the Communist Party of China on 19 July, provides a strong signal of the authorities’ efforts to improve confidence within the business community, says Fitch Ratings. However, the impact of the policies on investment and economic growth will depend on how this approach is executed and the detailed policies implemented to support the policy goal.
The increased emphasis on support for privately owned enterprises (POEs) comes as officials seek to boost economic growth. Weak confidence among POEs and lingering stress in the property development sector have held back investment in recent months. Private firms cut fixed-asset investment by 0.2% yoy in 1H23, even as state firms raised it by 8.1%. The government rolled out several other policies in July to support growth, including measures to boost consumption.
This is not the first time the authorities have committed to support the private economy, but the Central Committee’s involvement gives particular emphasis to the message. The announcement comes after crackdowns in recent years, notably on tech firms. The change in stance has been underlined by comments from Chinese tech leaders such as Pony Ma, founder of Tencent, and Lei Jun, founder of Xiaomi, in support of the new private sector policy approach.
The authorities have called for a number of measures as part of the strategy, such as easing market access by cleaning up onerous administrative barriers for POEs, removing restrictions that prevent fair competition, protecting intellectual property, and improving POEs’ receivables collection from government agencies. They also advocated greater tolerance for mistakes and failures from private firms’ legal business activities. These steps could benefit POEs’ growth prospects over the medium term, but outcomes will depend on how the measures are implemented by lower tiers of government.
Official guidelines also discussed strengthening policy communication and guidance, setting up grace periods for policy transition, and improving direct policy interpretation and guidance for private companies. If such changes are successfully executed, we believe they would reduce the risk of disruptive, sudden shifts in policy or policy implementation. However, implementation is likely to be challenging given the nature of China’s institutional environment.
A number of industries mentioned in the announcement could benefit from greater policy support. These include labour-intensive manufacturing, equipment manufacturing, clean energy, energy storage, modern agricultural products and rural tourism, among others. The announcement also calls for private companies to further increase R&D spending and cultivate technological leadership in key industries.
We believe the announcement is generally credit positive for corporate issuers that are industry leaders or in sectors serving national strategic goals, such as advanced manufacturing, high-tech, and clean energy. Firms in these sectors also benefit from official support under various other industrial policies.
However, there is a risk that the emphasis on raising investment could weigh on free cash flow. Among A-share listed POEs, those in the auto and auto parts segment recorded strong aggregate capex growth of 74% yoy in 2022 amid efforts to improve capabilities in electric vehicle production. Semiconductor and equipment companies also posted strong capex growth of 21%, driven by investment for solar equipment and materials, as well as chip production.
The guidelines encourage POEs to expand abroad and enhance competitiveness in international markets, with regulators raising the cross-border financing quota for domestic entities. Nonetheless, overseas financing may not pick up significantly in the near term due to adverse conditions with relative domestic and foreign interest rates, exchange rate risk and mounting geostrategic tensions.
Source: Hellenic Shipping News
