China private sector needs help to flourish further

Quality not quantity, argues a report published by the All China Federation of Industry and Commerce.

In a first of its kind, a just-released report on the private sector by the All China Federation of Industry and Commerce, the authors analyze the state of private sector across the whole of China and call for policies to improve the quality of the private sector, rather than merely encourage growth.

The private sector in the report is defined in the narrower sense of not including foreign-invested companies, including investors from Hong Kong and Macau.

It does include collective enterprises, small, uncorporatized businesses, individually invested corporatized enterprises and partnerships.

Significantly, the report concludes that the private sector offers a firm basis for the creation of a 'xiao kang', or moderately well-off society and goes as far as to talk of the 'capitalization' of society

The private sector now contributes 48% of the value of total national production and accounted for 24% of GDP growth in 2002, estimates the report.

The federation membership of private companies has multiplied by a factor of 24 in the last 12 years, registered capital has shot up 58 times, reaching a total of Rmb2.8 trillion, and 1,582 companies have an annual operating income of Rmb120 million or above. The largest private member company of the federation, not named, has an operating income reaching Rmb35 billion.

And thousands of companies have issued shares, changing themselves into limited liability companies to reduce the risk of doing business.

Annual increases in the operating income of member companies averages 17%, far outstripping GDP growth, the report points out.

An important new element in the burgeoning private sector has been the high tech sector, where nationwide 5,000 private high tech companies have developed links with some 500 education institutions.

That's unsurprising since the state sector has focused on what are now often considered sunset industries, especially the manufacture of obsolete heavy equipment for the army such as tanks. That has caused the private sector to focus on more modern industries, especially those where intellectual capital is more important than financial capital.

However, despite impressive advances in the private sector, technology, personnel, trademark protection, marketing, credit systems and management skills are all areas that need developing to cope with increased competition and the advent of WTO, the report says.

The government has introduced numerous policies favourable to the private sector. They have had considerable success, but it's the above areas which represent the most serious bottlenecks.

Further obstacles for private enterprises are excessive family management and not focusing on developing core strengths and suitable capital structure. More seriously, tax evasion, fake goods and poor labour relations are rife.

However, problems are not just caused by internal deficiencies. Outside the firm there is widespread fear and suspicion of privately operated companies, imperfect protection of private sector wealth and property rights and poor management of certain government departments.

Next year could, however, be a good year for the private sector, the report says, since much regulation is underway which will transform broad government support for the private sector into systematic measures: such as improved private asset protection, allowing private companies to participate more widely in cross-provincial state asset disposals, and ensuring that private companies get equal treatment with state-owned ones.

Indeed, it's an increased merging of the private and public sectors which is giving the private sector the opportunity to move into new sectors, the report notes.

For a long time, many areas deemed vital to maintaining China's communist party rule and defense were off-limits to the private sector.

That's changing thanks to the commercial unviability of many of these areas, leading the government to carry out an unprecedented sell off of government assets in areas such as finance, education and publishing.

China shows wide disparities in the strength of the private sector. 60% of private companies, or some 200,000 of the total, come from Jiangsu, Guangzhou, Zhejiang, Shanghai, Beijing and Qingdao.

It's not gone unnoticed by the government that it's precisely these areas which are growing the fastest, and which contributed 40% of China's GDP in 2002.

Tax is a powerful incentive to the government, the report adds, with 60% of tax income in Zhejiang province coming from the private sector. Even in lesser develop areas of China, private sector tax income can account for 50% of the total.

Perhaps most interestingly for China's ministry of finance, which is struggling to further its huge programme of public works investments and provision of social security, fixed-asset investments by the private sector reached a record level, says the report, approaching one trillion renminbi for the first nine months of this year, up 30% on the same period last year.