The recent deleveraging and credit crunch has put many private enterprises under tremendous financial pressure. What should private enterprises do to seek further development? To answer this question, China Fortune Bond interviewed Wei Jianguo, former Vice Minister of Commerce and Vice Chairman of the China Center for International Economic Exchanges.
Changing the development concept is the only way out
China Fortune Bond: How should we look at the current financial difficulties faced by private enterprises? Should we slow down the deleveraging?
Wei Jianguo: China’s private enterprises are at a very critical turning point right now because the development and growth models have changed. In the past, private enterprises get loans from the bank first, then look for market and produce goods. The biggest problem with this old model is that once the market changes, such as the breakout of the Sino-US trade friction, the processing trade-oriented private enterprises with inefficient market demand could be easily affected and hardly survive.
Some people think that the current deleveraging and credit crunch are too tough for private enterprises. I am afraid I can not agree with this view. I think that private enterprises should have a correct understanding and make better use of the favorable policies given by the government. If they always expect to be saved by government policies when the market suddenly changes, they will become anxious easily and have no idea on how to deal with the challenges. It is very important for private enterprises to overcome the difficulties during the transformation and completely change the old development model.
In the aspect of dealing with unexpected market changes, the provinces of Zhejiang, Fujian, and Guangdong did a better job because they choose to lead the market with innovation rather than blindly follow it. Private enterprises in the central and western regions represented by Chengdu, Chongqing and Wuhan also came up with new development concepts and measures, such as new energy, biomedicine and resources development along the Belt and Road region. What worries me is the northeast region, where the investment of the whole private enterprises is lower than the national average.
The development of these three regions illustrates a crucial point: the key factor for the future development of private enterprises is not capital or deleveraging, but the concept of development.
At the same time, some experts and scholars said that the state has advanced while the private sector has retreated, I am afraid I can not agree with them. In fact, the public sector economy has become smaller than the non-public economy since September 2017, and the proportion of the public ownership in the overall economy is falling. The ever-increasing registered capital of private enterprises shows that the entire ownership structure of China has changed dramatically.
Private enterprises should have a clear development goal. What we need now is an effective and efficient supply. Therefore, we must resolutely give up those inefficient areas and turn to the efficient supply side. For example, in the industries of catering, healthcare, pension, textiles, toys, household appliances and so forth, business efficiency has been rising. These highly efficient private enterprises will take the initiative in the future and achieve faster development, while those inefficient or “zombie” enterprises still wish to be rescued by the government, this is unrealistic.
The current trade protectionism and unilateralism launched by the Trump administration is likely to have a greater impact on the export market, which means private enterprises must be prepared for a more difficult time ahead.
Therefore, private enterprises must give up their illusions and prepare for the battle. The future market may be cruel to private enterprises, but they have to adopt a new concept of development.
China Fortune Bond: Amid the current circumstances, should financial institutions cooperate with enterprises to accelerate industry integration and restructuring, thereby increasing market concentration and improving efficiency?
Wei Jianguo: First of all, the market environment facing private enterprises has changed. The market was in short supply before the reform and opening up but now everything is so different. It is very important to understand that the main contradiction in our society has now become a contradiction between the people’s growing need for a better life and the unbalanced development.
Second, the development momentum of private enterprises is very different from before and private enterprises should focus on innovation. The family business model has helped many private enterprises to get rich but at the same time, it also hinders the development of modern private enterprises. Therefore, it is necessary to abandon this family-style management in a timely manner. Some people question why family-style management is getting better and better in other countries? I think that this is because they have adapted to the new market environment but the management of the family business in China has not kept pace with the times. I have spoken with many private entrepreneurs and they share the same feelings.
Ensuring a good business environment with the rule of law
China Fortune Bond: In your opinion, what are the other problems facing the development of Chinese private enterprises?
Wei Jianguo: First of all, private enterprises need to improve their risk-awareness and risk-prevention ability. In particular, they need to accumulate more experience in dealing with the ever-changing international market.
Secondly, their ability to integrate the industrial chain is relatively weak and do not have sufficient experience in making plans for the entire industry chain, such as the supply chain and service chain.
Thirdly, China’s private enterprises still lack high-quality talents, especially those with international management experience who can carry out cultural integration. In the near future, China’s private enterprises must strengthen their integration with the international community. Hopefully, Chinese entrepreneurs will become more international and China should have thousands of private entrepreneurs with global strategies.
On the one hand, we should protect private enterprises and encourage them to make further development. On the other hand, we must also pay attention to the problems of private enterprises. For the private enterprises who are committed to innovation and development, we should give the support they deserve.
China Fortune Bond: For the innovation of private enterprises, it is generally believed that a good business environment should be created for them, what is your opinion?
Wei Jianguo: The most important thing for creating a good business environment is to achieve equalities in three aspects: equal rights, equal rules and equal opportunities. That means all the companies should be treated equally regardless of their nationality, location and type of ownership. Secondly, the government should offer better services and give these companies a better expectation of the policy environment. Policies should be relatively stable and encourage investment facilitation and trade liberalization. Thirdly, we must provide better intellectual property protection. Finally, we must use the rule of law to ensure that China is on the road to marketization.
Private enterprises should stick to the go global strategy, not going back
China Fortune Bond: The current escalation of the China-US trade war has affected some of the export-oriented enterprises. Should these private enterprises continue with the “go global” strategy, or should they turn back to the domestic market?
Wei Jianguo: We should not give up easily when encountering problems. Indeed, private enterprises have experienced some setbacks on the road of internationalization due to the changes in the international market and trade protectionism of the United States, which can be a big test for private enterprises.
Nonetheless, private enterprises should continue with their internationalization, especially with the help of the Belt and Road Initiative and other platforms. Furthermore, they should make better use of the international and domestic markets and resources, work together with other private enterprises and actively expand their business globally.