How can China really boost business confidence? - Essay #1
A real story about dealing with government corruption, with tears, successes and lessons.
This is not a typical weekly review. Instead, I want to recount the story of a friend to shed light on the real reason why business confidence is low in China right now. It is a simple story, but it is a microcosm of struggles small businesses face every day. To protect my friend's identity, I will call him Mr. X.
This Monday, China's central bank and other government agencies announced the so-called "25 Measures" to step up financial support for the country's private sector, including efforts to diversify financial channels for private businesses, in yet another step to boost the private economy amid challenges. But is financing what private businesses actually lack the most right now? Will more funding make private businesses more confident? Mr. X's story will give you some better ideas.
Mr. X is founder of a consumer product company. Backed by several venture capital firms, he founded the company a few years ago during the height of late Premier Li Keqiang's "mass entrepreneurship and innovation" initiative. Like everyone else, he had some challenges since 2 years ago when consumer sentiments weakened due to a combination of negative factors related to real estate and covid. But he is lucky enough to operate in one of the relatively high growth sectors and has even achieved decent profit as of today.
Yet, he is wary of investing more into this business. For now, he only wants to maintain the business running as it is and tries to explore business opportunities abroad. In fact, he spent most of his time outside of China now and only came back home occasionally.
Why?
One big let-down for him is his experience dealing with local government officials. It first started with a marketing campaign. An innocuous technical flaw of the campaign was seized up by some consumers, who reported it to the local market supervision bureau. The bureau came for an inspection. Inexperienced with dealing with this kind of situation and with no desire to get into trouble, Mr. X found a Laoshi in the bureau (老师 or "teacher", is how a low-level civil servant in the government is commonly referred to) paid him several dollar worth of money to fix it. And fixed it was. Mr. X felt quite happy about it.
But he would soon regret it. From that point on, every few months similar incident will happen again and again. Missing certificate? Loopholes in procedures? All kind of government bureaus went down with their own "speeding tickets". The last straw came with the police force. One day, two economic policemen found them, and told Mr. X that he had breached tax laws by missing on income taxes and social security payments. I can instantly understand what the police were referring to. In China, because effective taxation (including social security payments) is so high in China, almost none of the small businesses pay them in full. So everyone is sort of guilty.
They told Mr. X wistfully that their police salary was only half of the average of Mr. X's employees, and they wanted to have some money for the Spring Festival. Otherwise he would be arrested. This was, essentially, extortion.
This time, it finally dawned on Mr. X he was being picked on. There must be some kind of "blacklist" of easy extortion targets shared among some hidden circles of bad government officials. He decided to pause a bit and think about it. The next day, the policemen called his staff and told them the sum was doubled. Now, Mr. X became really scared. He was no longer sure whether even after paying the doubled sum, this wouldn't be the end of it. He decided to communicate to his shareholders and inform them the string of exhortations the company faced in the last couple years. This time, he told his shareholders that he was fed up, and that he would stood ground and faced consequences. This is it.
One of his shareholders had a legal background and told Mr. X that, although never put into written law, in practice the tax infringement in the case of Mr. X was not serious enough to warrant an arrest. The next day, the shareholder went to the police station and filed a complaint. Mr. X ended up paying the unpaid taxes, but there was no arrest and no penalties. The two policemen were also never seen again, nor were the endless stream of extortions from other government bodies. So it seems, being bold for good reasons, even in front of the government, actually works in China.
Another incident has to do with Mr. X's manufacturing plant, which is located in a village in a relatively prosperous part of China. One day, the village head came to him and asked him to register the plant in that village, in order to pay "taxes". The village head does have a point, but Mr. X decides against it, because he has tax obligations to other localities and simply do not have extra taxes to allocate to that village. Then one day, a dozen villagers stormed the plant and locked the door. The workers inside freaked out. This happened despite the fact that a "village" in China is not actually part of the government and thus has no law enforcement powers. This is, essentially, a local gang doing an unauthorized illegal act.
This time Mr. X instantly decided not to become a fool. He arrived at the plant, dismantled the paper lock on the door, shouted to the villagers that their act was illegal and refused to pay a dime. Afraid, the villagers backed down. From this incident, Mr. X said, he learned that at least in Eastern and Southern China, you have to act like a "gangster" before your opponent, which means to become really rude and look very hard to deal with, like a porcupine, to scare them off. Being the CEO, he is the only one in his company who has the guts and willingness to act this “gangster” role. (He also doubts whether the same tactics apply to northern part of the country, where everyone seems like a real gangster.)
The two incidents both ended up as victories for Mr. X. But you can easily gauge the emotional toll this can leave on Mr. X's psychology. Acting as a gangster is just a pain in the a--. Living in fear also leaves little energy to focus on the real business. As far as I know, these incidents are not unusual at all, although I bet the majority of them also end up as "victories". However this is the precisely the problem. In a business environment where such incident is the norm, not the exception, is the fundamentally why business confidence sags.
Policies and Implementation
The 25 Measures this week was announced after the "31 Measures" announced by the Party and State Council to boost private business confidence, announced in July (great guided translation by
).Has either 25 Measures or 31 Measures achieved its goal? I am not sure. But Mr. X's story show that having better financing is not the biggest business difficulty for him. What he needs is more fundamental and more simple: a sense of security. To be sure, worsening macro-economic outlook associated with real estate crisis is also a major factor for pulling down confidence. But everyone knows that economic downturn is just part of the cycle and there are always ups and downs. But for something as fundamental as a sense of security, there will be no confidence whatsoever, if it is permanently breached.
In fact, the 31 Measures sought to address this problem. For example, it stated:
Adhere to the principle of balancing education and punishment, implement enforcement methods such as notification, reminders, and persuasion, and do not impose administrative penalties on first-time offenders who have committed minor offenses and have promptly corrected them in accordance with the law.
But this is only a top-level document, but the devil is always in implementation. The key is how to make those two policemen balk at extortion again.
So what can Chinese government do to boost business confidence?
Some of you may think the solution is simple: just turn China into a western-style democracy and let people vote the bad officials out of office and the problems will all be solved.
But I disagree. I think this is only a solution driven by ideology, but ideology never provides good solutions. Ideology is too simplistic and leads people to be oblivious of nitty-gritty limitations of the real world. The idea that elections can solve business problems is just the same as the claim that socialism alone can make people less starving. If elections are this good, then India should have been a much less corrupt and much more prosperous country than China long time ago.
Here are 5 thoughts of from me for the real world. To be sure, the government is already working on many of them, with varying degree of progress:
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