The responses for this year’s survey, taken from 840 executives of Chinese companies and 450 from foreign companies, were compiled in late 2016. About half of the executives surveyed considered overcapacity a serious problem in the industry of their core business, while only 19% did not see it as a problem. Meanwhile, they remained largely unimpressed by the Chinese government policy implemented from early 2016 with a stated goal of “cutting excess capacity, reducing inventory, and deleveraging.” Only 16% said the policy had a large effect on their companies. Not surprisingly, the impact on Chinese companies was greater than on foreign ones.
As seen in the 2014 survey compiled from responses in November and December of 2013, participating executives had high hopes for the Shanghai Pilot Free Trade Zone (FTZ), which was officially launched on Sept. 29, 2013. About 31% of Chinese company executives and 21% of their foreign peers had high expectations of the FTZ and considered it a model for China’s economic reform. Sept. 29 marked the third anniversary of the Shanghai FTZ, and the responses obtained from the CEIBS survey a few months later were a very useful barometer. Almost 80% of respondents said their companies had not been affected by its establishment, and only 19% reported a positive effect from its launch. However, it is worth noting that 24% of executives from foreign companies reported a positive effect on their companies, which is much higher than the 16% of executives from Chinese companies.
Shanghai’s FTZ is not the only reform policy that was perceived to be not as effective as executives had hoped it would be. In fact, only 11% of executives who responded said there had been “good progress” made in the pace of China’s economic reform. In comparison, 55% said there had been “slow progress,” 17% said there had been “no progress,” and there was even 16% who thought the country was “going backward.” It is not entirely surprising that the effects of economic reform policies were not strongly felt in 2016. In fact, the survey shows that, in recent years, business executives have viewed these policies with a high level of uncertainty. For example, of the 731 executives in the 2015 survey who responded to the question about whether their company would derive a future benefit from current reform policies, 43% of Chinese company executives and 57% of foreign company executives said they were not sure.
Getting the policy priority right
It is clear from CEIBS research that executives would like to see supply-side reform. In the 2015 survey, further analysis was carried out of company executives who said they had already benefited from new reform policies implemented in 2014. Of the 99 Chinese company executives who replied to a follow-up question, 28% listed “reduction of administrative regulation” as the No. 1 benefit from new reform policies implemented in 2014. For the 37 foreign company executives who answered the question, 41% listed “increase of market openness” as the No. 1 benefit. These answers indicate that companies prefer supply-side reform policies that increase the role of the market and decrease the role of government.
China’s policymakers face a difficult choice between promoting structural reform whose effects are usually not immediately felt, and maintaining middle-high economic growth that is a mandate for the Chinese government in order to fulfill its promise to the Chinese people of doubling their real income in 10 years (from 2010 to 2020). For example, in the second half of 2015, faced with the rising pace of the economic slowdown, the Chinese government’s policy priority shifted toward short-term stimuli, notably in the real-estate market, which led to a significant increase in already high housing prices in late 2015 and in early 2016. As skyrocketing housing prices looked likely to threaten economic and social stability, the Chinese government reversed its policy direction and introduced strong administrative methods to cool the real estate market in mid-2016. Thus, over the last two years, people in China had a roller coaster experience in the real estate market. In the 2017 survey, respondents were asked about the impact this had on their companies. Compared to only 8% of executives who claimed that their companies were positively affected, 35% claimed that the impact was negative. In addition, the real estate policy’s effects, whether negative or positive, were more pronounced on Chinese companies than on foreign ones. But overall, it is clear that the volatile changes in China’s real estate prices negatively affected most companies doing business in China.
In interpreting these results, it is important to understand that it takes time for supply-side reform to be fully implemented, and hence the finding that reform effects were weakly felt by the executives surveyed in 2016 does not necessarily mean that reform policies are not effective. The perception of weak reform impact may come partly from the slower-than-expected implementation of reform policies, and partly from the fact that some of the effects will take a longer time to be felt. With the Shanghai FTZ, there is no denying that some of the policies, such as Free Trade Bank Accounts, have been put on hold due to the changing macroeconomic environment both in and outside China. However, it is also true that some other reform policies created in the FTZ, such as the “negative list” policy, are in the process of being tested and improved; the fact that their effects are yet to be felt does not imply ineffectiveness.
And finally, a caveat: The sample of executives who participated in the survey has some unique features that may affect the interpretation of the results. The majority of survey participants are alumni or students of CEIBS, and most of them come from companies ranked high in their respective industries. Taking the 2017 survey as an example, the companies of the surveyed executives are mostly in the middle and high end of their respective markets. Given this “upward bias” of the sample, one needs to carefully interpret the results. For example, the policy of “cutting excess capacity, reducing inventory, and deleveraging” may be implemented unevenly across different types of companies. It is possible that this policy has been applied more frequently in companies that are more poorly managed and thereby are targeted by the policy. If this is the case, then the result that companies did not feel much effect from this policy warrants re-examination.