Finance, private business and the Wenzhou model

By Heiko Khoo
0 Comment(s)Print E-mail, April 9, 2012
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The first domino [By JIao Haiyang/]

The first domino [By JIao Haiyang/]

The banking reforms proposed by Premier Wen Jiabao are designed to facilitate the flow of credit to small businesses, which have suffered from a contraction in China's export markets and rising wages and raw material costs. The tight rules on bank loans and the fact that state banks lend overwhelmingly to state owned enterprises often drive small business into the clutches of loan sharks, who charge extortionate interest rates in grey and black market financing.

Such banking reform could act as a powerful leverage to normalize the relationship between the state and the private sector, thus ensuring that the constitutional position that guarantees the dominance of the public sector is maintained. The normalization of the protocol for lending to small- and medium-sized businesses can transform many of China's speculative capitalists into more productive economic agents, thereby binding them more closely to the progressive state objectives contained in its 12th Five-Year Plan.

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In 2011, financial crisis in Wenzhou hit headlines as dozens of business leaders fled the city to hide from creditors. The city has thousands of small-scale family firms that mostly produce consumer goods like textiles, shoes and lighters – labor intensive production with low entry costs. These manufacturing sectors played a vital role during the reform era, even though they also generated terrible breaches of labor rights and many products were of poor quality. Such labor rights abuses should be eliminated by coordinated and concerted efforts by the trade unions to raise wages and ensure that the labor laws are enforced. The control of product quality by government agencies has given rise to significant improvements over the last 10 years, but quality issues remain a common problem. Resolving these issues corresponds to state objectives, which aim to raise consumer demand and move China's production quality up the value chain.

China's banks have acted as an instrument to draw private cash into state coffers while limiting lending to the private sector. This helped to mobilize resources to meet targets for growth and development by channeling funds towards the large enterprises owned and controlled by the state, which retain dominance of the economy in line with the nation's constitution and its socialist objectives. The extraordinary success of China's economy during the biggest crisis of world capitalism since the 1930s is a testimony to the underlying validity of its structural balance of economic forces.

Freewheeling Wenzhou provides valuable lessons in the way to channel private interests to meet consumer needs. However, one cannot ignore the fact that Wenzhou's capitalists have played a particularly negative role by stoking up a speculative property boom all over China. This continues to cause the government a headache and perpetuate an unnecessarily severe housing shortage for urban workers. It is natural that workers, who see many millions of urban apartments left empty, resent the speculative activities of real estate capitalists.

In addition to the government's aim to construct 36 million low-cost apartments by 2015, measures should be taken to prevent private owners from leaving property empty. This could produce a rapid rise in rental availability and force properties onto the rental market, precipitating a much-needed fall in rents. Strong rent controls, contracts and tenants rights, such as they exist in many European countries, would normalize the sector. Lower rents and greater security of tenure will leave more money in the pockets of the urban workforce to spend on consumer goods for their homes.

Cities in the interior remain overwhelmingly dominated by state owned or state controlled enterprises, and these sectors are the primary engines driving catch-up development. The advantages of such publicly owned planning levers are most evident in the sphere of emulation and capital-intensive infrastructure investments.

According to the followers of Friedrich Hayek, the inability to meet consumer needs in a complex and sophisticated economy was the root cause of the collapse of the Soviet Union. In their minds, private sector innovation and flexibility inevitably conquers sclerotic state ownership and planning. China's reform era ownership combinations seem to disprove this idea. The non-state sectors of the market met consumer demands, which large-scale state ownership had failed to address, and China became a global manufacturing base for consumer goods, but it was state investment in large-scale industry and infrastructure that drove the overall pattern of development.

As early as 1921, the Soviet leader Vladimir Lenin proposed that the banking system should be used as a tool to integrate the small-scale producer into collective endeavour. He believed that the provision of credit to small-scale enterprises should be used as a means of materially motivating such firms to meet overall state objectives, and that by providing more favorable interest rates to the state and cooperative sector than to the private sector, social objectives could be prioritized.

Small- and medium-sized enterprises often complain about the high interest rates they are forced to pay along with other burdens on their profits. Credit flows to the private sector need to become more normalized and transparent. This can reduce corruption, undermine illegal financing, and stimulate small- and medium-sized private and cooperative firms while simultaneously bringing greater control over their activities.

Article 11 of the Chinese constitution explains that, "the State encourages, supports and guides the development of the non-public sectors of the economy and, in accordance with law, exercises supervision and control over the non-public sectors of the economy." Both of these components are required at the present time in order to ensure that the crisis in the private sector does not adversely affect overall development objectives, and that its capital and influence is channeled in a positive direction.

The author is a columnist with For more information please visit:

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