I met a Qinghua University professor some time ago. He told me that Qinghua is offering a 1-week management training course and charges 10,000 Yuan per student. This is a very popular course and most of the participants are from the emerging private sector companies. These managers and executives of private enterprises are very eager to learn and they are willing to pay what is in Mainland China a substantial sum of money.

This e-mail highlights some of the developments related to the significant growth of China's private sector economy in recent years. The continued liberalization of the Chinese economy is going to give more room for these private enterprises to develop. One could even argue that China's economic future depends more on these enterprises than the SOEs. Measured by GDP, the state sector is now about 1/3 of the Chinese economy, and the figure continues to come down.

If you want a more detailed analysis on the background to this subject, a report published by the International Finance Corporation (of the World Bank) in 2000 is a good reference.

The non-state sector of China's economy has grown rapidly since the reform years. The mode of operation in the bulk of the agricultural sector was effectively made private since the reform measures (the contract responsibility system) introduced in the 1980s (and that is about 20% of the national economy). Many individual/collective businesses also mushroomed in the rural areas during the 1980s.

In the industrial sector, non-state firms emerged rapidly since the mid-1980s. Initially, this was in the form of thousands of township and village enterprises (TVEs). These are the result partly of market forces (as the government then tolerated market initiatives), and partly because of inefficiencies of government policies. But since the 1990s, these TVEs went through a major consolidation process when a large number of them failed, particularly those inefficient, low-tech and often polluting ones. But some of these TVEs survived and have become more competitive. Gradually, there are also more and more urban entrepreneurs joining in.

They are now becoming firms which look like those SMEs in Hong Kong and Taiwan back in the 1970s. These are also the firms which are squeezing many (low end) Hong Kong and Taiwanese firms out of business.

The development of the high tech sectors (particularly in pharmaceuticals, IT and telecom) in recent years have also nurtured a large number of "knowledge" firms. In contrast to the TVEs, these hi-tech private firms are typically set up by people with professional background (university professors, graduates of Qinghua University, etc.) Huawei, a company set up in Shenzhen which has grown to become a major telecom equipment supplier, is a typical success example.

There are also many industrial enterprises set up by various private individuals. Initially, the lack of capital constrained the growth of the private sector. But over time, the number of firms with adequate capital has grown.

Meanwhile, the government has also allowed more freedom for private firms to develop. During the latter part of the 1990s, as part of the government's SOE reform policy, many small and medium sized SOEs were sold (through management buy-outs, for example) or just let go. Regulatory policies are also gradually changed such that in most non-strategic industries, firms (both state and non-state) are allowed to compete freely.

With the rapid growth of FDI during the 1990s, foreign investors also grew rapidly and have become a substantial part of the Chinese economy.

As shown in the 2 tables attached, the FFEs (foreign funded enterprises) now account for about 1/4 of the country's industrial output, whereas the non-state firms account for another 35%. The SOEs' share has fallen to about 20%. A similar picture is true of total employment.

In the services sector, a large number of retailers are now private. Over time, it is also likely that the services industries will nurture a lot more private firms.

By the end of 2000, official statistics show that there were 1.76 million private firms in China with aggregate registered capital amounting to RMB1,331 bn. Of this total, 219 of them has a registered capital of more than RMB100mn. Owners of these private firms number 3.95 mn and the total number of people employed was 20.1 mn. In recent years, all these numbers have been growing by anywhere between 15% - 50% each year. About half of these private enterprises are in the coastal east.

While many commentators still focus on the various issued faced by the SOEs, it is clear that the future of China's economy depend more and more on the prospects of the private sector.

The government also realizes the importance of nurturing the private sector. A number of developments are noteworthy :

It should be noted that despite the gradual recognition of the importance of these private enterprises and all the measures introduced, these firms are still treated as "second class citizens" in many aspects.

From a commercial banking perspective, the vast majority of these private firms have very high credit risk at this stage. SMEs in most economies have typically a very high turnover rate and most of them have a very low level of transparency. In China's case, the lack of a credit culture (as a result of a long history of communism) and the rapid changes going on in the economy make things worse.

But from an economic perspective, it is the flexibility of these private firms which provides the dynamism for the Chinese economy to move forward. Different kinds of private firms emerge at different stages to build the bridges for the country to move on to the next stage of development.

By K.C. Kwok

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