According to some analysts, China's private sector is still living in the shadow of the state sector, with major state enterprises playing the dominant role in economic output and transformation. Others, including those at the OECD, see the private sector as a success story that is saving the day in terms of employment and social stability.
Definitions are a large part of the problem. China has been slow to statistically recognize the transition of companies from state to private ownership; many companies use the guise of being a state enterprise ( 'wearing a red hat' ) to win bank loans and official approvals, and the process of privatization often creates a complex mix of public-private ownership that can last years. Back in the late 1990s, for instance, some companies registered themselves as "military enterprises" in order to ensure license registration ran smoothly and quickly.
Different Definitions, different results
The OECD said in a report in September based on official Chinese statistics that China's private sector was the engine of the country's growth and accounted for well over half of its GDP, and rising – 54% of GDP output in 1998, and 63% by 2003.
On the other hand, the CEO of Beijing Unihan Digital Technologies, Joe Zhang, said in a recent article contributed to the Financial Times that "[the private sector] still lives in the state's shadow," adding that private businesses collectively still generate less than one-third of China's GDP.
Zhang's view, however, leans on category divisions in which many arguably private enterprises are excluded from the 'private' categorization, and placed instead under joint-ownership, limited liability, shareholding and foreign-owned (i.e. Taiwan, Hong Kong, Macao) categorizations.
A key difference between the OECD and Zhang Definitions is the placement of collective enterprises, which are increasingly run as private enterprises with effective ownership structures in place. Moreover, Chinese law does not consider a company with a single industrial or commercial proprietor employing eight workers or fewer to be an enterprise, which, likewise, rules out a large numbers of firms from the private enterprise category.
SOEs' dwindling force
There are clear indications of the fading dominance of China's SOEs, among them the parlous state of China's stock markets that are comprised almost exclusively of SOEs. Moreover, the total number of state firms has dropped in the past decade from more than 300,000 to 150,000.
To be sure, some state enterprises are doing well, and making the transition well from centrally planned unit to commercial enterprise. A case in point is Shenzhen-based Huawei, currently the biggest manufacturer of telecoms networking equipment in China and also one of the fastest-growing global players in telecoms equipment. It has 30,000 employees worldwide and serves 22 of the top 50 telecoms providers.
The private sector, on the other hand, is adding workers at a fast rate – between 1996 and 2001 it witnessed a threefold rise in employees, according to the OECD report. The report said private sector TFP (Total Factor Productivity, or the efficiency with which both labor and capital are used) was double that of the state sector. The TFP rate slowed in 2003 to 2.8%, but that is still a lot more than the US, where TFP has averaged 1% over the past decade.
Several Chinese private companies have enjoyed huge success in the past decade, not only in the expected sectors like services and IT, but also in sectors traditionally dominated by the state, such as heavy industry and logistics. Frederic Cho, manager of China equities at Swedish brokerage firm Hagstromer & Qviberg, is bullish about the prospects for China's private companies.
"The private companies are definitely increasing," Cho said. "several private companies still wear the red hat of the SOEs, so their majority shareholders may not be evident at first sight."
He predicted that most of the future winners in the China corporate stakes would be private companies, citing Lining, a company that acts as a sales agent for Nike products which has "really good brand equity and great prospects for the Olympics". Another private sector domestic success story is The Hope Group, which specializes in feed production and related industries. Set up by four brothers in 1982, it now has a workforce of 15,000 and has founded 140 enterprises in China. Cho said that a few private Zhejiang companies have also enjoyed considerable success in the construction industry, an area usually associated with the state sector.
The government's hand
But this is China, after all, so it is best not to forget about the government, which often deals an unfavorable hand to private businesses in spite of the help it gets from them in keeping unemployment rates down. Financing, often the key to expanding a business, is one such problem, since many private companies cannot acquire the loans they need from China's banks. Moreover, they encounter significant barriers to listing their shares on China's stock exchanges, and they do not enjoy the ear of government in the way the SOEs do.
Cho stressed the importance of the party's role. "It still all depends on government industrial policy [for] private companies," he said. "The state can be slow in accepting applications, so that people lose deals. State companies have the advantage in traditional sectors."
Some might say China is cannily keeping its SOEs afloat with such policies, but in the meantime, some private companies are listing abroad instead and even forming their own lender groups by pooling resources – in effect an underground banking system. Others simply borrow from friends – sums such as RMB1 million are not unusual, according to a businessman quoted by French investment bank CLSA (Credit Lyonnais SA group) in its September report China's Capitalists.
Although private companies have problems borrowing from banks in most of China, the CLSA report also quoted one entrepreneur in the Zhejiang seaport city of Wenzhou as saying things were different there and that banks in the city were actively courting him to lend money to his business.