- Associated Press - Sunday, July 8, 2012

ZHANJIANG, China — Reformers say China needs more entrepreneurs like Liu Peijian. His chain of six furniture stores employs 60 people. But Beijing’s response to the deepest economic slump since the 2008 crisis is to pump money into state industry, leaving businesspeople like Liu who create jobs to fend for themselves.

Across town from Liu’s office is a project that exemplifies China’s mini-stimulus: A 69.6 billion yuan ($11 billion steel) mill being built by a government company and financed by state-owned banks that lend little to the private sector. It will employ 5,000 people — or one job for each $2.2 million of investment.

“We get no government help,” said Liu, as his office air conditioner struggled against the muggy heat of this southern city. “But we’re a small company, and small companies shouldn’t bother the government.”

Spending like that of Baosteel Group, owner of the Zhanjiang mill, is expected to help push up economic growth later this year. But the emphasis on state industry that creates few jobs will come at a longer-term cost, setting back efforts to reduce reliance on investment and generate self-sustaining growth powered by consumer spending.

The strategy will further entrench subsidy-guzzling government companies that dominate industries from oil to telecoms. That might hamper reforms the World Bank and others say are needed to keep the economy growing by curbing state industry and nurturing free-market competition and more dynamic private companies.

“When the economy gets into trouble, all those good intentions get thrown out the window, and we revert to Plan A, which is always to encourage more investment and ensure that funds keep flowing to state-owned companies,” said Mark Williams, chief Asia economist for Capital Economics.

Beijing has cut interest rates twice since the start of June and reduced fuel prices as it tries to buoy growth that declined to 8.1 percent in the first quarter. It has promised more spending on low-cost housing, airports and other public works. That will pour money into state-owned construction companies and suppliers of steel and cement.

Baosteel’s Zhanjiang mill is one of a series of industrial projects the government approved in May as stimulus measures after previously blocking them to prevent overinvestment in unneeded facilities. State-owned Wuhan Iron & Steel Group also received approval for a new mill state media say will cost more than 60 billion yuan ($9.5 billion).

Both are to be financed by state banks, which still channel at least 80 percent of lending to state companies despite China’s three decades of market-oriented reforms and the growth of private business that has driven its economic boom.

Leaders including Premier Wen Jiabao have promised to help the private sector with more bank lending and other measures, but entrepreneurs say they have yet to see changes.

“I have never been able to get a bank loan,” said Deng Mingxin, owner of a company in Changshu, a city northwest of Shanghai, that makes components for zippers. He said state companies appear to get credit easily while bank employees expect bribes to approve loans for private borrowers.

Deng’s workforce has shrunk by two-thirds to 10 people over the past six months as employees left after wage hikes of up to 30 percent failed to keep pace with rising living costs. He said he is considering moving to lower-cost Vietnam.

“I am disappointed at the situation in China,” he said. “This is unfair.”

Today’s state companies and their relationship to the private sector have changed drastically from the era of central planning.

Beijing cut back state industry in the late 1990s, wiping out tens of millions of jobs. Then a new generation of leaders began in 2005 to build up elite companies such as oil giant PetroChina Ltd., phone carrier China Mobile Ltd. and Bank of China Ltd. to control industries deemed strategic.

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