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Full transcript of the State Council policy briefing on Sept 11, 2015

Updated: Sep 11,2015 6:40 PM     english.gov.cn

The State Council holds the weekly policy briefing on Sept 11, which focuses on policies about lowering the initial capital requirement for fixed-asset investment projects and setting up a national fund to promote the growth of small and medium-sized enterprises. [Photo/china.com.cn]

Hu Kaihong (host):

Ladies and gentlemen, good morning. Welcome to today’s policy briefing of the State Council.

On Sept 1, the 104th executive meeting of the State Council discussed measures and policies about lowering the initial capital requirement for fixed-asset investment projects and setting up a national fund to promote the growth of small and medium-sized enterprises.

We’ve noticed public concern and media reports over these issues.

In order to get you better informed, I’m honored to have Zhang Yong, vice-chairman of the National Development and Reform Commission and Xu Hongcai, assistant minister of finance, to make an introduction and answer your questions.

Chairman Zhang, please.

Zhang Yong:

Good morning, I’m glad to attend this policy briefing. I’d like to brief you on the State Council’s decision to lower the initial capital requirement for fixed-asset investment projects.

On Sept 1, the executive meeting of the State Council decided to lower the initial capital requirement for fixed-asset investment projects to lower the threshold of investment, improve investment capability, increase effective investment and provide better public services, thus facilitating economic restructuring and bringing benefits to the people.

As a result, our work will focus on the following aspects:

First, to actively promote the construction of effective investment projects. Faced with downward pressure on the economy, it was decided that initial capital for projects related to the construction of ports, inland navigation and airports will be lowered from 30 to 25 percent. Those related to the construction of railways, highways and urban rail lines will be lowered from the current 25 to 20 percent, and that for a corn deep-processing project will be lowered from 30 to 20 percent.

At the same time, the initial capital for projects considered significant by the central government, in addition to the construction of urban underground pipelines and sewage networks and parking projects, will be open to more flexible terms.

These measures will help to mobilize investment in these fields and we will also do more to promote the construction of effective investment projects.

Second, there will be strict control over industries with excessive production capacity. Projects related to steel and electrolytic aluminum will have to stick to the requirement of 40 percent, and those related to cement will stick to 35 percent, while charcoal and other overcapacity industries will have to stick to the requirement of 30 percent.

Third, the independence of financial institutions regarding loan examinations should be insisted upon. When offering credit aid and services, financial institutions are required to abide by regulations and principles and insist on independent loan reviews to honestly prevent financial risks. They are also asked to demand the initial capital required when offering loans. They are also responsible for examining and assessing the authenticity of capital, investment returns and loan risks. Financial institutions have the right to decide whether to offer the loans, and how much will be offered. Through this, we aim to form a reasonable investment structure and encourage economic growth.

That’s all, thank you.

Xu Honcai:

Small and medium-sized enterprises are the source of economic vitality and the main force of employment. Under the “new normal” of economic development, supporting the growth of SMEs is important to stabilize growth, promote reform, economic restructuring, boost people’s livelihoods, and aid risk prevention. The Central Committee of the Communist Party and State Council attach great importance to the development of SMEs. Premier L Keqiang repeatedly urged reform of the investment and financing mechanism, played up the role of the government in guiding funds and the role of fiscal policy, in support of seed and early-stage financing for start-ups, and encouraged innovation and entrepreneurship.

The Ministry of Finance has consolidated the nine previous special funds supporting SMEs into the “National SME development fund”. The ministry will no longer finance specific enterprises and projects. The centralized fund will do two things: one is to help model cities support small and micro businesses and entrepreneurial innovation; the other one is the establishment of the National SME development fund. The fund will adopt market-oriented modes of operation, and attract social capital, so the effect of fiscal spending will be amplified. The fund will rely on a professional management team that will make fiscal spending more efficient and fair.

Xu Hongcai:

The National SME development fund will be run on market-oriented and professional principles. A number of fund entities will be set up under “limited partnership” . A partnership agreement will define each party’s responsibilities and rights. The government will play a “guidance” and “supervision” role, while market-oriented entities compete with each other, in order to improve the operating efficiency and effectively protect the legitimate rights of investors. Through public tenders, we will select competent, professional funds as “general partners”, who are responsible for fundraising, establishment, investment, management, exit, and other matters. The fund will establish a council. The council shall make the charter for the fund. It shall make decisions on major issues such as the establishment of the fund entities, the arrangement of the central government’s financial contribution, the fund management and performance evaluations. It shall supervise the operation of fund entities.

The central government will jointly set up a number of fund entities with social capital, which as a whole make up the National SME development fund. The central government will contribute 15 billion yuan, and attract private and State-owned enterprises, financial institutions and local governments through preferential policies so that the total size of the fund could reach 60 billion yuan. The fund will strive to achieve an 8 to 10 times multiplier effect, and entice a combined social capital investment of 120 billion to 150 billion yuan.

At present, we are working with the Ministry of Industry and Information Technology, the Ministry of Science and Technology, and other relevant departments to speed up the establishment of the fund.

Economic Daily:

My question is for Chairman Zhang. Why did the government again adjust the required minimal proportion for shareholders’ investment for fixed assets projects? How will the adjustment help?

Zhang Yong:

Thank you. The adjustment is closely related to the current economic situation. The requirement of a minimal proportion of shareholders’ investment for fixed-assets projects was established in 1996, to deepen the reform of the financial and investment system, improve the efficiency of the investment and prevent financial risks.

It was adjusted twice. The first was in 2004 when the minimal proportion set for most fixed assets projects was raised to tackle over-heated investment. The other adjustment was in 2009, when it was lowered to tackle the global economic crisis.

This is the third time we have adjusted it.

First, the proportion set for most fixed asset projects was lowered. As we all know, the downward pressure on our economy is huge and the global economy is sluggish. Thus, the three drivers of the economy - investment, export and consumption, especially investment, have become important ways to boost the economy.

Raising or lowering the proportion required will encourage or discourage investment. This is why we lowered it this time.

Second, we didn’t lower the proportion required for all kinds of fixed asset projects. We lowered it for the projects that we need to develop, and made sure that for projects in industries with bloated production the proportion required remains unchanged.

The proportion for major infrastructure projects concerning people’s lives such as ports, shipping, airports, railways and subways was lowered generally, while projects with bloated production or that consume a great deal of energy saw the proportion unchanged.

Third, we made sure banks have the authority to review applications for loans. We need to handle properly the relationship between the government and the market when adjusting the minimal proportion for shareholders’ investment for fixed assets projects. That the government adjusted the proportion doesn’t mean it will decide the loan amount for banks. The capital needed for a project comes from not only its shareholders’ investment but also financing. In China, the financing means mostly bank loans. We should stick to the principle set up in 1996, which is that banks should review applications for loans independently on the condition of following the government’s industrial policies.

It’s possible that banks will ask shareholders to invest more into the projects than is required by the government to permit a loan. For example, shareholders’ investment actually takes up 60 to 70 percent in some railway projects. For railway projects in good locations and have good returns, such proportions tend to be smaller. The proportion in railway projects in western areas where there are fewer people tends to be higher. The actual amount of investment the shareholders should make will be determined by banks.

Bloomberg News:

I have two questions. Firstly, does the reduction in the proportion of the capital ratio required for investment in fixed assets property reflect the relevant August figures that will be published on Sunday? Secondly, what’s the situation about the slowdown on fixed assets property growth and what’s your prediction on the upcoming figures on Sunday.

Thanks.

Zhangyong:

Thank you for your question. The State Council’s action on adjusting the project funding system and reducing the capital ratio is not directly relevant to the upcoming figures for August.

The move is closely linked to the recent overall economic trends. The economic situation still performs within a proper range, but downward pressure is strong. Under these conditions, it is very important to boost investment and to keep growth stable. Premier Li Keqiang has introduced the macro situation at the Summer Davos in Dalian. As for investment, so far it is relatively stable, but it is also on a weak trend. China’s fixed-asset investment grew 11.2 per cent year on year in the first 7 months and I think the figure for August should be at the same level.

China Radio International:

Many have been concerned about the idea of the state development fund for small and medium-sized enterprises. If social capital is to be introduced at this stage, will it be for the purpose of making profit? If so, what are the standards to choose the enterprises that the capital will be directed to? Please introduce to us your opinions on the fundraising, allocation and management model of the fund, and how to guarantee it will contribute to “public entrepreneurship and mass innovation”?

Xu Hongcai:

The State Council’s decision to establish the state development fund for small and medium enterprises is in nature an important move to spur “public entrepreneurship and mass innovation”, and effectively confront the economic downturn. So far, in order to secure the effect of the policy fund, we have taken the following measures:

First, to attract extensive social capital. The fund takes the form of a limited partnership. The government has invested 15 billion yuan ($2.35 billion) in the fund. When seeking cooperation with other social capital funds, it will take measures, such as transferring profit, to attract enterprises, which include private and state-owned companies, as well as financial institutions. Local governments are also encouraged to invest in this effort. In this way, the government and the market will jointly create a new financing mechanism, which is expected to support the development of the small and medium-sized enterprises. An extensive volume of social capital will be involved in this process.

Second, to expand the scope of policy benefit. We had some funds that supported small and medium-sized enterprises, but they were managed by different departments and directed to different industries. The new fund will not have designated directions; instead, we will direct capital to small and medium-sized enterprises at seed or start-up stages in various areas such as industry, agriculture, science & technology, education and culture, which means the policy will be expanded to cover all fields. All kinds of small and medium-sized enterprises can enjoy state policy support through the innovative mechanism.

Third, stick to market operation and professional management. A council will be established to guide and supervise the fund, but will not interfere in its operation. The initiation, establishment, investment and management of the fund will be carried out according to business principles, and separate ownership, management and trusteeship.

Through public bidding, we will choose several marketized and professional fund management institutes to take charge of the fund’s operation, instead of our previous way of direct capital allocation by government departments.

Fourth, frame regulations on information publicity. The council of the fund will have to report to the State Council on its operation status on a regular basis, and disclose relevant information to the public in order to be better supervised.

The aforementioned are several key aspects of the design and operation of the fund. We will secure investment efficiency of the fund through a scientific management framework and effective operation, in a bid to further advance “public entrepreneurship and mass innovation”.

Phoenix TV:

Mr. Xu, if the small and medium enterprises follow the market operation mode, they need a huge social investment to create profitability. But some people think that publicly raised funds could have the same function. Will the government operate the fund according to the market so as to promote mass innovation and entrepreneurship and offering support for small and medium enterprises? Should more subsidies be offered to better support small and medium-sized enterprises that have low profits? And will there be more limits in the policies? Thank you!

Xu Hongcai:

Talking about the market operation mode, a limited partnership will be adopted in the process of management or setting up a fund.

In this case, the funds initiated by the government is totally different from the ones set up by the market because the former mode will transfer more profits to enterprises.

Three ways to achieve this policy target:

First, establishing a profit transferring mechanism.

For small and medium-sized enterprises in their early stages, government-invested equity can transfer profits to attract social investment.

Of course, based on signed agreements, when allocating dividends within a duration, the part invested by the government and fund-managing institutions is the last one to take the dividends within the hurdle rate, which means that social investments have the dividends preference.

In addition, based on the situation of fundraising, government investment can give up the part of the income that surpasses the hurdle rate to increase fundraising ability. The capital recouped by the central finance will be applied to funds for cumulative use.

Furthermore, the funds are set for a certain period of time. Government’s development funds for small and medium enterprises will be withdrawn in a timely manner when the term ends or enterprises have moved on to a better stage, which means that the government’s development funds will not compete for dividends with the enterprises.

Second, setting up a diversified structure.

We can see that the number of small and medium-sized enterprises is very large. The investment of a single enterprise is small. And it’s not proper to have a single large-scale fund.

That’s why the development fund for small and medium enterprises is a combination of several funds.

The combined fund can greatly attract social capital and enable enterprises to get more financial support.

The fund could provide direct support for the small and medium enterprises, especially for promising small and micro businesses, tackling the problems that the markets are not able to solve.

Third, establishing a supervision mechanism.

The fund sets up a council, which will be responsible for reviewing agreements by partners and discussing investment orientation.

The council also will monitor the operation of the fund and take charge of performance appraisal to safeguard the rights and interests of investors.

The government is now considering taking these steps to make sure the fund will operate towards its targets.

China Daily:

You have mentioned that the national development fund for small and medium enterprises will be used to supplement the lack of capital in the market. But how? Will it be invested in those areas affecting the national economy and people’s livelihoods, or in some strategic areas or areas concerning social welfare? By the way, local governments have set up many such funds in recent years. There are both experiences and lessons. And what lessons will the national fund get from these local government funds?

Xu Hongcai:

First, the fund will be used to support mass innovation and entrepreneurship. Besides the development fund for small and medium-sized enterprises, China established a fund for strategic emerging industries. These are two different funds. The latter fund will be used to support strategic industries that will influence the national economy and people’s livelihoods. And the development fund for small and medium enterprises will support mass innovation and enterprises in all industries.

Second, enterprises supported by these two funds are also different. The national strategic development fund mainly supports large and medium-sized enterprises.

Third, the strategic fund mainly supports enterprises that have reached a mature period, and the development fund for small and medium enterprises will be used to support enterprises that are just starting their business.

Local governments also established some funds before. But as their investment direction is not quite clear and failed to operate according to the market, their investment efficiency is not very high.

The national development fund for small and medium-sized enterprises will play an exemplary role for local funds through scientific management and standardized market operation.

Guang Ming Daily:

You just mentioned the adjustments in initial capital requirement for fixed-asset investment projects. I found that most of the adjustments are focusing on areas such as airports, railways and highways.

My question is, what’s the difference between the adjustments this time and the massive stimulus measures of the past, which used to rely on railways, highways and infrastructure construction to boost investment.

Zhang Yong:

The adjustment and improvement of the initial capital requirement have gone through a thorough study and careful screening, and they are also based on experiences and lessons learned from the past.

We decided to lower the requirement for industries that are still less developed, in other words, we still need to include construction projects such as railways, highways and infrastructure.

As people’s wealth grows, so do their demands for public infrastructure facilities.

For example, the National Day holiday, or Golden Week, is coming around the corner. Golden Week actually creates pressure for government departments every year, especially the transportation sector, whether they be highways, airports or ports, as well as scenic spots, as they are all packed with people.

These demands, therefore, become the priorities in our investment, and we are poised to solve these problems this time. We will allocate investments in these fields more effectively, instead of lowering the initial capital requirements for all the projects. That is to say, we will be quite selective in this regard.

However, we maintain the requirement ratios for some manufacturing industries that are faced with overcapacity, and there are indeed such needs to keep the ratios at the original levels, as we have to either upgrade, or replace old projects, such as coal mining projects.

We have made it clear, in accordance with the requirement of the State Council, that the adjustments this time shall not include industries with overcapacity, or duplicated projects.

However, lowering the initial capital requirements is just one of the tools to promote investment and stabilize economic growth, which requires multiple comprehensive measures.

We are studying and will launch a slew of comprehensive measures, for example, making use of the funds, including public-private partnership. Our country witnessed a massive scale of investment, roughly 51 trillion yuan last year, which was an enormous figure.

But we should also sum up the experience and lessons from the past, and avoid reckless investments.

Even for projects concerning railways, highways and infrastructure construction, we still need planning at the initial stage.

We will bring in more investment and financing by lowering the capital requirement for projects within the planning, thus promoting investments and stabilizing economic growth.

Xinhua:

As far as I know, the development fund for small and medium-sized enterprises is mainly used to invest in the stock of those enterprises in their start-up stages, but some enterprises complain that it costs too much to exchange stock for capital, and instead they prefer credit funds from banks at a lower cost. To solve these problems, some local authorities set up loans for small and medium-sized enterprises. My question is, will there be any similar measures nationwide, or any new efforts in guiding banks to provide financial support to small and medium-sized enterprises?

Xu Hongcai:

The development fund for small and medium-sized enterprises will help increase the capital fund of an enterprise, so that it will be easier for the enterprise to get loans from banks.

That is why we established the development fund. As to the difficulties an enterprise encounters in raising capital, governments in some regions have thought about and implemented a series of measures, some of which saw good results, but risks exist at the same time.

We have been keeping a close eye on those measures, summarizing and analyzing their successful experiences, and will give our assessment later.

Hu Kaihong (host):

That’s all for today’s policy briefing. Thank you all.