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China calls on businesses to join hands with state sector

China’s ruling Communist Party is calling on the country’s businesses to invest in infrastructure projects to stimulate domestic demand and reboot the flagging economy, but analysts said the plan looks like an attempt to seize private sector assets as governments across the country run out of money.

Under the plan, the government will allocate “franchises” to invest in infrastructure projects on a “user pays” or “build-operate-transfer” basis, according to an official statement.

The government wants private companies “deeply involved” in attempts to stimulate domestic demand through public-private partnerships and joint ventures with state-owned companies. Stakes will be allocated depending on how “market-sensitive” an industry or a project is, according to guidelines for the “new mechanism” issued by the State Development and Reform Commission.

The idea is to hand out “franchises” for projects that could benefit from private-sector assets and know-how, under a scheme that Beijing is hoping will bring local government finances “into the sunshine” and “curb new, hidden debt carried by local governments,” according to the guidelines, published by the State Council on Nov. 3.

The plan seeks to expand on 10 years of the government’s “public-private partnership” policy, which has coincided with growing government controls on big technology firms and the introduction of ruling Chinese Communist Party committees into private enterprises.

While officials have denied that their vision of a “unified market” under tight regulation is another way of saying a planned economy, the ruling party has recently announced it will crack down on an “unruly” financial sector, using “Marxist financial theory” to stave off systemic risks and boost the economy.

Growing debt burdens

Local governments have seen their coffers drained by three years of society-wide COVID-19 restrictions, as well as a sharp fall in land transfer fees – which once made up 40% of local fiscal revenues – and other property-related income. 

They are now struggling with an ever-mounting debt burden, prompting officials to borrow more to pay back old debts, and to raid the coffers of medical insurance funds to make ends meet, resulting in cuts to medical benefits and mass protests in major cities in February.

The “new mechanism” still means that the state-owned sector will advance “at the expense of the private sector, said Simon Lee, senior lecturer in accounting and finance at the Chinese University of Hong Kong.

“These are all experiments – they are looking for a sustainable model for economic growth,” Lee said, adding that he wasn’t surprised by the current direction being taken in Beijing.

“If they find out that ultimately this way is unworkable, it will have an impact on economic development,” he warned.

A screen displays an image of the Jinzhou 25-1 oilfield at the China National Offshore Oil Corporation (CNOOC) booth during the 2021 China International Fair for Trade in Services in Beijing, Sept. 4, 2021. The government plans to allocate “franchises” to invest in infrastructure projects on a “user pays” or “build-operate-transfer” basis. Credit: Florence Lo/Reuters

The new “franchises” will focus on “user pays” projects with clear charging channels and income streams, and must incur no new local government borrowing, according to the guidelines. The projects will run on “build-operate-transfer” principles or similar models, with the rights, ownership and responsibilities made clear in each franchise agreement.

They can include highways, railways, civil aviation infrastructure, transportation and logistics hubs, urban utilities, parking lots, as well as sports and tourism facilities, the guidelines say.

“Priority will be given to private enterprises,” the guidelines say, adding that private companies could wind up with stakes as low as 35% in projects with a high degree of importance for the national economy and people’s livelihood.

But there are penalties for companies deemed not to have delivered what the government wanted.

“If the public products and services provided do not meet the standards agreed in the franchise agreement, the franchisee shall bear liability for breach of contract in accordance with the agreement,” the rules state.

Asset grab?

Current affairs commentator Fang Yuan said the overall effect will be an asset-grab by the public sector.

“In essence, this is a rebranding of an expansion of state control of the economy,” Fang said.

“Firstly, the cooperation between state-owned enterprises and private companies [envisaged here] is unequal,” Fang said. “State-owned enterprises will provide an empty shell, while the private companies keep investing, but the private companies own small stakes and don’t control [the franchise-holding entity].”

“In the past, when there have been disputes between state-owned enterprises and private companies, the private companies have lost out due to the imbalance of power,” Fang said. “As soon as a dispute occurs, the assets of private enterprises will be swallowed up by state-owned enterprises.”

However, the government says it is seeking applications from private enterprises to control or wholly own franchises in waste treatment, leisure facilities, logistics hubs, sports facilities and tourist facilities, as well utilities, rail and other transportation links, as well as rural power grids, oil and gas pipelines and water conservation infrastructure, including hydropower, the guidelines say.

“We welcome private enterprises to actively participate in the reform of state-owned enterprises and to promote their in-depth integration into various types of ownership structure,” Yuan Ye, deputy director of the State-owned Assets Supervision and Administration Commission of the State Council, told a recent enterprise reform conference.

‘Hungry children’

He said state-owned companies at the central government level have already invested in more than 13,000 private companies, adding that the government favors mutual stakeholding as a model for public-private partnerships.

Yuan said that while state-owned companies have been approaching private companies to forge cooperation arrangements for some time, private enterprises are now being invited to make such approaches too.

But financial commentator Si Ling said the move is an indirect way for the government to lay hands on some of the assets accumulated by the private sector over the past four decades of rapid economic growth.

“Private enterprises are still rich, and the government wouldn’t seek to use this money unless it was as a last resort,” Si said.

“State-owned enterprises are the hungry children of the Chinese government, who cry and have to be fed milk,” he said. “But now it’s the government who is crying, and there are no resources left to support state-owned enterprises.”

“So this current phase of operations is about targeting the private sector, who have profited from society,” he said. “Now it’s their turn to give something back.”

Translated by Luisetta Mudie. Edited by Malcolm Foster.