2019 was a year of mounting challenges for China. Firstly, China's economy experienced much downward pressures, and secondly, geopolitical pressures faced by China was also on the rise following America's adjustment of its global strategy and recalibration of its relationship with the country. From the perspective of trade and geopolitical environment, ANBOUND's researchers believe that China is currently facing what is, in 30 years, the most challenging external development environment there is, and foresee that the state will extend in 2020.
Following the shift of America's global strategy and recalibration of its relationship with China, the geopolitical pressures faced by China has also increased. Looking from the perspective of trade environment and geopolitical environment, ANBOUND's researchers believe that China is currently facing what is, in 30 years, the most challenging external development environment there is, and that this state will extend in 2020.
With regards to China's economic problems, those within policy circles and academics alike are debating as to whether the problems faced are that of a cyclical or structural nature. In our opinion, be it a cyclical or structural issue, it still shows a clear sign either way that the development of Chinese enterprises is stifled at the microeconomic level. This is especially true given the downturn in the development and the relative increase in the difficulty of operating private enterprises. Micro-economic support is much needed for the macro economy to sustain itself. If private enterprises, which account for a large part of micro-economic entities, do not have sufficient development, the stability of the Chinese economy will inevitably be shaken. On December 22nd, Xinhua News published an article entitled "The Opinions of the State Council on Creating a Better Development Environment in Order to Support the Reform and Development of Private Enterprises" with the concept of "fairness" being its focal point of discussion. Primarily, it touched on the act of providing a fair market environment for enterprises to compete in. To make that possible, nurturing the environment to respect policies and the rule of law is necessary. This will ensure equal rights, opportunities and rules. Specifically, it includes further liberalization of the market and lowering of the barriers of entry for private enterprises. With a liberal market environment, businesses can access key industries such as power, telco, railway, oil and natural gas. Areas such as infrastructure, community affairs and financial services too will be lenient with its barriers. Other than that, a fair and unified market supervisory system will also be put in place and the tight constraints of a fair competition review system will also be strengthened. Under the new transparency, hidden barriers to bidding will also be removed.
The implementation of the policy is worth mentioning, giving that it is an effort to address unfair environmental problems brought about by the development of private enterprises. In this case, having a policy is better than having none. At least from the perspectives of ideology and policy reform, what needs to be done has been established. From a practical point of view though, ensuring that private enterprises undergo development under a fair environment brings about a full set of challenges. To achieve this outcome, a large amount of institutional and systemic reforms is required, and many structural issues will also need to be reformed.
Thus far, ANBOUND's researches believe there are four types of enterprises in China, all of which exist in different levels of the country's economy and are nestled in the social structure, ultimately forming a unique group termed the "Quaternary Structure".
The first level is central enterprises. In this level, the status of central enterprises is quite high up in the chain. These companies are heavily involved in the fields of finance, telecommunications, energy, consumables, shipping, railway transport, power, national defense and many others. They are also able to obtain unique policy support and financial resources. According to the 2018 official statistics, central state-owned enterprises have 80.8 trillion yuan of assets, RMB 54.7 trillion of total liabilities and capital equity of RMB 16.7 trillion, financial enterprises excluded. This means they have an average asset-liability ratio of 67.7%. In the same year, the total assets of state-owned enterprises nationwide were 264.3 trillion yuan, with total liabilities at RMB 237.8 trillion, thus resulting in net assets of RMB 17.2 trillion.
The second level is local state-owned enterprises. The ownership and management rights of local state-owned enterprises belong mostly to local governments. Quoting official statistics, the total assets of local state-owned enterprises in 2018 stood at RMB 129.6 trillion and total liabilities at RMB 80.3 trillion. Capital equity stood at RMB 42 trillion, making the average asset-liability ratio 62%. Although the status of local state-owned enterprises differs from that of centrally owned enterprises, they frequently receive support from local finance channels, achieve market access and asset injection due to their affiliation with local governments across multiple levels.
The third level is enterprises invested in by foreign capital. This group is an independent layer in the domestic market. According to statistics released on December 19th 2019 by the China Association of Foreign Investment Enterprises, China has attracted more than 900,000 companies from abroad and more than US$ 2.1 trillion in foreign investment. Out of the world's top 500 companies, 400 have invested in China. The country's actual utilization of foreign capital in 2018 was US$ 138.3 billion, representing a 3% increase year-over-year (y-o-y). From January to November, 36,747 new foreign-invested enterprises were established in China, and the actual use of foreign capital reached RMB 845.9 billion, representing a 6% y-o-y increase. Amidst the global trade war, the significance of introducing foreign capital to the Chinese market has become an increasingly vital move again. In addition to that, China has revised its laws and conditions regarding foreign investments, as well as increased the protection of foreign technology and intellectual property. This will no doubt strengthen the organizational and structural attributes of foreign invested enterprises to a certain degree.
The final and fourth level is private enterprise. The central government's emphasis on private enterprises has often been reflected. This can be seen in November 2018 when President Xi Jinping spoke at a forum on private enterprises, saying that the number of private enterprises in China has exceeded 27 million by the end of 2018. Additionally, individual industrial and commercial households have exceeded 65 million and the registered capital involved exceeded RMB 165 trillion. President Xi stated that the private economy has a special characteristic of being "50-60-70-80-90" - wherein tax revenue attributed by private economy is more than 50%, more than 60% of GDP, more than 70% of technology and innovation based achievements, more than 80% of urban based labor and the employment number of companies being more than 90%. Based on the number of enterprises and their relative contribution back to the economy, private enterprises play an important role in the development of China's economy. Unfortunately, private enterprises are unable to take a seat at the big boy's table thus far and remain inferior to the other two "stronghold" enterprises. There is still a long way to go for private enterprises in China as the development environment, capabilities of resource allocation, political standing, individual assets and wealth protection of private enterprises still needs to be improved upon.
The different enterprise groupings above has formed what is a "Quaternary Structure" amidst the Chinese society, solidifying the space for enterprises to develop their resource allocation capabilities and societal position as well as societal influence. Private enterprises are currently in a state of survival and development where their importance and influence are still at insufficient levels. If the development of private enterprises is insufficient, the Chinese economy will lose an important piece of the mechanism that drives it.
Final analysis conclusion
Central enterprises, local state enterprises, foreign capital and privately owned companies have formed a special quaternary type structure in the Chinese market. In facing these largely structural problems, strong structural reforms need to be carried out. Otherwise, the status and the survivability of private enterprises will be difficult to change in the short term.
