Private Investment in China: What Could this Mean for China and the Global Economy?

Following a mandate by China’s State Council, China’s Cabinet, to boost private investment into previously state-controlled industries largely dominated by SOEs (State-Owned Enterprises), China’s NDRC (National Development and Reform Commission) has drafted laws to open several industries, namely, the healthcare, railway and transport industries, to investment by private companies.

While not necessarily a watershed moment on the path to a more open China, reforms were attempted in both 2005 and 2010 respectively, it does mark a significant turnabout for China given the state of the economy, with GDP growth slowing to 7.4% in the third quarter, thereby necessitating action from the government and ensuring that legislation will have the teeth required to push previously monopolized industries into reform. This is in sharp contrast to previous versions of the reforms, where economic growth was rapid and the government was trying to bring the economy under control.

Healthcare, railways and transportation are not the only industries slated to open up, however, with the State Council mandating at the beginning of this year that, in addition to the aforementioned industries, municipal administration, finance, energy, telecommunications, and education markets too, should be opened up for private capital.

Domestically, this offers China several advantages, including providing private investment with a place to go outside of the real estate sector, dubbed “the most important sector in the known universe”, not for its vibrant growth, but due to the systemic risk that it presents should a bubble, fueled largely by private capital, burst. Allowing private money to be invested elsewhere ensures that property prices will come more in line with what average citizens can afford, thereby further ensuring stability. Better still, consumers will ultimately receive products offered by what were once SOE monopolized industries, from private companies competing for their business, improving prices and the quality of end-user experiences.

But growth in China is indeed good for the global economy as well. With growth continuing to evade Europe, and the United States still in a tepid recovery, a recession in China could potentially be the straw that breaks the proverbial “camel’s back”. Moreover, by giving private capital a chance to grow, consumers will ultimately be able to better afford goods, domestic and foreign alike, while tax revenues for the government will increase, reducing the necessity of municipal governments to depend on property development for tax revenues alone and further empowering a middle class able to create wealth and invest it accordingly.

While change will by no means be immediate, indeed, this transition could likely take several years, the potential for both China and the world at large look bright as the country proceeds on its march toward more open markets.

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