Abstract: China has been paying a lot attention to improving manufacturing industry in recent months amid economic slowdown and trade uncertainties.
Some countries have begun reviving manufacturing industry in recent years feeling a sense of urgency out of China's catching-up speed, and have undergone fierce competition with China in manufacturing sector. In particular, the US has put forward a few measures to revive manufacturing such as tax cut and trade war. With the intensification of China-US trade frictions, China's manufacturing industry has been highly under pressure.
In a recent article by CF40 senior researcher Xiao Gang, he pointed out three problems facing China's manufacturing industry: strategically, China's manufacturing value added to GDP has declined; there is still a large amount of low-end, ineffective supply; the proportion of technology content and added value is relatively low.
In addition, China is now in late stage of industrialization, and its capabilities to develop investment and financing ecology and financial service innovation are constrained. Also, traditional collateral-based models under which banks provide loans can hardly meet the financing needs of manufacturing industry.
This article proposed three policy recommendations:
1. Further optimizing the financial eco-environment, improving the structure of manufacturing, speeding up the development of credit system and optimizing the policy-based financing guarantee system.
2. Accelerating the supply-side structural reform of financial sector, innovate and develop financial services and product systems that are consistent with the characteristics of manufacturing.
3. Further promoting reform of manufacturing enterprises. Improving corporate governance and enterprises quality, enhancing enterprise innovation and competitiveness, standardizing corporate financial systems and strengthening corporate integrity and cultural system.
It's widely-accepted that the manufacturing industry is very important for the national economy. As President Xi Jinping stressed in many occasions, the manufacturing industry is fundamental to China's development and prosperity. It underpins the country's comprehensive national strength and international competitiveness. Thus, we have to promote the high-quality development of the industry and step up efforts to make China stronger in manufacturing. The industry is also paramount to China's industrialization and modernization drives. Given that China is such a large country, it has to be independent and strong in manufacturing.
A strong manufacturing industry is a prerequisite for China's modernization. Most developed countries have seen continuous development and upgrading in their manufacturing sector in modern history. The United Kingdom took the lead in completing the industrial revolution by replacing traditional manual workshops with large-scale factory production in the 1760s; and at the end of the 19th century, riding the tide of the second industrial revolution, Germany and the United States marched ahead of other countries in electrical machinery and other important sectors, and successfully modernized. Similarly, after World War II, Japan joined the league of developed economies with the fast development of its steel, electronics and automobiles industries.
Developed countries all share the experience of making their manufacturing industries bigger and stronger. The stories of the above-mentioned countries, in particular, show that the development of the manufacturing industry is of vital importance. Conversely, the root cause why some Latin-American countries suffer from stagnations and some economies are in the middle-income trap is that their manufacturing is lagged behind. This again demonstrates the paramount importance of the industry to a country's economic soundness.
Made in the USA: The Rise and Retreat of American Manufacturing written by Vaclav Smil from the United States fully reveals the importance of the manufacturing industry. He argues in the book that no advanced economy can prosper without a strong, creative manufacturing sector and the jobs it creates.
I would like to share my views from four perspectives on the manufacturing industry. First, competition of manufacturing among major economies; second, what has and has not China done well in the development of its manufacturing; third, the reasons why manufacturing in China faces bottlenecks in terms of investment and financing; and fourth, my policy suggestions.
I. Intensified competition among countries revitalizing their manufacturing industries
In May, 2019, PMI worldwide has dropped below the threshold of 50. During the past decade, the index has only hit below 50 during the European debt crisis in 2011.
Since the financial crisis broke out in 2008, PMI has been on the decline, but it only fell to 49 and below amid the European debt crisis. Later, the index picked up and remained above 50 despite some fluctuations, such as the one in 2015 when PMI dropped as a result of slumped oil price and many other factors including a disaster in China's stock market and mounted pressure on the exchange rate regime of RMB.
After that, global economy began to recover, and PMI kept picking up since 2016 to 54 when economies around the globe were booming – including China. After it passed its peak, it fell again, until it hit below 50 again in 2018 as a result of the trade war between China and the United States.
The trade war is an important factor affecting the fluctuations in manufacturing PMI. This can be proven by the fact that the index remained under 50 since the trade war broke out in 2018 to May, 2019, when it was 0.6 lower month-on-month.
Global manufacturing PMI consists of three sub-indices– new order index, production index and manufacturing employment index. Let's take a look at them separately. In May, 2019, new order index was 49.5, dropping by 0.6 compared to that in April; the production index was 50.1, 0.5 lower despite being over 50; and the manufacturing employment index was 49.9 – lower than the threshold of 50.
PMI in China, the United Kingdom and Germany was 49.4, 49.4 and 47.7 respectively – all below 50. The PMI of the United States was a bit above 50, standing at 50.5, but it was still the lowest in a decade and 2.1 lower than in April. It can be seen that the trade tensions between China and the United States, which will continue over a long period of time, has also put much pressure on the American economy.
In the past several years, all major economies were thinking about economic transformation – to upgrade from a manufacturing-based economy to a service-based one. But once they have finished the transformation, they revert back to the problem of how to revitalize their manufacturing industries and compete in this traditional economic field.
The Unites States is no exception – it took multiple measures to resume its leading position in manufacturing, including tax cuts and trade wars. Statistical data shows that the measures have been effective to some extent – from February, 2017 to March, 2018, 222,000 jobs were created in the United States, accounting for 9.8% of total jobs, and the manufacturing industry was indeed picking up.
Meanwhile, the Americans are also reflecting on their development model. In recent years, American transnationals have been booming. However, more than 50% of their assets are not in the United States, but are scattered around the world. More than half of jobs created are given to local people, while one-third of the shareholders are not Americans. The Americans feel that they have suffered huge losses, and want the transnationals back in the country.
From President Trump's campaign slogan, his commitments and what he did after he took office, we could see that he wants to make United States the best choice for transnationals to build factories and employ workers.
Of course, there are also different voices in the United States. Opponents believe that the key to the future economic success of the country is not manufacturing, but are free trade and a prosperous service sector. This argument is grounded in that the locations of factories are no longer that important because production and consumption are increasingly separate as costs of the transfers of goods, labors and knowledge decrease amid globalization.
After the trade war broke out, many believed that the United States suffered losses as imported Chinese goods were more expensive given the higher tariffs. In response, President Trump welcomed American transnationals back to the United States to build factories and produce as the tax for the manufacturing industry had been much lowered.
Made in China 2025 has not brought much shock in China; however, it has attracted wide attention and in Western countries, especially in the United States, and has been studied in-depth. Renowned American think tanks are all quite familiar with the initiative, and they believe that China will become quite strong in manufacturing. They are feeling the pressure brought by China's speed in catching up with them.
For instance, Strategy for American Leadership in Advanced Manufacturing released by the United States in October, 2018 mentioned China. According to the report, American's global manufacturing rivals are well-organized, good examples of which are the Industry 4.0 initiative proposed by the European Union and China's "Made in China 2025". However, the United States remains the leader in technological innovation. It has to protect and take advantage of this leading position, develop new technologies efficiently in both its domestic industrial bases and its global alliance countries, and materialize its new manufacturing technologies.
In February 2019, Germany released a report about Industry 4.0 – National Industry Strategy 2030. The report applauds China's achievements in successfully developing its manufacturing industry. It points out that leading platform economies and internet companies around the globe are mostly based in either the United States or China, but not in Germany or European countries. As a result, Germany is pressed to take actions.
It is mentioned in this report that China has established particularly successful industrial policies. As early as 2015, Made in China 2025 was formulated as a general development roadmap. In China, the policies combining market economics principles and active supporting measures have proven quite effective. That's why an increasing number of countries are now also developing national strategic plans, justifiably as a way of preparing for competition with China. Such competition will certainly grow more and more intense.
The competition mainly lies in three dimensions.
The first dimension refers to future technologies represented by those related to artificial intelligence (AI) and cyber security. The competition in the realm of artificial intelligence is particularly fierce, as evidenced by the joint efforts between Germany and France initiated last year in building an AI center and exploring into this technical domain, and National Artificial Intelligence Research and Development Strategic Plan released by US government that lays out a strategic plan for AI development.
The second dimension is about technical talents. There is a long list of countries that have issued many favorable policies in order to attract talents from around the world.
The third dimension involves leading enterprises in core areas. Competition in this field may take the form of investments or policies.
In the sense of competition, investments in R&D have the greatest implications, and such investments are typically heavy and long-term in nature. Recent years have witnessed steady growth of total R&D investment in China, which now represents 2.1% of GDP. This proportion, though still lower than the level in USA, Germany, and Japan, corresponds to a fairly large sum of R&D costs considering the tremendous amount of China's GDP.
Policies also play a critical role. Among the various competitiveness-boosting policies formulated by different governments are those related to innovation promotion, protection of intellectual property rights, taxation, foreign investment introduction, environment protection, sustainable development, and infrastructure construction.
II. Four achievements and three issues in Chinese manufacturing industry
Four major achievements have been made in Chinese manufacturing industry:
First, the total volume of the manufacturing industry in China ranks No. 1 across the globe. With an annual growth rate of 7.4% in the past five years, this industry has reached a total added value of over RMB 24 trillion, accounting for about 27% of global total. According to the statistics of World Bank, in 2017, the output of Chinese manufacturing industry was 3.59 trillion USD, higher than the sum of that of USA (2.16 trillion USD) and Germany (0.76 trillion USD).
Second, China has remained among world's three most competitive manufacturers. A report on global manufacturing competitiveness published by Deloitte shows that China, USA, and Germany have maintained their rankings as top three manufacturers since 2013.
Third, high-tech manufacturing is booming. In China, total investment in manufacturing industry during the past five years grew by 9.3% annually on average. The annual growth rate was 11.9% for investment in technical renovations and 11.7% for investment in high-tech manufacturing.
Fourth, the proportion of high-end manufacturing and equipment manufacturing has increased. Equipment manufacturing is generally characterized by more advanced technologies and higher added value. Currently in China's manufacturing industry, equipment manufacturing accounts for 32.9% of total output. Besides, there are statistical data indicating that high-end manufacturing products account for 42% of total exports. It's also worth mentioning that in recent years, spurred by supply-side structural reforms, large industrial enterprises experienced an annual profit growth exceeding 6%. The figures of this year are not as encouraging, of course, due to the change of general economic dynamics.
The prosperity of AI industry in China is evident. According to the book China vs. US: Battling to Become the World's First AI Superpower published by Tencent Research Institute, as of June 2017, there were 2542 AI enterprises distributed across the globe. Among them 1078 (42%) were based in USA and staffed with 78 thousand employees, and 592 (23%) were based in China and staffed with 39 thousand employees.
In the period from 2013 to 2017, among all computer and AI related papers published worldwide, 59573 (25%) came from China mainland, ranking at the first place in 167 countries and regions, followed by 32527 (13.66%) from USA. It should be noted that 4307 of these papers were coauthored by Chinese and American researchers. A conclusion can be easily drawn from these comparative figures that AI is flourishing in China.
In spite of the above-mentioned developments, three major issues remain to be addressed in Chinese manufacturing industry.
First, strategically speaking, the proportion of added value generated by manufacturing industry in GDP is declining.
A national economic safety policy document printed in 2016 contains a statement that the added value of manufacturing should be maintained at a level representing at least 30% of GDP. The actual proportion, however, has continued to drop after hitting the peak of 31.5% in 2010, and is still below the defined threshold of 30%.
A rapid increase of general manufacturing efficiency typically leads to drastically improved supply of industrial products, which will in turn result in saturated consumption of common industrial products. That's why consumption upgrading and manufacturing efficiency promotion tend to drive a shift of economic pattern from industrial functions to service ones. This is widely accepted as a general rule.
A research report of PIIE reveals that from 1950 to 2012, 44 countries (excluding China) experienced overall declining proportion of manufacturing-derived added value in GDP. Zhang Bin, a senior researcher at CF40, reached the same conclusion in his study. Specifically, in the course of industrialization, higher manufacturing efficiency and consequent saturation of consumption of industrial products will cause manufacturing sectors to play a less important role in generating added value, while service sectors will change in the opposite direction.
Even if this general rule plays its role in China, drop of the proportion of manufacturing-derived added value in China's GDP will probably not be as fast as expected due to the following four factors.
First, technological advancements are blurring the distinctions between manufacturing industry and service industry. It is safe to say that not all service sectors rise rapidly, and not all manufacturing sectors grow at a slow pace. This argument is at least true in USA, Japan, Germany, and China. The efforts made by Chinese manufacturing players in transitioning towards service functions somehow help eliminate the boundary between these two industries. These players, perhaps already a part of service industry, are nonetheless manufacturers in nature.
Second, in countries with successful trading patterns, the proportion of manufacturing-derived added value in GDP drops at a slower rate. Japan, Korea, Singapore, and China are good examples. Since a substantial portion of manufactured products are exported, the momentum created by trading business tends to slow down the drop rate.
Third, with R&D and innovation activities gaining speed and high-tech enterprises growing in number, a shift from old to new patterns occurs, and industries with intensive human capital evolves more rapidly. This is exactly the stage China is experiencing now. From 1997 to 2007, the number of Chinese high-tech enterprises increased by 14.7% every year on average. In the period from 2012 to 2017, this annual increase was even higher, at a level of 22.3%. This trend helps slow down the drop rate of proportion of manufacturing-derived added value in China's GDP.
Fourth, the saturation of consumption of industrial products in China has been somewhat overestimated. It is true that the increase rate of total retail sales of social consumer goods has dropped from more than 9% to somewhere between 8% and 9%, but this slowdown is not necessarily a result of saturated consumption of industrial products. Presumably, other factors may have played a part, e.g. slow growth of income per capita, crowding-out effect of housing mortgage, or lack of merchantability in some products. Hence the so-called saturation of consumption of industrial products is likely to be something of overestimation, and there is still space for increasing consumption and updating existing industrial products in China.
And in theory, whether the new technical revolution will shape investments in manufacturing industry positively or negatively remains a controversial topic.
One view is that the development of new technologies requires more investment, hence the investment in technological transformation will increase; another view is that technological advances may lead to cheaper cost for investment, so the impact on the total investment is not that big.
However, I personally believe that based on the current situation in China, the development of the new technological revolution will certainly drive manufacturing investment and have a positive impact on manufacturing investment. Because during the investigation of enterprises, it is found that enterprises must invest money if they are engaged in technological transformation and research and development.
Second, from the perspective of quality, China's manufacturing industry is large but not solid indeed, which means that there are still a large number of low-end, ineffective supplies. Relevant statistics shows that the output of 220 industrial products in China ranks the first place in the world, but the external dependence of core technologies and components is still high. Although China's high-end manufacturing exports accounted for 42% in the total exports, it is still far lower than the United States (60%) and Germany (53%).
Third, from the perspective of efficiency, the technology content and added value within China's industry are low. Since the reform and opening up, China's industrial added value rate reached the highest in 2006 to 29.68%, and then suffered from continuous decline to 21.5% now. The annual output per capita of the US manufacturing industry is $110,000, while China's is less than $30,000. In terms of the military industry, US military exports in 2017 were $610 billion, while that of China was $280 billion, one-third of the United States.
According to the 2017 revenue ranking of global military businesses, Boeing ($93.4 billion), Airbus Group ($75.3 billion), China North Industries Group Corporation Ltd.($64.6 billion), Aviation Industry Corporation of China ($59.3 billion) And Lockheed Martin ($51 billion) ranked the top five. However, as far as the automotive industry and the pharmaceutical industry are concerned, Chinese companies are basically unable to enter the top five.
In the future, to improve the quality of China's manufacturing industry, we should focus on the following aspects:
The first is to achieve the industrialization of key technologies. China is less industrialized in technology, especially in the cultivation of independent innovation. China has a long way to go to realize its five "90%" goals. The five "90%" goals mean 90% of innovative enterprises are local; 90% of R&D institutions are to be established within enterprises; 90% of R&D personnel are staying in enterprises; 90% of research funds and 90% of patent applications are from enterprises.
The second is to realize the intelligence-oriented manufacturing, that is, to integrate manufacturing and information technology in one.
The third is to realize service-oriented manufacturing, which is to promote the productive service industry to approach the higher end of the value chain.
The fourth is to achieve green manufacturing, energy conservation and emission reduction.
III. Manufacturing Investment and Financing are under Three Constraints
According to our research, China's manufacturing investment and financing are indeed suffering from difficulties, mainly from narrow channels in investment and financing, difficulties in financing, high cost in financing and short term in financing. In recent years, it is becoming harder for manufacturing to get loans from banks, while the equity investment accounted for a smaller proportion in manufacturing. I want to discuss the reasons in three aspects.
First, there are bottlenecks in the later stages of industrialization.
China has entered the later stage of industrialization, which means things have become completely different from the situation 30 years ago.
One of the differences is the rising prices of production factors such as labor and land.
The second difference is the heavy burden of manufacturing taxes and fees. Despite the recent VAT cut of three percentage points and certain benefits companies have received, they still face a lot of expenses in addition to taxes.
The third difference is the changing structure of industrial workers, and the labor-capital relation has taken on new features. The workers are less educated than required by the developing manufacturing. There are 400 million industrial workers in China now, of which 240 million are rural migrant workers in cities, indicating that our workers are not exactly qualified in the later stage of industrialization.
The fourth difference is the problem of overcapacity.
We do have problems with overcapacity. We need to cut it, deleverage, and rule out zombie companies. Frankly speaking, we are not fast enough in weeding out zombie companies; the exit rate of firms is still low.
At present, China is seeing a high birth rate of enterprises. According to the statistics of the Bureau of Statistics and the State Administration of Industry and Commerce, there are 18,000 enterprises newly founded and registered in China every day. Reduced by the number of enterprises that die every day, the total number of firms is still growing, which is a good sign, indicating the public enthusiasm for innovation and entrepreneurship is high. However, we must also see that there are still problems of zombie enterprises which have not exited, which is not conducive to market clearing.
On the one hand, this affects investors' profit expectations. If the enterprises with overcapacity stay for a long time, the low profit expectation will eventually curb investment. On the other hand, slower exits will retard the spread of new technologies. Therefore, dealing with zombie enterprises and speeding up their exits will not only help the transformation and upgrading of the manufacturing industry, but also improve expectations, increase investment, and accelerate the spread of technology.
Fifteen out of one hundred companies will be eliminated from American market every year. We did not pay enough attention to the exit rate of enterprises in the past. A low exit rate will do harm to the development of the entire industry, a high one too.
The fifth difference is increasing difficulty in replacing old growth drivers with new ones.
The sixth difference is greater impact on traditional manufacturing by new economy and models.
These bottlenecks in the later stages of industrialization are problems that many countries encounter during their development. When the industry develops to a certain stage, the effective demand of the manufacturing will fall. On the one hand, the uncertain prospects and the low expected profit margin of manufacturing make people unwilling to invest; on the other hand, there is a lack of funds for investment due to insufficient financing.
Second, there are eco-constraints on investment and financing.
One of the constraints is that the debt ratios of manufacturing enterprises are generally high. The debt ratio of China's manufacturing enterprises is as high as 70%. The non-performing loan ratio of the national banking industry is only about 1.9%, while the non-performing loan ratio for some local manufacturing reaches 9%. High default rate of debt and non-performing rate have caused many banks to withdraw loans, which affects public confidence in investment and financing.
The second constraint is that the investment and financing environment is not favorable. For example, credit information has not been shared enough. The local financing guarantee institutions did not play a satisfying role, meaning small amount guaranteed and high guarantee costs. At present, the guarantee institutions charge 2%, which is very high. Local governments set up guarantee companies at every level of the province, city and county, and each level needs to bear the cost of personnel, which is ultimately reflected in the guarantee fee. I personally think that it is not necessary to set up financing guarantee institutions at every level. Setting up one or two at the provincial level is enough.
Third, commercial credit is underdeveloped. Today's credit system largely relies on bank credit, and commercial credit of enterprise itself tends to be less valuable. For example, draft issued by an enterprise might not be trusted unless it is accepted by bank. The fair trading and legal environment for enterprises' competition should be improved.
Fourth, treatment to state-owned enterprises and private enterprises is unequal. Private enterprises have created 80% of the country's patents, 60% of invention patents and 70% of new products. However, the proportion of private enterprise loans has been declining year by year, while loans to state-owned enterprises have increased year by year. According to the statistics of the central bank, in June 2018, loans outstanding for private enterprises decreased from 47.64% to 36.01%, compared with 2013, a decrease of 11.6 percentage points; while the proportion of loans outstanding for state-owned enterprises increased by 13.15 percentage points in the same period.
Thirdly, the ability of financial services innovation is constrained.
First of all, multi-layer capital market is underdeveloped and direct financing channels are not smooth. In recent years, the development of venture capital and private equity investment funds has seen some progress, which, however, only formed five trillion yuan of social capital after more than 10 years' development. Five trillion is still too little relative to the 300 trillion yuan of total financial assets.
Second, industrial investment guidance fund set by local governments has failed to play its role. On the one hand, the scale of the fund is small, especially since the issuance of the new regulations for asset management, it has been difficult to raise funds for private equity funds and local government industrial investment funds; on the other hand, the risk appetite of local government investment fund is relatively low which should have been higher as technological innovation requires more investment, and is more risker. However, local government industrial investment funds are very cautious, and have zero tolerance for loss. The assessment system of many local state-owned investment companies does not allow loss for any investment, which makes it quite difficult to invest into private enterprises and technology companies.
Thirdly, for quite a long time, bank loans have been heavily backed by land and real estate mortgages, with little credit loans. There are also bundling terms when banks provide loans – that is, requiring a certain percentage of the funds to be deposited with banks, which will raise the cost of capital for firms.
More importantly, as the maturity of the majority of bank loans are within one year, when firms cannot obtain roll-over capital from banks, it will have to continue its loans through bridge financing at high interest rate. And if even bridge financing cannot be obtained, firms will be put into a tight spot.
The common phenomenon is that if bank interest rate is 5%, firms’ actual burden may be 10%-12%. The rates for bridge funds and guarantees in total are at least twice of bank's interest rate, which manufacturing companies can hardly afford.
IV. Policy recommendations for optimizing the investment and financing model of manufacturing
First, further optimize the financial eco-environment, which involves further improving the structure of manufacturing and speeding up the disposal of zombie enterprises. Although this might harm employment and cause losses to banks, this is something that must be done and should be done as soon as possible. Market clearing is necessary for enterprises to embrace vitality. While further developing the credit system, policy-oriented financing guarantee system and guarantee capacity should be improved. In the meantime, the development of commercial credit environment should be promoted, sparing no efforts to protect the credit eco-environment so as to improve financial eco-environment.
Second, accelerate the supply-side structural reform of financial sector, innovate and develop financial services and product systems that are consistent with the characteristics of manufacturing.
The effective demand of manufacturing industry must be connected with the targeted services of the financial industry, while seeking balance in the following three aspects.
The first one is to deal with the relationship between new and old industries, which refer to emerging and new technology industries and traditional industries, respectively. At present, the financing of new industry is not difficult, as multi-level equity financing, banks and governments are also supportive, but traditional industry tends to find it difficult to obtain financing, as well as to upgrade. When dealing with the relationship between new and old industries, it is necessary to introduce more equity investment in new industries rather than relying on bank loans. In particular, research and development must not rely on bank loans, which is not sustainable.
The second one is to deal with the relationship between big and small firms.
Generally speaking, large enterprises have less financing difficulties than small enterprises do. The production process is different between manufacturing and service industry. The former needs to go through a series process including purchasing raw materials, producing products, and finally selling the finished products, which means long-term funds are needed for turnover. Since 1983, public financing has no longer appropriated capital to enterprises whose production and operation funds have been supplied by bank loans, which is an institutional reason for the high debt ratio of state-owned enterprises currently.
The term of bank loans provided to firms should be reasonably verified in accordance with the production and operation cycle of the manufacturing firms, which should not be either three months or six months. The production cycle differs among different products, which needs to be checked by banks. In addition, various financing products could be developed to support financing for small- and medium-sized enterprises, such as financing product that can renew loans to firms without requiring repayment of principal. Commercial banks can also establish investment and financing linkage with enterprises, and develop some insurance funds for direct investment.
The third one is to deal with the relationship between light and heavy assets. Manufacturing enterprises mainly have either light assets or heavy assets. But now manufacturing enterprises relying on light assets often can hardly obtain loans, while those relying on heavy assets can hardly afford loans. The problem for manufacturing firms with light assets is that their main and only asset is intellectual property rights which can hardly be pledged; the problem that heavy-asset-based manufacturing enterprises are facing is that they often need large amounts of capital which banks are reluctant to provide.
To address these problems, we could establish a sound financing system for movable property and a national intangible asset assessment and trading market for intangible assets such as accounts receivables and intellectual property rights. In addition, the role of insurance institutions should be exercised to carry out loan guarantee insurance and credit insurance businesses. Qualified financial institutions can also set up financing divisions to cope with the financing needs of advanced manufacturing.
Third, the reform of manufacturing enterprises should be vigorously promoted.
The mixed ownership reform requires the introduction of social capital and enterprise restructuring, improvement in corporate governance and operating mechanisms, as well as improvement in the quality of enterprises themselves who should avoid blindly expanding their scale. The mixed ownership reform will also require firms to enhance innovation and competitiveness; standardize corporate financial systems and strengthen corporate integrity and cultural system. The stock pledge crisis last year has shown that more than 80% of the pledge funds were not used in company's main business. This is a profound lesson for us to learn.
