By Shaun Rein
With the world’s elite in Davos as the backdrop, Chinese Premier Wen Jiabao has reiterated the government’s stance that it can hit 8 percent gross domestic product (GDP) growth in 2009—despite exports dropping 2.8 percent in December and fourth quarter GDP growth falling to 6.8 percent. An 8 percent GDP growth rate is the magic number many analysts believe China must reach in order to absorb the 6 million university graduates joining the workforce every year and maintain social stability.
Premier Wen says 2009 will be a hard year but that government spending in health care, environmental protection, and other large-scale projects will make up for foreign investment shortfalls. With China’s debt levels at only 17 percent of GDP (versus well over 50 percent in countries like the United Kingdom) and deflation emerging as a bigger concern than inflation, China also has the option to push banks to loan more money.
However, China’s planned $586 billion stimulus package is far too focused on large infrastructure and state-owned enterprise projects, leaving the country’s ability to hit that growth rate in jeopardy.
Aside from the fact that the stimulus may increase non-performing loans and create more corruption in local governments’ push to spend funds, these projects are not the most efficient targets as they lack much of a multiplier effect. Rather than following in the footsteps of Japan and pouring money into infrastructure projects that do not yield sustainable growth, China should focus more on reforming regulations that stimulate China’s small business sector and create new jobs quickly for the millions who have recently lost work due to closing factories.
Over 9 million Americans submitted taxes as S-Corporations last year and over 60 percent of new job growth in the last two decades has been generated by companies with fewer than 50 employees. In China, however, no equivalent of an S-corporation entity exists and establishing a company is a difficult and costly process that often takes months as entrepreneurs work to maneuver through various layers of bureaucracy in multiple ministries.
New companies must sign an office lease—they cannot legally work out of their garages like many a great entrepreneur in the U.S. has done—and go through endless paperwork before their business is considered legal. With banks focused on large companies and venture capital only available for a small sector of the economy, such as IT startups, building a new company is very difficult for non-connected Chinese.
Making matter worse, since new human resource laws implemented last year make it costly to fire workers, companies are hesitant to add employees to the payroll and cannot hire short-term contract workers for more than a fixed period of time. This leaves huge numbers of people who would be independent consultants in the United States looking for jobs that do not exist.
As, most entrepreneurs cannot get bank loans, Beijing needs to encourage families and friends banding together with little capital to start companies. With jobs being lost by the millions in hard hit export-oriented areas like Guangdong and Zhejiang, the best way to spur job growth is to make it easier to start companies.
Too much of China’s stimulus package is going to infrastructure and lethargic state-run enterprises, while few benefits are going directly to the people that need it most.
Premier Wen should be given much credit for acting quickly and decisively to offset the effects of the downturn, but he now needs to use the downturn as an impetus for China to reform some of its rules on entrepreneurship and allow China’s people to take more of their financial well-being in their own hands.
Shaun Rein is the founder and managing director of the China Market Research Group, www.cmrconsulting.com.cn, the leading strategic market intelligence firm focused on China.