Private firms have been one of the driving forces propelling China's rapid economic growth in recent years, as witnessed by their rising shares of production, investment, and job creation. However, a number of institutional problems need to be addressed in order to further their development. Among them, (1) the lack of sufficient legal framework to protect private property rights, (2) barriers hindering entry into various sectors, and (3) restrictions in financing activities, are the most serious ones.
Under the traditional Marxist ideology, private firms are usually equated with capitalism. Indeed, since the Communist Party came to power in 1949, private firms have been consistently subjected to various restrictions, if not totally forbidden. The situation has gradually improved since China shifted to a reform and open-door policy in the late 1970s. Through three-step amendments to the constitution, non-state enterprises, including private firms, have come to be recognized as an "important part of the socialist market economy." This significant shift in government policy, however, has yet to be fully reflected in the provisions of Chinese laws. Because of insufficient protection of private property rights, many entrepreneurs hesitate to expand their business through reinvestment. Instead, corporate profits are being diverted to consumption or even remitted overseas, and this has adverse effects not only on the management of individual companies but also on the national economy as a whole.
Private firms are also blocked from entering a number of business fields that are opened not only to state-owned companies but also to foreign companies. Even in areas where private firms are allowed to enter, they face numerous discriminations used to protect vested interests. It is quite common that private firms have to accept hard-to-swallow terms regarding technology, personnel and financing to get government approval to enter a certain market. Also, in taxation, private firms are being forced to shoulder an unreasonably big burden compared to state-owned companies and foreign firms, both of which are entitled to all kinds of preferential treatments.
Furthermore, restrictions on financing activities are hindering the development of the private business sector. Four major state-owned banks continue to dominate the Chinese banking sector, and their lending is highly concentrated in state-owned companies, making it difficult for private firms to raise enough funds for financing their business activities. Most companies listed on the stock exchanges in Shanghai and Shenzhen are also state-owned. When private firms make initial public offering of their shares, many of them find no other choice but to do so by buying out an already listed state-owned company, which adds to the cost of listing.
When private firms started to emerge during the early stage of the reform period, the presence of institutional discriminations did not act as a serious constraint because they could sell whatever they produced amid the persistent supply shortage inherited from the past. Over the years, however, reform of state-owned companies has proceeded and more and more foreign companies are now launching business in China in full scale. In the face of increasingly fierce competition, the growth of Chinese private firms has begun to slow down. In addition to reinforcing the protection of property rights, facilitating competitive and fair market conditions is necessary to allow further development of the Chinese economy. As a major step in this direction, discriminative measures against foreign firms are being gradually removed following China's WTO accession. At the same time, the government should also quickly move on to grant "national treatment" to Chinese private firms as well.
