Current Development Status of Private Sector

At the end of 2002, 1.753 million individual industrial and commercial enterprises with a total registered capital of Rmb4.362 billion were in operation in Guangdong, ranking first among all provinces and cities in China. The number of private enterprises stood at 259,000, with registered capital totalling Rmb338.01 billion, placing the province in the second and first positions in the country respectively.

Private enterprises in Guangdong are largely concentrated in PRD and account for over one-third of GNP of the PRD cities. The form of operation is gradually shifting from backyard workshop to technology-based business. On the whole, private enterprises have gone through the initial stage of development and are entering into the next phase characterised by "re-investment" and market expansion. This issue highlights the current status and characteristics of the development of private enterprises in various PRD cities.

Guangzhou

Private enterprises in Guangzhou represent not only a significant number, but also play a pivotal role in the city's economic development. At present, private enterprises account for one-third of Guangzhou's industrial output value and their overall standard is improving. In terms of industry sector, private enterprises are shifting from the traditional, relatively low-level processing of clothing, furniture, plastic products and hardware to the production of higher value-added and high-tech categories like auto parts, machinery and electrical products, electronic information products, and bio-chemical pharmaceuticals.

Quite a number of private enterprises in Guangzhou have teamed up with multinational companies (MNCs) on joint investment projects. Private enterprises in Baiyun District alone account for 60% of the total operations in the city. Among these, five have partnered with famous MNCs including Toshiba of Japan.

Shenzhen

Private enterprises in Shenzhen have been expanding rapidly in terms of business scope and form of operation. From the traditional businesses of commerce and catering, private enterprises are spreading their wings in manufacturing, farming and service sectors. In particular, the high-tech industry and services are two high growth areas.

The high-tech industry encompasses computer, communications equipment, instrument and meter, bio-engineering and micro-electronics. A number of outstanding high-tech private enterprises with industrial output exceeding Rmb100 million have emerged. These include Huawei, Beiyadi, Haoyitong, Yunhai, Wandelai, Kangmeisi and Kingdee. The branded products of these private enterprises enjoy significant shares in the programme-controlled exchanges, wireless network, optical communication and software markets both at home and abroad.

In terms of the number of establishment, private enterprises now account for over 80% of wholesale businesses and over 90% of retail and catering businesses in Shenzhen. In terms of industrial output value, private enterprises have grown rapidly to top 20% of the city's total.

Foshan

At present, the private sector constitutes the most vibrant component of Foshan's economy, making up the largest share of and contributing most to the local economy. In terms of GDP, the private sector currently accounts for over 40% of the city's total. A number of large private enterprises with significant market shares have emerged.

Over the past few years, towns with specialised manufacturing strengths have developed in Foshan. Examples include Dali specialising in aluminium products, Yanbu in undergarment, Nanzhuang and Shiwan in ceramics, Xiqiao in textiles, Jinsha in hardware, Zhangcha in knitwear, Lanshi in non-ferrous metals processing, Huanshi in children's wear, Yunggui and Beijiao in home electrical appliances, Longjiang and Lecong in furniture, Lunjiao in woodmaking machinery, and Chencun in horticulture. These towns are industry leaders in China in their respective sectors.

Dongguan

In the past year, individual and private enterprises in Dongguan have expanded dramatically, doubling both in terms of number of establishment and registered capital. Besides, characteristics such as small-scale operation and scattered location are giving way to more integrated set-up, group management style and higher technology content. In 2002, a number of high-tech private enterprises have emerged in the city.

Various towns in Dongguan have developed their own specialties. Examples include Humen specialising in garment, Houjie in furniture and Dalang in woollen knitwear, all of which have become growth engines of their respective towns characterised by economy of scale, complete range of supporting services and high growth rates.

Major Incentives to Boost Private Sector

Guangdong provincial authorities as well as individual cities in the PRD region have introduced, and will continue to implement, a series of new incentives to create a level playing field and favourable social environment for the development of private enterprises. They are also prepared to inject funds to help sharpen the competitiveness of the private sector. These measures include:

Relaxing the Scope of Investment

With the exception of those sectors that are prohibited by state regulations, all other sectors which are open to foreign investors and those which are not expressly prohibited by any laws, regulations and policies, will be accessible to private investors. These include basic facilities in urban areas, public utilities, and all kinds of industrial and technology projects encouraged by the central, provincial and municipal authorities. Besides, a registration system will be introduced for individual or private enterprises investing in non-restricted, non government-funded projects.

Relaxing Eligibility Criteria for Business Operations

The registered capital requirement for setting up private limited liability companies will be lowered. Besides, the capital may be injected by phases and the deadline extended for overdue capital injection. For technology projects, these requirements may be further relaxed.

Eliminating Discriminatory and Unreasonable Rules

Unfair treatment to private enterprises in the areas of import-export, land-use, talent recruitment, licence and permit application, and fees will be eliminated. Private enterprises will now enjoy the same treatment as other companies of different ownership structures. This includes the reporting of technology projects, eligibility for government subsidy for interest payment, access to import-export quotas and export rebates.

Strengthening Financial Support to Private Enterprises

These include giving support to private enterprises to raise funds through public listing and bond issuance, establishing a SME credit guarantee system, and setting up an SME development fund with government funding.

Encouraging Diversification and Low-cost Expansion

These include giving support to private enterprises to reorganise themselves into listed companies through buying shell companies and shares acquisition; encouraging and guiding private enterprises to take part in state-owned enterprise restructuring through various means such as rights transfer, joint venture, sub-contracting, leasing, trusteeship and shareholding; encouraging private enterprises to form joint ventures with foreign investors.

Creating a Favorable Environment for Private Sector Development

These include streamlining the various official procedures; enhancing the policy and legal framework for the protection of private property; clamping down on irregular practices such as smuggling, counterfeiting, tax evasion and other unscrupulous market-disrupting behaviour; and providing professional and standardised services to private enterprises.

Four types or private enterprises are the target recipients of government assistance, namely technology-based enterprises, outward-oriented enterprises, those employing workers laid off by other enterprises, and those specialised in agricultural products processing.

Development Trends of Private Enterprises in PRD

Structural Changes

At present, private enterprises are primarily engaged in catering, entertainment, retailing and street pedlaring. Due to policy restrictions, private enterprises have until now made hardly any inroads into the finance, insurance, transportation, power, iron and steel, petrochemical and telecommunications sectors. With the new policy

in place, it can be expected that private enterprises will gradually shift from labour-intensive industries to those that are both technology- and labour-intensive, diversifying from traditional sectors such as catering and retail to certain basic industries.

Technology Innovation

Due to their short history, private enterprises in the PRD generally lack a strong foundation and their technical level remains relatively low. Some of them are still employing rather backward or primitive technologies. Technology-based private enterprises are now a target for promotion of the government authorities. This, coupled with the flexibility typical of private enterprises, will be conducive to the establishment of a new mechanism for fostering technology innovation. More private enterprises are expected to capitalise on this initiative and develop along the lines of technology innovation and high-tech industries. According to economic statistics for the past few years, private enterprises have become a leading force driving technology innovation in Guangdong.

Evolution of Operation Scale

The fact that private enterprises are generally operated as a family business has become a hindrance to their further advancement. Given the current strong government backing and guidance to the development of the private sector, and the actual needs of the private enterprises for expansion, the situation is expected to improve. More private enterprises are going to recruit management staff from the labour market. The small scale of operation typical of private enterprises will gradually give way to larger scale and increased integration of operations.

Management Improvement

In their initial stage of development, many private enterprises focus primarily on profit maximisation and tend to overlook the importance of corporate management. When an enterprise grows to a certain scale, low management level will threaten to stifle its further development. Many successful private enterprises have become aware of the importance of management in the course of development. Nowadays, more private enterprises seek to enhance their management standard through organisational restructuring.

Expansion through M&A and JV

With the implementation of policy incentives targeted at boosting the private sector and giving it national treatment, there is much room for private enterprises to further expand. More of them are expected to acquire the shares of state-owned enterprises through various means such as merger and acquisition (M&A) and restructuring, as well as form joint ventures (JVs) with foreign firms.

Business Opportunities for Hong Kong

Business Partnership

Although private enterprises in Guangdong have reached a certain level of development in terms of operation scale and business strength, they are generally disadvantaged in several respects such as low technology content, limited number of brands, small scale of operation and lacking in management expertise. This, coupled with policy restrictions, has resulted in limited financing options for these enterprises. The majority of the private entrepreneurs make their initial investment with personal savings. Equity shares are usually held by families and friends and other parties closely connected to the private enterprises. The shortage of capital is one of the main obstacles faced by private enterprises.

Today, government authorities are stepping up efforts to encourage private enterprises to cooperate with foreign firms. Private enterprises have now become a priority in investment promotion campaigns organised by local governmens. Private enterprises which are lacking in capital, talent and modern management expertise are likely to actively solicit cooperation with foreign investors. By leveraging on the strengths of their foreign counterparts in terms of capital, management know-how, technology, branding and marketing network, private enterprises will become more advanced, more competitive and in step with the international business community.

Technology Transfer and Technical Support

For those private enterprises wishing to develop new and high-tech industries and expand operation scale, access to new technology is very important in order to drive technology innovation. Government authorities have formulated a series of measures to support technology-based private enterprises, such as strengthening government guidance, coordination and service to these enterprises, encouraging technology input as an in-kind equity contribution, and offering R&D subsidies. In this respect, the R&D consultancy sector offers excellent potential for business development and cooperation.

Management Consulting and Training Support

Many of the family-type private enterprises and township enterprises urgently need improvement in their management. They see the pressing need to hire management consultancy firms to offer expert advice on corporate development and new business concepts. Many private entrepreneurs who are from an agricultural background look for ways to broaden their horizons, increase their capabilities and enrich their knowledge. Hence, the market for training these entrepreneurs and local government officials has good prospects.

Venture Capital

Capital shortfall is one of the obstacles faced by private enterprises seeking development. In Shenzhen, a brand new financing channel in the form of foreign venture capital has been offered to private enterprises. This offer has attracted a number of foreign venture capital institutions and strategic investors into the special economic zone. Shenzhen's successful experience can serve as an example in promoting this new financing option. Private enterprises, especially those in the high-tech sector, have a number of advantages such as flexible operation, clear ownership and advanced technology. They are set to increase the use of foreign venture capital, technology and human resources to accelerate their own development.

Technical and Management Experts

As private enterprises are placing greater emphasis on technology innovation and management, they are willing to offer high pay to attract qualified people to work for them so as to enhance their competitiveness.