China in Transition
The Development of Private Companies as a Prerequisite for the Reform of State-owned Enterprises
Chi Hung KWAN
Consulting Fellow, RIETI
On Jan. 12, 2005, Premier Wen Jiabao convened a meeting of the State Council's standing committee in which "Some Opinions Regarding the State Council's Encouragement and Support of the Development of the Non-state-owned Economy" were discussed. The view was presented that, "Not only does encouraging, supporting and guiding the development of the non-state-owned economy help promote the economic prosperity in urban and rural areas and increase fiscal revenue, it is also beneficial in creating new jobs, bettering the lives of the people, improving the economic structure and accelerating economic growth. It also has important strategic significance in realizing an all-round well-off society and in pushing forward the process of socialist modernization." At the same time, the latest "opinions" recognize the need to "provide the non-state-owned economy with an environment of competing on the equal footing; a system based on the rule of law; and a policy and market environment and policy measures that encourage, support and guide the development of the non-state-owned economy." Needless to say, the non-state-owned economy here refers mainly to the private-sector economy, which has seen rapid growth. Since private companies have faced discrimination in various areas, it is significant that the government has made clear its intention to grant them "national treatment," as well.
The expansion of the private-sector economy is natural for China, which is striving to become a market-oriented economy. Pluralistic economic agents are necessary for the development of a market economy, and a real market economy cannot be established where there are only state-owned enterprises. There is a need not only for reform of the joint-stock system of state-owned enterprises but also for participation of private capital in the privatization of such enterprises, as well as their retreat from areas where they compete with the private sector. In addition, the private-sector economy provides a huge number of employment opportunities, and thus contributes to the stable development of Chinese society and the domestic economy.
During the era of the planned economy, private property was viewed as the root of all evil. But under the leadership of Deng Xiaoping beginning in the late 1970s, the government put forward a plan to develop private companies in order to adapt to the demands of people pursuing personal wealth. These policies have become a driving force behind China's economic growth. As the shift toward a market economy progressed, many township and village enterprises (TVEs) in rural areas, which started out with collective ownership, have since been converted into private companies. At the same time, the privatization of state-owned enterprises is also progressing.
The growth of private companies provides a favorable environment for state-owned enterprise reform, including privatization.
The development of private companies has created new jobs for the surplus labor of state-owned enterprises. The private sector was nonexistent during the planned economy era, but it has expanded rapidly since the shift to market-opening reforms and especially since Deng Xiaoping's famous speech during his tour of south China in early 1992. In that year, only 8.38 million people were employed in the private sector in urban areas; as of 2003 the figure had risen to 49.22 million ( table ). Of this number, 25.45 million people are employed at privately-owned enterprises with eight or more employees, while 23.77 million work at companies run by individuals - those with fewer than eight workers. (In China, privately-owned enterprises and individually-owned enterprises are together called private companies, or the private- sector economy.) Meanwhile, in rural areas, the number of workers in the private sector more than doubled from 18.62 million in 1992 to 40.14 million in 2003 (Of these, 17.54 million people worked at privately-owned enterprises and 22.6 million worked at individually-run businesses). By contrast, the number of employees at state-owned enterprises stood at 68.76 million in 2003, down considerably from its peak of 112.61 million in 1995. Thus, the growth of private companies has been absorbing workers affected by restructuring at state-owned enterprises and the surplus workforce of rural areas. In fact, in 2003 alone the private sector created 7.83 million new jobs: 6.54 million in urban areas and 1.29 million in rural areas. When we also consider the fact that many state-owned enterprises and township and village enterprises are bringing in private capital, the private sector's contributions are probably much greater than these figures suggest.
Also, the rapidly growing private sector is directly participating in the reform of state-owned enterprises in the four following ways: First, some private companies purchase a portion of the stock of state-owned companies as they shift to a joint-stock company. They may even hold enough shares to be able to assume a leadership role in the company's operations. Second, some private companies purchase a state-owned enterprise outright. In this case, the state-owned enterprise continues to exist as a private company. Third, a private enterprise may absorb a state-owned enterprise through merger. Fourth, the state-owned enterprises that have been operating in the red for a long time and for which rehabilitation may be liquidated through legal means so that private businesses can purchase their assets and use them more efficiently.
Meanwhile, the rise of private enterprise has led to intensified competition; the monopolistic position of state-owned enterprises is under threat and their profitability is declining, while the demonstration effect of up-and-coming private businesses despite the adverse business environment they face stands in sharp contrast to the stagnation at state-owned enterprises. This is making the public more aware of the need for reform and is a key factor in keeping conservative forces at bay.
Thus, after 25 years of reform China's private sector economy is becoming a force equal to that of the state-owned economy. Future economic development in China depends on the dissolution of this dual economic structure in which a vibrant private sector coexists with a lethargic state-owned sector. In other words, as private companies continue to grow, the core of the economy will further shift to the private sector as some of the state-owned enterprises that are still competitive are privatized and those that are no longer competitive die out.
(Note)Based on the China Statistical Yearbook, 004
January 20, 2005
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