Screening out bad assets
Updated: 2014-06-18 07:37
The latest official data show that recent positive policies have stimulated domestic investment well. But more needs to be done to promote quality economic growth, says a 21st Century Business Herald editorial.
China's decision-makers have clearly recognized that private investment in China faces problems, such as the complicated procedures involved and uncertain expectations. That's why they have chosen to introduce tax cuts and ease the approval procedures, as well as lowered the market entry threshold for more industries. The influence of these policies will become more evident in the long term.
Currently it is mainly State investment that is easing the pressures resulting from the slowing economy, but in the long run, private investment will undoubtedly play a role that is no less significant.
However, the problems facing China's economy are many, among which the overcapacity that exists in manufacturing and heavy industries is a severe one. Such overcapacity, if not screened out through the market mechanism, will only be an increasingly heavy drag on whole industries, which is an essential reason why the cost of financing is high despite the government's loose monetary policies.
There are already many examples of enterprises in heavy industries surviving on credit only without making any profit. It is necessary to screen out these companies so that they, as bad money, don't drive out good money.
For example, in the steel industry, it is time to liquidate those enterprises that are making constant losses, and to promote mergers and acquisitions so that the useful assets of the dying enterprises can be better employed where they are needed.
Some analysts claim that eliminating such loss-making enterprises might trigger some risks. But the fact is, China faces structural problems in its economy and decision-makers cannot take an ostrich approach to these problems and try to pretend they don't exist, in doing so they will only accumulate more risks.
It is time to screen out the bad assets and lower the costs of financing, to ensure that efficient enterprises survive and thrive.
That will also reduce the risks facing China's financial system and earn time for decision-makers to solve the economic structural problems in the long run.