Private Enterprise in China / Ross Garnaut
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rivate Enterprise in China Published by ANU E Press The Australian National University Canberra ACT 0200, Australia Email: [email protected] This title is also available online at http://epress.anu.edu.au National Library of Australia Cataloguing-in-Publication entry Title: Private enterprise in China / Ross Garnaut ... [et al]. ISBN: 9781922144478 (pbk.) 9781922144485 (ebook) Subjects: Free enterprise--China. Privatization--China. Industrial policy--China. China--Economic conditions--1976- Other Authors/Contributors: Garnaut, Ross. Dewey Number: 330.1220951 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of the publisher. 2001 This edition © 2012 ANU E Press Contents Tables vu Figures and Boxes Vlll Abbreviations ix Preface x A summary overview of emerging private enterprise in China Xl Policy recommendations XIV Implications XXll 1 Introduction 1 Objectives 1 Methodology of the survey 2 Sampling strategy 4 2. Development of the role of private enterprise in China 9 An historical perspective 9 Contributions of the private sector to the national economy 1 5 Evolution of private firms' ownership 21 Sectoral and regional distributions of private firms 24 3. Descriptions of the sample enterprises 29 Profiles of the four surveyed cities 29 Size and industrial distribution 3 1 Evolution and performance 37 4. Market competition 42 Macroeconomic conditions 42 Market entry: openness and requirements 43 Competitors, partners and the role of network 46 Firms' reaction to the market conditions 50 Appendix 4.1 52 2. Finance 53 The financial position of the sample firms 5 3 Access to formal loans 5 9 Other forms of private firms' financing 66 Reforming the financial system 7 1 Appendix 5.1 75 fi Taxation 78 China's new taxation system 78 Problems in the implementation of the current taxation system 80 The distribution of tax burden 82 Concluding remarks 89 Z Internal governance 90 Ownership forms 90 Internal decision making 92 Governance and industrial organisation 96 Employee involvement and labour management 98 .s. Labour and managerial skills 100 Skill profiles of managers and workers 1 00 Training and impediments to obtaining and retaining skilled workers 104 Wage differentials 105 The new social security system and its impacts on private firms 106 .2 Technological challenges 110 The pattern of technological innovations 11 0 Factors affecting firms' technical capacities 113 The protection of intellectual property rights 115 10 Laws and government administrative regulations 117 Laws and regulations related to private firms and their impact 117 Regional differences in law enforcement and administrative performance 120 Business intermediaries and government services as a bridge for information dissemination 123 Business associations 125 Room for improvement 130 Social consciousness and channels for private entrepreneurs' VOICes 132 References 137 Index 138 Tables 1.1 Summary statistics of received questionnaires 6 1.2 A comparison of Phase I and Phase II sample 7 2.1 Compostion of China's GDp, 1998 17 2.2 Private firm development since 1991 19 2.3 Ownership structure of private firms 25 2.4 Capital size distribution of private firms 25 2.5 Sectoral distribution of private firms: workers 25 2.6 Sectoral distribution of private firms: output 26 2.7 Regional distribution of private firms: number of firms and workers 26 3.1 Basic information of the four cities' private sectors in 1998 30 3.2 Size distribution of sample forms: 1995 and 1998 33 3.3 Statistics of firm size 34 3.4 Sales and capital of sample firms: 1995 and 1998 36 3.5 Industrial distribution of sample firms, 1998 36 3.6 Growth of capital stock since the founding of the firm 37 3.7 Pre-tax profitability of sample firms by city: 1995 and 1998 38 3.8 Pre-tax profitability by industry 39 3.9 Pre-tax profitability by firm size 40 4.1 Types of entry barriers 45 4.2 Types of entry barriers by firm size 47 5.1 Sources of firms' initial capital 54 5.2 Sources of capital financing 55 5.3 Turnover of working capital: 1995 and 1998 58 5.4 Applications for formal loans by city 61 5.5 Loan applications by firm size 6 1 A 5.1 Fees collected for collateral appraisal and registration in G autonomous region 76 6.1 Tax contribution of the private sector: 1986-97 83 6.2 Difference between tax due and actual payment by firm size 84 7.1 Ownership distribution of sample firms: 1998 91 7.2 Pattern of internal management 93 7.3 Certified accounting reports by ownership 93 7.4 Industrial organisation 97 8.1 Educational profile of managers by city and firm size 102 8.2 Former experience of managers by city and firm size 103 9.1 The distribution of new products by city and firm size 112 10.1 Power supply by city 122 Figures 2.1 Workers in the private sector 1981-97 12 2.2 Share of employment in private sector in national total 1981-97 13 2.3 Industrial output of private sector 1980-97 18 2.4 Share of private sector industrial output in national total 1980-97 18 2.5 Ownership shares in China's GDP: 1998 19 2.6 Private sector including agriculture in total GDP: 1998 19 Boxes 2.1 Shunde's privatisation 22 2.2 Gaizhi in Sichuan province 23 4.1 W Arts Co. Limited 46 4.2 Firm J's conquest of the market 48 5.1 Firm Y's journey to get a bank loan 63 5.2 Bank finance in Wenzhou 69 6.1 Firm S's local taxes and fees 87 6.2 Fees collection and government corruption 88 7.1 Changing ownership and internal governance in private firms 95 9.1 MD: Development by way of innovations 111 9.2 Intellectual property rights and technical innovation 116 10.1 Firms P's loss of its land 121 10.2 Guizhou Chamber of Commerce 128 10.3 Wenzhou Garment Chamber of Commerce 129 Abbreviations ACFIC All-China Federation of Industry and Commerce APSEM Asia Pacific School of Economics and Management BET Bureau of Economics and Trade BICM Bureau of Industry and Commerce Management CASS Chinese Academy of Social Sciences CCER China Center for Economic Research CCP Chinese Communist Party CEO chief executive officer CV coefficient of variation Getihu Single business proprietor ICBC Industrial and Commercial Bank of China IFC International Finance Corporation MLSS Ministry of Labour and Social Security MOFTEC Ministry of Foreign Trade and Economic Cooperation MSB Min Sheng Bank NPC National People's Congress PBOC People's Bank of China R&D research and development SETC State Economic and Trade Commission SOB state-owned bank SOE state-owned enterprise SSB State Statistical Bureau TSPE Tentative Stipulations on Private Enterprises TSRIPE Tentative Stipulations on the Registration of Individual and Private Enterprises TVE township and village enterprise Preface The book reports and interprets results from a detailed study of the contemporary private sector in China. It is based on the Technical Report on Private Enterprise Development in China commissioned by the International Finance Corporation (IFC) and the State Economic and Trade Commission (SETC) of the People's Republic of China.The research was undertaken by a team from the Australian National University and Peking University. The Report to the International Finance Corporation has been augmented by additional materials, for example on social perceptions of private enterprise, for this book. Readers' attention is also drawn to the important publication by Gregory, N., Tenev, S. and Wagle, D. China's Emerging Private Enterprises: Prospects for the New Century (International Finance Corporation, 2000). We gained a great deal from the officers of the IFC, including Neil Gregory, Dileep Wagle, Stoyan Tenev, Davin Mackenzie and Jianguo Cui and officials from the State Economic and Trade Commission (SETC), Mr Wei Dong (Director General, Small and Medium Enterprise Department) and Mr Tian Chuan (Deputy Director, Small and Medium Enterprise Department). We thank IFC and SETC for their permission to publish this work. We also thank various government and non-government institutions including the All-China Federation of Industry and Commerce (ACFIC) and their regional offices for providing the research team with important support during the fieldwork in the four cities in which surveys were conducted. The funding for the project upon which this book is based came from IFC and AusAID. We would also like to thank Asia Pacific Press for publishing the book and, in particular, Mikaela Wilson and Tracey Hansen. Ross Garnaut, Ligang Song, Yang Yao, Xiaolu Wang Canberra and Beijing May, 2001 su ma ove ew of emerging private e riseill in China The Chinese economy is currently undergoing its third great institutional transformation of the reform period. This transformation is as profound as the replacement of the peoples communes with the household responsibility system in the early 1980s and the emergence of township and village enterprises as the main locus of economic dynamism in the second half of the 1980s. The third transformation is the emergence of the private sector as the main focus of economic growth. Like the two preceeding transformations of the reform era, it has proceeded quietly and swiftly, building upon an emerging reality, with change accelerating once the authorities have recognised the benefits of the reality and given official blessing to continuation of the transformation. A constitutional amendment acknowledging the importance of the private sector was adopted during the 1999 sessions of the National People's Congress. It " provides a legal basis for private enterprise in the economy .. makes official recognition of the important emerging reality, that a majority of the growth in non-farm employment and output is in the private sector despite the continued tendencies for capital and government services to be allocated disproportionately to state-owned enterprises • allows individual enterprises to take off their 'red hats', thus reducing uncertainty in the business environment • allows the official policy and regulatory environment to be refocused to remove impediments to continued dynamism in a major, and soon the major, part of the economy.