Poor relations

Zhang Liu recalls how difficult it was to get a business licence when he set up his small printing firm in 1991. He spent five months getting all the required government chops stamped on his application. Today, it would take at most a month to get the same licence, he says, adding that the staff at the licensing authority have become more helpful and friendly.

Zhang's story underscores the friendlier world enjoyed by the estimated 32 million self-employed individuals and private firms in China today. Finally, after two decades in the shadows, they are getting some support from a communist government which had long suppressed private commercial initiatives.

This year, Zhang and other private businessmen find themselves better treated than ever by the government bureaucracy, with the disappearance of ideological and economic hurdles once pitted against them. At the annual parliamentary session held last March, politicians rewrote the constitution to grant private enterprises a higher political status. They are now regarded as an important component of the socialist market economy – a long overdue recognition since private businesses now employ more people than the state sector, according to the All-China Federation of Industry and Commerce. Nationwide, registered private enterprises account for 15-20 percent of GDP.

Recently, the government has called on banks to provide more loans to private companies. It also granted for first time 20 private firms the right to export directly, bypassing state trading firms.

The government is giving private firms the support they deserve because it needs them to create more jobs and business opportunities. In total, they have absorbed 3. 5 million state workers made redundant in the last few years. Private business is the only booming sector in China's sluggish economy, contrasting with a shrinking state sector and a stagnant level of foreign investment. The private sector accounts for one-third of the nation' retail sales and an average of 10 percent of tax revenues in most provinces. Increasingly, the vital distribution sector is also in the hands of private firms.

Mr. Wu Jinglian, director of the Beijing-based Development Research Centre of the State Council, is impressed by the growth. "I was in Zhejiang province recently. There is no unemployment there because private business is doing well. If more places in China were like Zhejiang, there would be no problem even if state firms lay off a larger number of workers," he says.

Governors and mayors have also spoken highly of private enterprises. For example Liaoning province, the conservative industrial heartland in north-east China, has admitted that its economy has not done well because there are not enough private enterprises. Mr Wang Huabin, chairman of the Liaoning Trade and Economic Commission, said recently that the province needed to shut down half of its small and medium-sized firms this year, implying that private business should replace them in the marketplace.

In some cities, like Chongqing, government officials expect the private sector to account for more than half of their GDP within the next few years. In Changchun, capital of Jilin province and another bastion of heavy industry, the city government has set a private sector annual growth rate target of 33 percent over the next four years. Such growth is imperative as a means of absorbing the large number of laid-off workers from the state sector.

Even in Shanghai, where local officials had been slow to develop private industry, a special investment zone has just been set up in Pudong for private enterprises. There, private firms can buy land at a preferential rate, obtain guarantees for loans of less than Yn2m and even provide residency rights in Shanghai for their managers.

In this more favourable political climate, private companies are removing their fronts – usually state firms or agencies of local governments – behind which they hide their real status as privately owned firms. These ‘red hats' had protected private businessmen politically, but they also led to abuses and confusion in management. State companies or agencies which had lent their names to private firms often charged a high fee or demanded a large share of the profits, even though they were contributing little to the relationship.

In Shanghai alone this year more than 1,000 private enterprises had taken off their ‘red hats,' according to Brilliance, a Beijing-based monthly magazine specialising in stories about successful private businesses.

Keeping a low profile
For decades, private businessmen had lived in fear and uncertainty. In successive political campaigns after 1949, the Chinese communists had purged capitalists from the newly established socialist republic. However, unlike in the Soviet Union the private sector was never eliminated totally. Vestiges of entrepreneurial skills and experience which remained were vital to the government with the arrival of economic reform in the 1980s.

While the Communist party has become more tolerant of private enterprises, public opinion and the business environment have remained hostile. Private businessmen still have to work harder that their counterparts in the state sector, while keeping a low profile so as not to attract undue discrimination from the tax bureaux.

Their lot, however, greatly improved in 1992 when patriarch leader Deng Xiaoping swung his support behind a sector he recognised as an economic pillar. Between 1993 and 1995 the number of private firms increased at an annual average rate of 66 percent. Today, there are 1.2 million private firms, employing 17 million people and producing Yn585bn-worth of goods a year. There are another 31.2 million ‘private households,' categorised as self-employed or private companies employing fewer than eight people. These smaller companies also represent an economic powerhouse, generating 61 million jobs and Yn596bn-worth of goods.

Private companies can be found in all kinds of businesses, but they are most active in agriculture, retailing, trading, catering and other services. Nearly all non-staple foods are produced by the private sector. The government in Changchun said they would like more private sector involvement in domestic services, medical care and old people's homes and to invest in community projects such as libraries and cinemas.

Private sector activity is most evident in eastern and southern China, where many individuals have never given up private trading. Guangdong leads in private business, with 120,320 private firms at the end of 1998, followed by Zhejiang, Shandong and Jiangsu.

Unfair treatment
Many private firms have grown from small-time traders to industrial giants. Feedstock dealer New Hope of Sichuan, for example, has more than 10,000 employees and 140 subsidiaries. In 1997 the group recorded sales exceeding Yn6.5bn. Mr. Liu Yonghao, its president, is also vice-chairman of the All China Federation of Industry and Commerce, the official body representing private business. His personal wealth is estimated at Yn1bn.

The average private firm, however, is far smaller, with a registered capital of Yn535,000 and a sales volume of Yn320,000 in 1998. In recent years, a new kind of private company has emerged – high technology and internet related firms run by young, highly educated computer experts. The best example is Sohu, an internee search engine company started by a 35-year-old Chinese graduate of the Massachusetts Institute of Technology in the US.

Private businesses have come a long way in recent years, but they are still competing at a great disadvantage. State firms remain the favoured sons, enjoying preferential treatment in taxation, loans, the use of land, foreign trade, access to capital markets, and acquisition of other state firms.

"We want fair treatment," says Liu of New Hope, citing the example of his firm's recent difficulty in remitting foreign exchange overseas. A state firm of a similar size has fewer problems in this area.

New Hope, however, has this year been successful in getting the right to export directly. It has won the concession through persistent lobbying.

"We have been exporting for 10 consecutive years, with Yn1bn-worth of exports. We applied many times to sell overseas directly but were rejected," Liu says. This year, New Hope is among the 20 private firms given the licence to export independently.

The other big gripe of private business is financing. They are denied access to raising capital on the stock-markets and most banks are reluctant to lend to private companies, especially fledging ones with little track record and no collateral to back up their borrowings. In the past it was common for banks to lend to state-owned enterprises, which in turn passed on the loan to small firms at very high levels of interest.

"This is the single biggest problem of private firms today. Although the central bank has already asked state banks to help, there has been little progress at the local level," says Liu. Banks still prefer to lend to state firms because local governments back such kind of lending.

Big private firms like Liu's are also beginning to be courted by banks. "At the start of each lending season, I have to seek refuge from bankers scrambling to provide me with bank credit," says Liu. His cash-rich firm has little appetite for loans, though, in contrast to the millions of struggling private businessmen.

Zhang, owner of the printing firm, says he can understand why banks are reluctant to lend to small private firms. "There are such a mixed variety of people starting their own business these days. You have retired bureaucrats, redundant workers, academics, farmers and professionals. It is very difficult to distinguish the bad borrowers from the good ones," he says.

One example acting as a deterrent to banks involves Mr. Mu Qizhong, president of the Beijing-based Nande Corporation, the troubled group engaged in trading, property development, manufacturing and other businesses. Mu, once the darling of Chinese banks, is now in deep financial trouble because of his business failures, leaving his creditors holding the burden of massive bad loans.