Only a few years ago, it was inconceivable that private entrepreneurs would once again become a dominant force in the Chinese economy. I recall only 20 years back, when I was an exchange student at Peking University, my classmates and I found it very exotic to dine at the only privately-owned restaurant in Beijing, in an alley south of the Art Museum.
The restaurant had only two tables, but the food was inexpensive and good, it was clean and tidy and, last but not least, service was excellent, unlike every other restaurant in the city, all of them state-owned. As far as I know, that tiny restaurant is still there.
Two decades along and the private sector is clearly here to stay, not only in the restaurant business, but in most and soon all sectors of the economy.
In hindsight the change was hardly surprising. Private entrepreneurialism, if defined as economic activity by family-owned firms, has been the norm through China's long history, and the planned economy that has prevailed since 1949 can be regarded as a short aberration. A glance at how ethnic Chinese entrepreneurs have prospered in Southeast Asia, Hong Kong and Taiwan proves what economic growth can be generated if only certain conditions are met.
The reason the private sector has been allowed to make a recovery is simple: the eternally pragmatic Communist Party has realised that what is required to stay in power is job creation and economic growth. Whether the companies that create the jobs are state-owned or not is of little importance.
While private companies and foreign-invested enterprises are often good at creating capital, state-owned enterprises (SOE) are often equally good at destroying capital. The large amounts of non-performing loans that weigh down the Chinese banks are largely derived from loans to distressed SOEs.
Private sector companies are simply in a better position to prevail than most state-owned enterprise. Why? The answer is a basic principle of economics: private companies put their own money at risk, and are thus incentivised to ensure sound financials, while the typical SOE puts other people's money (bank loans etc) at risk with, more often than not, insufficient accountability.
In China today, the real street economy plays the role of incubator for the private enterprise economy, a situation not without precedent. From the watermelon seed king of the early 1980s to Li Ka-shing who started building his fortune by selling plastic flowers, top private companies grow from the most humble of origins.
Since the mid-1990s, the private sector has been receiving increasingly beneficial terms. The sector's existence has been acknowledged in the constitution, legal rights have been strengthened and Chinese financial institutions have been allowed to offer more services to this sector. So is everything okay for the private sector? No, but conditions continue to improve by the day.
Chinese private entrepreneurs are still discriminated against compared to state enterprises. Over the years, I have participated in many discussions with Chinese entrepreneurs who vent their frustrations at how they are treated by different parts of the bureaucracy, their complaints ironically paralleling those raised by foreign enterprises.
But the discrimination is correlated to the relative levels of economic development in various regions. There is little discrimination in Shanghai and much more in, say, Sichuan. But the trend is clear, and the discriminatory practices will over time disappear because the private firms are the ones creating the most new jobs.
For foreign companies looking for partners in China, private enterprises are definitely worth considering rather than state companies in sectors where private firms have been given a relatively level playing field. Private enterprises are more business oriented and competitive although in less developed areas of China, the local bureaucracy has a tendency to maltreat them. Private enterprises should be more competitive for OEM production, light industrial goods and service industries, although in more complex industries such as power and chemicals, there may be no choice but to partner with state enterprises.
Private sector companies should not be implicitly trusted, of course. Transparency has never been the strongest point in the Chinese economy, and private companies are often family-owned with a propensity for secretiveness. But for anyone having dealt with companies in Taiwan and Southeast Asia, there are many similarities – the key principles are trust, price-sensitiveness, competitiveness and flexibility. If you feel comfortable dealing with firms in Southeast Asia, you should be happy dealing with similar companies in Zhejiang.
But beyond the traditional family unit, there is a new generation of younger entrepreneurs who are more than willing to pay for external advisory services and the management structures they oversee are rapidly becoming much more clearly organised.
It is interesting to note that private entrepreneurs in China tend to be ascetic. The basic concepts of Buddhism and traditional Chinese values – frugality and plain living – have found new life among them, probably for the same reason: if the money invested is your own and every second is a matter of corporate life and death, you have no time for the extravagant lifestyles of many state-owned company bosses.
Private companies continue to fight against local protectionism and bureaucratic intervention. Moreover, many family-owned businesses face the problems of changing ownership structures to allow for further growth – merging with or acquiring other Chinese companies, introducing foreign capital or going for a stock listing.
But the good news is that China now recognises what has been the natural state of things throughout most of its economic history: the private sector works fine.
Fr?d?ric Cho is a Sweden-based China consultant with over 15 years' experience in China's financial sector.
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