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14 Mar, 2012

Six Major Problems Facing China’s “Real Economy”

By Dong Wei (China Youth Daily)

March 14, 2012 — Edited and translated by People’s Daily Online

“Wuhan Iron and Steel Company veers off business focus to pig farming because it is more profitable than steel production. It shows that China’s real economy is facing serious internal problems, in addition to external problems such as sluggish demand and snobbish banking practices,” said Li Xiaolin, a member of the Chinese People’s Political Consultative Conference (CPPCC) and also a member of the Central Committee of the China Democratic National Construction Association (CDNCA).

The CPPCC recently adopted a proposal for economic reforms from the CDNCA, Chinese Peasants’ and Workers’ Democratic Party, and All-China Federation of Industry and Commerce, as the first policy document for discussion at its annual session this year.

The three political groups believe that China’s real economy is facing six major problems:

First, small and medium-sized enterprises (SMEs) in the real economy are under heavy pressure of razor-thin profits and soaring production costs caused by multiple factors. Second, excessive state monopolies have stifled access to capital for private enterprises, and seriously limited the growth of SMEs in the real economy. In such a context, a large amount of private capital has turned into hot money. Third, SMEs in the real economy are receiving much fewer orders and facing a serious overcapacity problem due to sluggish market demand caused by the global financial crisis. Fourth, private SMEs in downstream industries are facing serious problems such as financing difficulties and labor shortages, forming a sharp contrast to those in upstream industries. Fifth, investment in the virtual economy can bring much higher returns at a faster pace than investment in the real economy, so capital naturally flows to the virtual economy. Sixth, business innovations require heavy investment and carry high risks. Due to insufficient resources and limited capability, SMEs are having problems conducting innovations and transformation.

The vice chairman of the All-China Federation of Industry and Commerce Zhuang Congsheng said, “If we do not pay close attention to the real economy of our country now, we may face a crisis like the European debt crisis or U.S. financial crisis. It is very hard to run an industrial enterprise and the margin is very thin too. Therefore, we, as well as the Chinese Peasants’ and Workers’ Democratic Party and the China National Democratic Association, jointly propose that China’s policies should favor the real economy more, support the real economy and create an environment that is good for the development of the real economy.”

In the joint proposal, members of the three parties suggest that China should expand investment channels for private capitals, especially accelerate the reform on monopolized industries, guide private capitals into strategic emerging industries and enlarge the development space of the real economy, and government should also make efforts to eliminate individuals and enterprises’ excessive profits from speculative activities, build up a market environment encouraging hard work, innovations and industrial enterprises, and pay close attention to the “polarization” caused by the excessive monopoly of the upper end of the industrial chain and the excessive competition of the lower end of the industrial chain.

In the joint proposal, three parties especially suggest to reform the financial system, relax the restriction for private capitals on establishing financial institutions, change the private finance from growing abnormally underground to growing rationally aboveboard, realize a virtuous interaction between the real economy and the financial section, and let the financial industry back to its original orientation of serving the real economy.

The dislocation and imbalance between the financial system and real economy have led to the capital shortage of SMEs and the surplus of private capitals. To ease the current difficulties, China should actively deepen the reform on the financial system, properly relax the restriction for individuals to found small and medium-sized financial organizations, actively foster the small and medium-sized financial organizations serving SMEs, guide the operation of private capitals from a disorder gray zone to a bight “zone of sunshine.”