China’s New Look at Business

Beijing, in what may be its most ringing endorsement of private property since the Communists took over in 1949, last week promised to treat the fledgling private sector the same way it does the dominant state enterprises. That’s easier said than done, but, combined with the significant trade concessions Beijing recently made to the United States, it does indicate that China knows it has to open up its economy and create a private sector; the bloated state-run companies are losing steam.

China earlier last year gave private property constitutional status--elevating it to an “important component” of the economy--and in its latest pronouncements said it is willing to go much further. “We will eliminate all restrictive and discriminatory regulations that are not friendly toward private investment,” said Zeng Peiyan, head of the powerful State Planning Commission. That would mean state and private enterprises would be taxed in the same manner and would be subject to the same rules on land use, licensing and trade. Zeng also promised private companies unprecedented access to China’s stock markets, which are dominated by state enterprises.

It will take more than rhetorical flourishes to put the two sectors on par. The Communists harbor deep suspicions of the private sector, and China’s business mentality must change as well. Already laden with nonperforming loans to state companies, banks with no experience now face the problem of making loans based on commercial risks. They will have to learn to lend, which takes time. Until then, the authorities should encourage enterprises to set up private banks among themselves.

Zeng’s remarks carry the understanding that the government must apply laws impartially and fairly. Moreover, in its trade deal with Washington, which opens the World Trade Organization’s door for China, Beijing has accepted an obligation to comply with internationally agreed rules.

This is significant if China hopes to create a vibrant private sector to replace the sputtering state-run companies as the engine of economic growth. Although China’s economy grew at a provisional 7.1% last year, it is slowing down and is likely to continue to deteriorate unless the government pumps billions into public works projects.

The challenges Beijing is facing are formidable. It is making the right moves to address them.