Finance, private enterprise and the Wenzhou model

The banking reforms proposed by Premier Wen Jiabao are designed to facilitate the flow of credit to small businesses, which have suffered from a contraction in China’s export markets and rising wages and raw material costs. Strict rules on bank lending and the fact that state banks lend heavily to state-owned enterprises often push small businesses into the clutches of loan sharks, who charge exorbitant interest rates in gray and black market financing.

Such a banking reform could act as a powerful lever to normalize the relationship between the state and the private sector, thus guaranteeing the maintenance of the constitutional position that guarantees the dominance of the public sector. Standardizing the Small and Medium Enterprise Lending Protocol can transform many Chinese speculative capitalists into more productive economic agents, thus tying them more closely to the progressive goals of the state contained in its 12th five-year plan.

In 2011, the financial crisis in Wenzhou made headlines as dozens of business leaders fled the city to hide from creditors. The city has thousands of small family businesses that mainly produce consumer goods such as textiles, shoes, and lighters – labor-intensive production with low entry costs. These manufacturing sectors played a vital role during the reform era, although they also generated terrible labor rights violations and many products were of poor quality. Such violations of labor rights should be eliminated through coordinated and concerted efforts by unions to raise wages and ensure that labor laws are enforced. Product quality control by government agencies has resulted in significant improvements over the past 10 years, but quality issues remain a common problem. Addressing these issues aligns with state goals of increasing consumer demand and moving the quality of Chinese production up the value chain.

Chinese banks have acted as an instrument to attract private liquidity into state coffers while limiting lending to the private sector. This has helped mobilize resources to achieve growth and development goals by channeling funds to large state-owned and controlled corporations, which retain dominance of the economy in accordance with the nation’s constitution and its laws. socialist goals. The extraordinary success of the Chinese economy in the greatest crisis of global capitalism since the 1930s testifies to the underlying validity of its structural balance of economic forces.

Freewheeling Wenzhou provides valuable lessons on how to channel private interests to meet consumer needs. However, one cannot ignore the fact that Wenzhou capitalists have played a particularly negative role in stoking a speculative real estate boom across China. This continues to cause headaches for the government and perpetuate an unnecessarily severe housing shortage for urban workers. It is natural that the workers, who see several million urban apartments left empty, are indignant at the speculative activities of the real estate capitalists.

In addition to the government’s target of building 36 million low-cost apartments by 2015, steps should be taken to prevent private landlords from leaving properties empty. This could produce a rapid increase in rental housing availability and force properties into the rental market, precipitating a much-needed drop in rents. Strict control of rents, contracts and tenants’ rights, as they exist in many European countries, would normalize the sector. Lower rents and greater security of tenure will leave more money in the pockets of the urban labor force to spend on consumer goods for their homes.

Inland cities remain overwhelmingly dominated by state-owned or state-controlled enterprises, and these sectors are key drivers of catch-up development. The benefits of such public planning levers are most evident in the area of ​​competition and capital-intensive infrastructure investment.

According to followers of Friedrich Hayek, the failure to meet the needs of consumers in a complex and sophisticated economy was at the root of the collapse of the Soviet Union. In their minds, private sector innovation and flexibility inevitably trumps sclerotic state ownership and planning. China’s reform-era ownership combinations seem to refute this idea. Non-state sectors of the market have responded to consumer demands that large-scale state ownership has failed to meet, and China has become a global manufacturing base for consumer goods, but it is public investment in large-scale industry and infrastructure that have driven overall growth. development model.

As early as 1921, Soviet leader Vladimir Lenin proposed that the banking system be used as a tool to integrate the small producer into the collective effort. He believed that the granting of credit to small businesses should be used as a means of materially motivating these businesses to achieve the general objectives of the state, and that by offering interest rates more favorable to the state and to the cooperative sector than in the private sector, society the objectives could be prioritized.

Small and medium-sized businesses often complain about the high interest rates they are forced to pay as well as other charges that weigh on their profits. Credit flows to the private sector must become more standardized and transparent. This can reduce corruption, undermine illegal financing, and stimulate small and medium-sized private and cooperative enterprises while simultaneously providing greater control over their activities.

Article 11 of the Chinese constitution explains that “the State shall encourage, support and guide the development of the non-public sectors of the economy and, in accordance with law, exercise supervision and control over the non-public sectors of the economy. economy”. Both of these components are needed at this time to ensure that the crisis of the private sector does not negatively affect overall development goals and that its capital and influence are channeled in a positive direction.

The author is a columnist at China.org.cn. For more information, please visit:

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