China Investors Convinced Policy Is ‘Turning Left,’ Citigroup Says

(Bloomberg) -- China’s domestic investors are more bearish than their overseas counterparts because confusing policy signals have convinced them the government is favoring state enterprises over private companies.

That’s according to a Citigroup Inc. report from Oct. 31 which says entrepreneurs see government policies "turning left" in favor of state enterprises even as officials profess to "turn right" in support of private companies and further reform and opening up. Whether intended or not, a series of policy measures has unsettled the confidence of domestic entrepreneurs and recent attempts to turn around bearish sentiment have fallen short, said analysts led by chief China economist Liu Li-gang in Hong Kong.

Reforms to slash excess industrial capacity and clean up the environment since 2016 unintentionally forced many small and medium-size businesses to exit their industries, while bigger state-owned enterprises gained from the consolidation and received favored financial support, Citi says. President Xi Jinping’s flagship campaign to rein in ballooning debt also has cut off credit lines to private firms and pushed some to default, the analysts say.

There is "a deep-rooted concern that Beijing may have more or less determined to create a policy environment that favors state-owned enterprises even more at the expense of privately owned enterprises," the analysts said.

Falling Short

The negative sentiment is hurting the most dynamic sector of the economy just as it grapples with the impact of a trade war with the U.S., Citi says. It says private enterprises contribute 31 percent of urban employment, 50 percent of tax revenues, 60 percent of fixed asset investment, and 44 percent of exports.

The government is responding to the financing difficulties faced by small businesses and Citi notes that officials from Xi’s top economic adviser Liu He to central bank Governor Yi Gang and other top financial regulators have all vowed to help their plight.

Citi says the policy response is falling short. Despite four cuts in the amount of deposits banks must hold as reserves this year and calls by the central bank and State Council to support small enterprises, lending growth to small and medium enterprises slowed visibly through September and at a steeper rate than for bigger firms, the analysts said.

1950s Feeling

A series of policy actions also have signaled that a harsher operating environment awaits private enterprises with the specter that tax collection and a range of social welfare and pension payments will in future be collected uniformly by the national tax bureau, the analysts said. Although the plan, originally scheduled to begin in January, was shelved, Citi says it remains a risk that looms for private companies.

Media reports citing Qiu Xiaoping, deputy director of the Ministry of Human Resources and Social Security, saying private firms should share profits with workers, and that workers should participate in companies’ operations to democratize their management contributed to negative sentiment among entrepreneurs, the analysts said.

"Recent policy statements and policy actions also rekindled the fear of the early stages of nationalization of private firms in the 1950s, sending a chilling feel among private entrepreneurs," the analysts said.

They conclude the bearish sentiment is unlikely to change for a while. They suggest the Communist Party’s 4th Plenum, to be held before the end of the year, needs to send a strong message to reassure domestic investors that is followed by concrete actions.

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at

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