Premier Li Keqiang stressed that earnest payments should be abolished to lower social credit cost, at a State Council executive meeting on June 15.
One issue discussed at the meeting was to regulate earnest payments in engineering construction sectors, lower costs for enterprises, and create a fair business environment.
Earnest payment is a practice in the engineering construction sector where companies have to submit “guarantee money” to get the opportunity to start a construction project and get back the money when the project is finished.
Premier Li said that he thought all kinds of the so-called earnest payments that he heard during his local inspections were jokes.
“Now it seems that they indeed exist. Some are set in the name of security and credit. But those practices are at the cost of social credit and will finally increase such cost.”
“Earnest payment in transactions among enterprises is in line with market practices. But it is against market economy principles that government set regulations and receive such money,” he said.
The Premier added that the essence of market economy is credit but credit does not simply depend on “earnest payment”.
“Such practice will only result in less trust among market entities and high transaction costs, or even incur cheatings in construction, thus creating the consequence where ‘bad money drives out the good’,”
If an engineering construction company has to pay different kinds of earnest money and has to be ready not to get the money back in a few years, it will save money in somewhere else, such as construction costs, according to the Premier.
To solve the problem, the meeting decided to abolish all earnest payments except four such ones concerning payments for migrant workers, project bidding, contract implementation, and construction quality.
According to estimation, the move will vitalize nearly one trillion yuan ($150 brillion) for construction enterprises.
Premier Li noted that it is necessary to streamline the earnest payments in engineering construction sector. But the move should be carried out steadily.
“Keeping the four practices (payments for migrant workers, project bidding, contract implementation, and construction quality) is out of such concern,” he said.
“In future, when all kinds of credit systems are established and social credit awareness are enhanced, they will be gradually substituted by the penalty money of contract breach.”
At the end of the meeting, he emphasized that in addition to the engineering construction sector, the problem of earnest payment exists in many other sectors and all government departments should carry out streamlining efforts to regulate the practices and clear path for development.