China’s private-enterprise blues

Growing at a reported 20% a year, the private sector is the driving force behind China’s economy. Trouble is, at this pace, the private economy’s transformation is outpacing the government’s own legal and institutional reforms.

Private firms account for 70% of China's total industrial output
Private firms account for 70% of China's total industrial output

Take the success story of Zhang for example. Sitting in his small office attached to one of the capital’s numerous research centres, he exudes an aura of entrepreneurial zeal and corner-cutting pragmatism that many businessmen say are essential tools for survival in China’s ‘anything goes’ capitalist environment.

Like many young and ambitious Chinese who continue to ride the wave of economic reform, Zhang decided to quit his job at a state-run property developer and open his own firm. Specialising in architecture, he has made his mark on numerous Beijing landmarks over the past six years.

Yet, as he confessed to, he has done so using legally dubious means.

Once run by Mao, the Communistparty now takes in businessmen

Once run by Mao, the Communist
party now takes in businessmen

Never in possession of a proper licence, Zhang – he declined to have his full name used – has exploited loopholes and official indifference to ensure that his small but fairly lucrative company stays in business.

In the present circumstances, Zhang said, it is impossible for him not to operate in what he calls a “legal grey area”.

“Although legally entitled to it, a private company like ours finds it impossible to get a bank loan. When we sought an architect’s licence, the law demanded that we have 30 full-time engineers on our payroll before applying.”

“Such conditions show how the government is not moving in time with private enterprises,” Zhang says.

Giant shift

Are the authorities in Beijing aware of Chinese entrepreneurs’ frustrations?

In a conversation with, Shen Mingming of the Beijing University Research Centre for Contemporary China said, “The government is in a transition from promoting a dictatorship of the proletariat to representing the overall population, including private business.”

On the face of it, the Chinese Government is making all the right moves in embracing the private sector: allowing the state banks to lend to non-state sectors; rewriting the constitution to recognise private enterprise; and, in a step that would have Chairman Mao turning in his glass coffin, allowing private businessmen to join the Communist party.

Ailing state firms are kept aliveto keep unemployment in check

Ailing state firms are kept alive
to keep unemployment in check

A signatory to the World Trade Organisation, China this year enshrined the protection of private property in the constitution – a move that signals a further weakening of the ideological chain that once bound the nation.

However, critics say government support towards the state sector creates an unfair playing field, in particular when trying to source investment.

Although the private sector now accounts for some 70% of today’s annual industrial output value, 80% of all investment funds find their way into the ailing state sector as the government tries to prop up failing industries in a bid to stave off higher unemployment.

Lack of progress

Compared by some to a bottomless pit, bank managers continue to sign off on loans to technically bankrupt companies, safe in the knowledge that as they are lending to a state-operated enterprise, the loan is guaranteed by the government.

“Bank managers are not changing their ways. It is like taking money out of one pocket of the government and placing it into the other,” lawyer Zhang Xingshui said.

“Private companies can only get loans with a bribe.”

“Ensuring a healthy and expanded private sector is clearly part of the government’s policy”

Shen Mingming,
Beijing University Research Centre for Contemporary China

Zhang was involved last year in a major courtroom battle featuring a prominent private businessman who used employees’ savings illegally – but with their consent – as a source of investment.

As a corporate lawyer, Zhang is critical of the lack of progress on this issue.

“The government needs to give private businesses more room to develop. At present, their control over banks lending and financial activities towards the private sector are not the principles of a market economy,” he said.

Prescribed policy

Rao Ziming, a doctoral student, does not agree with Zhang’s prescription. Rather than rely on state banking institutions, private businesses should look to themselves for support, and the government should react by doing nothing, he says.

Having recently concluded a comparative study of various Chinese provinces, Rao discovered that the provinces with the most developed private economies have the highest GDP (Gross Domestic Product) rates.

“In many areas, small and medium-sized businesses face too many taxes. For example, in one town in Gansu province (in western China), companies faced 69 taxes from 19 governments departments,” he said.

Lawyer Zhang Xingshui says bank
lending policies are outdated

“In addition, in some areas, fees placed on private firms are 20-25% higher than those placed on state-operated enterprises. What my research shows is that the best thing that governments can do is to leave the private sector alone.”

Pointing to the coastal province of Zhejiang, long considered one of the most entrepreneurial regions in China, Rao said that many private businesses there are permitted to establish themselves and raise funds through their own means without local officials paying them too much attention.

The low unemployment levels, growing tax revenues and high GDP growth rate that the province can then boast are seen to outweigh any illegalities that private businesses might incur by not seeking funds through official channels, Rao said.

Image problem

Although beneficial to growth, the perceived illegalities in China’s rapidly expanding private sector have spawned their own problems.

To be sure, whereas once, graduate students would have had no choice in choosing their profession, a recent survey suggests that the comparatively dynamic private sector is now many fresh graduates’ field of choice.

In fact, in a China youth survey done by the public-relations group Hill and Knowlton, 64% of students interviewed believed that “sooner or later it would be better to work for myself than be employed by a company”.

“What my research shows is that the best thing that governments can do is to leave the private sector alone”

Rao Ziming, PhD candidate

Nevertheless a caveat is in order: despite the zealousness for entrepreneurship exhibited by China’s youth, public opinion is still laced with hostility towards the nation’s self-made men and women.

Published every year, the Forbes Rich List provokes heated discussion within the media and wider public, often raising questions as to how the list’s members – who are all private businessmen – made their millions.

In one prominent case, a Shanghai property tycoon Zhou Zhengyi and Forbes Rich List member, was this month sentenced to three years in jail for stock-market fraud after numerous complaints from Shanghai citizens, who accused him of unfair and sometimes violent evictions from their homes.

Attitudes differ

“In China many people traditionally respect officials,” said Dong Yigong, one of the few people in China to own a Humvee and a self-confessed fan of the Forbes Rich List members.

“I respect those people, regardless of how they got there as they are successful. The general public will not think like me though. They will say, why is he so rich, he must have done some underhand activities … . But I don’t believe that this is necessarily true.”

Humvee owner Dong Yigong says
the rich deserve to be admired

“There is no public poll on the attitudes to the list,” said Shen Mingming, the Beijing University scholar, referring to the Forbes survey. “But the popular feeling is that there must be some illegality in the business dealings of the list’s members.

“I don’t think the general public, or the government, trust private enterprises as much as they trust the state sector,” he added.

Lacking in accountability, private companies (and more than a few state-operated enterprises) often have no independent board of directors. Furthermore, as some businessmen told, the keeping of two account book ledgers, one for the taxman and one for themselves, is a common practice.

Indicative of an economy and society in transition, the hope is that given time, the private sector in China will become more transparent while the apparent lack of parity between state and private sectors will be erased.

“It takes time to change the system,” said Shen, summing up the hopes and fears of a nation in transition. “Ensuring a healthy and expanded private sector, though, is clearly part of the [Chinese] government’s policy.”

Source: Al Jazeera

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