Cover Editorial, Issue 457, Feb 22, 2010
Translated by Tang Xiangyang
Original article: [Chinese]

In keeping with tradition, this week's issue of the Economic Observer, the first after this year's Spring Festival, features a survey of the policies that China's top-level financial decision makers hope to implement over the coming year. We have also published our annual survey of CEOs from major Chinese companies, focusing on how they view the year to come.

In the process of putting the two lists together, we've discovered that comparing the policy-makers' goals with the CEOs' expectations, offers up some very interesting insights.

In general the business world is adopting a very cautious approach to the prospects for economic growth in 2010, with 52 percent of respondents predicting China's GDP will grow by somewhere between 8 and 9 percent over the coming year.

Sometimes, expectations can lead to drastic changes. For example, the huge increase in new yuan-denominated loans that took place in the early weeks of January this year, can, to a large extent, be attributed to market expectation.

As the central government had already sent out signals that monetary policy tightening had already changed from a question of whether to one of when, it was reasonable for businesses to get their hands on as much cheap capital as they could before the taps were turned off.

We're not sure whether policy-makers have taken the effect that such expectations can have on policy into account.

The reality is, due to the fact that businesses have rushed to get their hands on such a large amount of funds, the government may well interpret this to mean that the economy is already overheating and that there's a need to hasten monetary tightening.

However, if everyone agrees with general market expectations, perhaps such a tightening needs to be reconsidered.

It's commonly held that China's annual GDP growth rate can't dip below 8 percent, based on the view that if the economy failed to grow at a rate of at least 8 percent, a series of social problems would likely emerge.

In other words, according to our survey, most business leaders are predicting growth only a smidgen above the level required to maintain social stability.

So in this way, we're able to see that the tone of the current policy-settings are out of tune with market sentiment.

We're worried that if this difference in terms of growth expectations between the business world and officials extends for a significant amount of time, it could result in serious consequences.

It's not impossible that policies aimed at curbing excessive growth could inadvertently lead to unexpected instability in the whole economy.

This year, policy-makers have made activating private investment one of their key policy goals, with all ministries adopting related policies, involving tax deductions and allowing more market access.

But, according to an analysis of our survey results, the outlook of the country's business leaders is bound to play an important role in determining how effective these policies will be.

If Chinese entrepreneurs lack confidence in the overall growth prospects for the national economy, do you think by simply introducing a few favourable policies, that the government will be able to tempt them to invest?

A lot of the government departments in charge of macroeconomic policy are very good at preventing any leaks of soon-to-be-released policies.

But this attitude of keeping policy making decisions under wraps until the final announcement is made, is one of the most disruptive factors that clouds an entrepreneur's ability to forecast the outlook for the economy.

Without the ability to have a relatively clear and stable view of future economic conditions, the business world is likely to respond in a confused way to unexpected policy signals, which, in turn, is likely to make the situation even more chaotic, leading to more confused policy and thus a chain reaction ensues.

The problem is, throughout this process, information is easily distorted and misunderstood.

For example, in the survey we conducted at the start of 2009, most respondents expected tax cuts to be a major policy shift over the following year. Though the government did reduce taxes by 500 billion yuan, many firms reported that their tax burden had actually increased.

They also lobbied for the country's labor policy to be re-evaluated, but due to the pressures of high unemployment in 2009, there was no response from policy makers.

Despite the roll out of the central government's four trillion yuan stimulus package, private capital probably still didn't feel particularly assured in relation to these concerns, as the government, appears to have neglected addressing them.

Business players always consider an uncertain policy environment as the greatest risk to their survival, and the current situation undoubtedly increases the operating cost for Chinese enterprises.

On the one hand, they are excessively cautious when making business decisions, even when they are sure that they are right; on the other hand, some investors seek to gain a unfair advantage over others by getting their hands on inside information ahead of a formal announcement.

How can we establish more cooperation between policy makers and business when it comes to the practice of forging policy? 

We believe first you need to establish channels that allow open communication and the sharing of views.

Also, when making policy decisions that effect a wide range of industries, the government should invite business people to participate in the policy design process. By doing so they can avoid the possibility of the process being marred by any back-door deals.

Meanwhile, an open and transparent information system for the release of government policy should be set up so as to eliminate situations in which conflicting policies issued by multiple ministries or policies are constantly changed.