China's Leadership Transition

Private companies still viewed with distrust by mainland authorities

With the private sector distrusted by mainland authorities, companies are hoping for fairer rules to compete with state-owned enterprises

PUBLISHED : Tuesday, 11 September, 2012, 12:00am
UPDATED : Tuesday, 11 September, 2012, 5:39am

Hostility towards private enterprise runs deep in the Communist Party, and despite the spectacular economic growth brought about by market reforms, mainland authorities' distrust of private business has never disappeared.

The profits of private industrial companies have risen by an average of 42 per cent since 2005, outpacing state-owned enterprises in every year except 2010. But they are still considered "unreliable" by the government and barred from many "sensitive" sectors.

The latest case was in June, when the Heilongjiang provincial government declared that solar and wind power were "state-owned".Private companies wanting to harness them to generate energy were told to first seek approval from local meteorological bureaus.

An offence punishable by death during the Cultural Revolution in the 1960s and '70s, private business blossomed under reforms introduced by Deng Xiaoping and quickly became a key driving force behind the "China miracle".

The growth of the private economy reached its zenith under former president Jiang Zemin and former premier Zhu Rongji , aided by two controversial decisions. One, at the 15th party congress in 1997, gave private companies legal status, and the other was the issuing of Jiang's theory of the Three Represents, which provided a theoretical basis for allowing entrepreneurs to join the Communist Party and was implemented at the 16th party congress in 2002.

The private sector continued to grow strongly well into the era of President Hu Jintao and Premier Wen Jiabao , but efforts to promote private enterprise gradually lost momentum. Hu and Wen put the priority on closing wealth gaps and creating a "harmonious" society.

A central government circular issued in 2005 said the development of the private sector was still encouraged, but "as a supplement to the state-owned sector".

By the end of last year, the mainland was home to 9.68 million private companies, with registered capital of 25.79 trillion yuan (HK$31.5 trillion) and 104 million employees - more than 75 per cent of the urban workforce. Official figures also showed that those companies contributed 45 per cent of the nation's tax revenue. But important as they are, private companies are still made to carry a handicap when competing against state-owned enterprises (SOEs).

The global financial crisis that came to a head in 2008 triggered a worldwide intellectual crisis for the free market school of thinking and encouraged advocates of "state capitalism".

On the mainland, the government injected a record 9.6 trillion yuan of bank loans to help fund the so-called 4 trillion yuan stimulus package. The lion's share went to big SOEs and local government investment vehicles. As a result, the capital gap between government and private businesses is bigger than ever .

Entrepreneurs now hope the new party leadership - to be unveiled at its 18th national congress this autumn - will review the status of the private economy and address the imbalance.

They also hope the congress will set the tone for reforms that would put private companies on a more equal footing in terms of access to financing, break up SOE monopolies in many areas and better protect the legal and social status of private businesses.

"We are keenly anticipating the congress will bring good news for private companies," said Zhou Dewen , chairman of the Wenzhou Small and Medium-sized Enterprise Development Association.

"Policies issued in the past have not been effective. Only forceful measures can break up monopolies and bring hope to struggling private companies, so that they can help maintain stable economic growth."

Wenzhou, in Zhejiang province, became a hotbed of private enterprise during the mainland's export boom. Once the envy of the nation, it is now reeling from a sharp decline in exports to debt-mired European nations and rising labour costs.

"Wenzhou companies are trying to move away from low-end manufacturing business, such as producing the world's cheapest lighters, glasses or shoes," Zhou said. "Local entrepreneurs are most interested in financial services, oil exploration and many other industries, but they are barred from participating."

Desperate to get the weakening economy back on track, the top leadership has promised to open some state-monopolised sectors, such as railways, health care and banking, to private investors. But entrepreneurs are waiting for policy details before celebrating.

The government issued 36 measures designed to support the development of private enterprises in 2005 and 36 similar measures in 2010. However, despite the official rhetoric, little has been done for fear of upsetting the interests of the state-owned enterprises that dominate sectors such as telecommunications, railways, oil and banking.

And the latest move to invite private investment in infrastructure projects - traditionally a state monopoly - smacks of desperation rather than a sincere step to reform the system.

It has been prompted in part by local governments' need for fresh capital following an infrastructure spending binge that left huge financial gaps.

It is little wonder that entrepreneurs are sceptical. Abrupt policy changes and weak protection for private property still haunt many of them.

Liu Yiqiang , 36, said: "I was invited to invest in coal mines by the Shanxi provincial government in 2007. Two years later, the mine was closed, as the nation wanted all small mines shut down to ensure no accidents occurred.

"Now the Ministry of Railways says private investment is welcomed. What if it announces later that private companies have problems and should be driven off? My investments will turn out for naught."

Writing on his blog, Professor Xu Xiaonian , of Shanghai's China Europe International Business School, said that China should reaffirm respect for private property to restore people's confidence in making investments. Another important step would be to gradually open up monopolised sectors to the market, ensuring fair competition.

Last year, the All-China Federation of Industry and Commerce surveyed the owners of the top 500 private companies on the mainland by sales revenue about the obstacles they faced in entering state-monopolised sectors.

Around 52 per cent said government departments were half-hearted in implementing the policies, and 39 per cent said that the SOEs that dominated those industries were trying to raise the thresholds to entry to prevent them from getting in.

Private companies also find it hard to borrow from banks, which mostly prefer to lend to government-backed firms.

Stock markets, another important financing channel, are also difficult to access because the listing rules are tilted heavily in the favour of SOEs.

As a result, cash-starved private companies seeking capital have been forced to turn to acquaintances, friends and shady operators in the non-official, "grey" loan market.

In 2009, 30-year-old Zhejiang billionaire Wu Ying was sentenced to death for raising 770 million yuan in funds with the intention to default on repayment. The harsh sentence sparked a furore, with many viewing Wu as a victim of the system.

The strong public reaction forced a retrial of the case earlier this year and her death sentence was suspended for two years, meaning it is likely be commuted to life imprisonment.