A fiscally low-cost solution to China’s challenges
Published: 02:12 PM,Dec 09,2024 | EDITED : 06:12 PM,Dec 09,2024
A woman cycles past the Beijing Stock Exchange building in Beijing, China. — Reuters
The Chinese stock market has rallied recently in anticipation of another round of government stimulus. This is understandable, as the authorities have rolled out multiple monetary and fiscal stimulus packages to stave off deflation and boost GDP growth. But with public debt already well above historical norms, there is limited room for further fiscal intervention without risking a future debt crisis.
Given this constraint, China should focus on policies that stimulate entrepreneurship, investment, and economic growth without adding to the government’s debt burden. Policymakers could take several steps to bolster investor and consumer confidence while maintaining fiscal discipline. First, adopting a more liberal capital-market regime that makes it easier for private-sector firms to be listed on domestic stock exchanges can boost investment beyond those waiting to launch an initial public offering.
Currently, Chinese securities regulators follow a paternalistic model, selecting firms they deem “suitable” for investors. This approach often excludes firms that are not yet profitable – a standard that would have disqualified global giants like Alibaba, Tencent, Amazon, and Tesla from going public in China at the time of their IPOs. Shifting to an IPO system like that in the United States, where regulatory oversight emphasizes accurate and complete disclosures rather than picking winners, could remove these barriers, enabling dynamic companies to access the funding they need to expand their workforce and increase investment.
By facilitating public listings, policymakers could create valuable exit opportunities for early-stage investors, attracting more capital from domestic and international private equity and venture capital funds. This would help to cultivate firms that could become future giants.
Moreover, allowing prominent private-sector firms such as Ant Group, JD.com, and ByteDance to go public – even on overseas stock exchanges – would send a powerful signal that the Chinese government values private-sector entrepreneurs and recognizes their vital contributions to innovation and economic growth. This could inspire a new generation of innovators, helping China reclaim its position as a global leader in entrepreneurship.
Second, introducing a statute of limitations on financial crimes could significantly enhance investor confidence with minimal impact on government revenue. Far from encouraging or condoning corruption or tax evasion, setting a clear time frame for prosecuting crimes or filing lawsuits would strike a necessary balance between ensuring accountability and maintaining economic stability.
This imperative is especially relevant in China, where, decades ago, it was nearly impossible to obtain permits, land, or funding without resorting to bribery. While statutes of limitations already exist within the Chinese legal system – for example, private parties typically have three years to file lawsuits over financial damages – local governments often prosecute infractions committed 20 or even 30 years ago, discouraging entrepreneurship and causing successful businesspeople to consider emigration. Establishing a reasonable statute of limitations would foster a fairer, more predictable business environment and encourage entrepreneurs to remain in the country.
Third, transparent and consistent policymaking is essential for reducing uncertainties that deter domestic and foreign investors. China’s ban on after-school tutoring serves is a cautionary tale. Before the ban was announced during the summer of 2021, the Chinese edtech sector had established itself as a global leader, leveraging information technology to offer scalable learning opportunities for children and adults.
Many companies in the sector were publicly traded unicorns with valuations above $1 billion. But the unexpected policy shift dealt a major blow to the industry. To be clear, the reasoning behind the ban was not without merit, as authorities raised legitimate concerns that children were spending too much time in after-school learning programs narrowly focused on improving grades at the expense of creativity, sports, and leisure.
Yet despite these good intentions, the policy’s abrupt implementation led to widespread uncertainty and value destruction, potentially deterring would-be innovators. Moreover, it remains unclear whether the tutoring ban has achieved its stated goal.
Notably, it failed to address the underlying problem: the fierce competition for academic success. Lastly, although Chinese laws ostensibly protect private property and private firms, entrepreneurs often view the playing field as heavily tilted in favor of majority state-owned enterprises, especially when it comes to funding access, government procurement, licensing, and regulation. Correcting these imbalances could unlock the potential of China’s private sector to drive growth and innovation. None of this is to say that large-scale fiscal and monetary interventions are unnecessary. But the institutional reforms proposed here could stimulate investment, job creation, and innovation without imposing a higher burden on taxpayers or increasing government debt, thereby steering the Chinese economy onto a healthier and more sustainable growth trajectory. Copyright: Project Syndicate, 2024
Given this constraint, China should focus on policies that stimulate entrepreneurship, investment, and economic growth without adding to the government’s debt burden. Policymakers could take several steps to bolster investor and consumer confidence while maintaining fiscal discipline. First, adopting a more liberal capital-market regime that makes it easier for private-sector firms to be listed on domestic stock exchanges can boost investment beyond those waiting to launch an initial public offering.
Currently, Chinese securities regulators follow a paternalistic model, selecting firms they deem “suitable” for investors. This approach often excludes firms that are not yet profitable – a standard that would have disqualified global giants like Alibaba, Tencent, Amazon, and Tesla from going public in China at the time of their IPOs. Shifting to an IPO system like that in the United States, where regulatory oversight emphasizes accurate and complete disclosures rather than picking winners, could remove these barriers, enabling dynamic companies to access the funding they need to expand their workforce and increase investment.
By facilitating public listings, policymakers could create valuable exit opportunities for early-stage investors, attracting more capital from domestic and international private equity and venture capital funds. This would help to cultivate firms that could become future giants.
Moreover, allowing prominent private-sector firms such as Ant Group, JD.com, and ByteDance to go public – even on overseas stock exchanges – would send a powerful signal that the Chinese government values private-sector entrepreneurs and recognizes their vital contributions to innovation and economic growth. This could inspire a new generation of innovators, helping China reclaim its position as a global leader in entrepreneurship.
Second, introducing a statute of limitations on financial crimes could significantly enhance investor confidence with minimal impact on government revenue. Far from encouraging or condoning corruption or tax evasion, setting a clear time frame for prosecuting crimes or filing lawsuits would strike a necessary balance between ensuring accountability and maintaining economic stability.
This imperative is especially relevant in China, where, decades ago, it was nearly impossible to obtain permits, land, or funding without resorting to bribery. While statutes of limitations already exist within the Chinese legal system – for example, private parties typically have three years to file lawsuits over financial damages – local governments often prosecute infractions committed 20 or even 30 years ago, discouraging entrepreneurship and causing successful businesspeople to consider emigration. Establishing a reasonable statute of limitations would foster a fairer, more predictable business environment and encourage entrepreneurs to remain in the country.
Third, transparent and consistent policymaking is essential for reducing uncertainties that deter domestic and foreign investors. China’s ban on after-school tutoring serves is a cautionary tale. Before the ban was announced during the summer of 2021, the Chinese edtech sector had established itself as a global leader, leveraging information technology to offer scalable learning opportunities for children and adults.
Many companies in the sector were publicly traded unicorns with valuations above $1 billion. But the unexpected policy shift dealt a major blow to the industry. To be clear, the reasoning behind the ban was not without merit, as authorities raised legitimate concerns that children were spending too much time in after-school learning programs narrowly focused on improving grades at the expense of creativity, sports, and leisure.
Yet despite these good intentions, the policy’s abrupt implementation led to widespread uncertainty and value destruction, potentially deterring would-be innovators. Moreover, it remains unclear whether the tutoring ban has achieved its stated goal.
Notably, it failed to address the underlying problem: the fierce competition for academic success. Lastly, although Chinese laws ostensibly protect private property and private firms, entrepreneurs often view the playing field as heavily tilted in favor of majority state-owned enterprises, especially when it comes to funding access, government procurement, licensing, and regulation. Correcting these imbalances could unlock the potential of China’s private sector to drive growth and innovation. None of this is to say that large-scale fiscal and monetary interventions are unnecessary. But the institutional reforms proposed here could stimulate investment, job creation, and innovation without imposing a higher burden on taxpayers or increasing government debt, thereby steering the Chinese economy onto a healthier and more sustainable growth trajectory. Copyright: Project Syndicate, 2024