It
is a truism that economic reform in China has meant
a substantial expansion in the role of private initiative
in economic activity. The dismantling of communes
and collectives, the encouragement of foreign investment,
the recognition of the private sector initially as
a ''supplement to the state-owned economy'' and subsequently
as an ''important component of the socialist market
economy'', the closure, restructuring and disinvestment
of shares of enterprises in the state-owned sector,
the opening of Communist Party of China (CPC) membership
to entrepreneurs and businesspersons, the sale of
equity in leading state-owned banks and most recently
the decision to make all state-held shares in the1,300
listed companies publicly traded, have all contributed
to a substantial expansion in the role of the private
sector, and continue to do so.
As this process has been unfolding, Western observers
have repeatedly sought to assess the relative roles
of the private and state sector in the Chinese economy.
The reasons for this interest are not difficult to
identify. To start with, it could be argued that as
and when the private sector overtakes the public sector
in China's economy, the only example of a large economy
with substantial state ownership and control vanishes,
leaving no living example of an significant alternative
to predominately market-driven capitalist economies.
But more importantly, many observers feel that if
the private sector displaces the state-sector as the
dominant player in the economy, it would not be long
before the CPC would have to relax its legally unopposed
dominance and control over the political, social and
cultural life of the nation. Some have even argued
that political democracy would be an inevitable fall
out of a growing role for the market and the private
sector, resulting in a gradual decline in the ideological
sway of the CPC. In sum, China is in their view on
the brink of a ''velvet revolution'' precipitated
by the very state and party that would be ousted by
such a revolution.
This renders significant the release in September
of a first survey of China by the OECD as part of
its Economic Surveys series, which is unconventional
since China is not an OECD member. The survey argues
that as far back as 1998 the private sector's share
of value added exceeded 50 per cent both at an economy-wide
level and within the business sector. And more recently
in 2001, the report says, the private share of value
added crossed the half way mark in the non-farm business
sector as well. The long delay in recognising that
the so-called ''transition'' had been completed is
attributed to the fact that Chinese Law, which specifies
what is an enterprise and which enterprises can be
deemed to be private, and, therefore, Chinese statistics,
make the segregation of the private-controlled component
in different sectors extremely difficult, if not virtually
impossible. Add to this the peculiarities of the transition
in China where state-owned firms, collective enterprises
and town and village enterprises are being gradually
corporatised with both other state organisations and
private individuals and institutions acquiring a stake,
and the difficulty of deciding which is private and
which is not, only increases.
Thus, Chinese law does not consider a unit with a
single industrial or commercial proprietor employing
eight or less workers as an enterprise, and leaves
such units out of the category of private enterprises.
Units deemed to be privately owned enterprises are
one of eight categories of domestically funded enterprises
along with state-owned enterprises, collectively-owned
enterprises, cooperative enterprises, joint-ownership
enterprises, limited liability enterprises, shareholding
enterprises, and other enterprises. Besides these
there are foreign funded enterprises, including those
funded from Hong Kong, Macau and Taiwan. Reform has
meant that in almost all these categories, private
stakeholders have been accommodated to differing degrees.
But none of them can be considered as being fully
private, inasmuch as some of these enterprises still
only have a minority private stake. Even foreign funded
enterprises need not be privately controlled, since
foreign-funded shareholding corporations require only
a minimum 25 per cent foreign capital contribution
to registered capital.
The OECD survey attempts to unbundle the data by dropping
the official definition of what is private and using
microdata from the National Bureau of Statistics to
arrive at an assessment of the relative size of the
private sector. The survey claims to use a strict
definition of the private sector by separating firms
according to type of controlling shareholder: whether
it is the state (directly or indirectly), a collective
(local government), or a private entity (individuals,
domestic legal persons, or foreign companies) that
controls the firm. The estimates are made for the
business sector as a whole (including all economic
sectors up to distribution and commercial services
but excluding government and non-profit services),
which accounted for 94 per cent of GDP in 1998, as
well as for specific components of that sector such
as its non-farm component which accounted for 76 per
cent of GDP in that year. To simplify matters, economic
activities included in GDP that take place outside
the official reporting system are assumed to be in
the private sector.
On the basis of this analysis, the survey declares
that the Chinese economy has been characterised by
more private than public ownership for some time now.
Thus, the private sector, which accounted for 43 per
cent of value added in the non-farm business sector,
was responsible for 57.1 per cent in 2003. The corresponding
figures for the business sector and the economy as
a whole were 53.5 and 63.3 and 50.4 and 59.2 respectively.
This is indeed a remarkable transition.
What is more, if the analysis is restricted to companies
that regularly produce statistical reports (those
with annual sales of over CNY 5 million), then the
private sector's share of valued added has risen from
28 to 52 per cent between 1998 and 2003. Further,
in 1998, the private sector contributed a larger share
of value added in only 5 out of 23 ''non-core'' manufacturing
industries. By 2003 this had risen to cover all 23
of these industries. In half of those industries,
private firms produced more than three-quarters of
output. Overall in these 23 industries, the private
sector is estimated to employ two-thirds of the labour-force,
contribute two-thirds of valued added in these industries,
and is responsible for over 90 per cent of their exports.
To top it all, over a quarter of all industrial output
is now reportedly produced by private foreign-owned
companies.
This rapid rise of the private sector implies that
it is not just the result of private firms accounting
for a disproportionate share of the increase in domestic
and export markets. The private sector is displacing
the collective state-owned sectors in pre-existing
markets as well, partly as a result of the conversion
of these units into private-controlled entities and
partly as a result of their closure. According to
the OECD's figures, about one-third of the increase
in the private sector share is mirrored in a decline
in the number and output of collectives, with the
remaining two-thirds reflected in closure and divestment
of solely state-owned firms.
It must be noted that, outside the non-farm business
sector, to treat these figures as indicative of the
role of private ownership is indeed an exaggeration.
This is because land is by no means privately owned
in much of rural China. Rural land in China is still
owned by the village collective, which allocates land
to households predominantly based on size. Further,
even though laws have been passed to provide peasants
rights to a 30-year lease, this has not been implemented
in most parts of the country. The OECD survey itself
reports that in 1999, almost two-thirds of farmers
in a random sample of 11 provinces lived in villages
that had not implemented the 30-year lease system.
And whatever be the duration of lease adopted, there
are indications that most leases do not foreclose
adjustments of allotments during the lease period.
That is while there is a strong relationship now between
household effort and returns earned, Chinese agriculture
cannot be seen as characterised by private ownership
in the conventional sense.
However, this does not undermine the significance
of the large and rising share of private business
in the value-added by the non-farm business sector.
But here too the evidence underestimates the role
of the state. To start with private presence in industry
is regionally concentrated. An overwhelming share
of private industrial output is produced in the eastern
coastal region (especially Zhejiang, Guangdong and
Jiangsu provinces). In this region, the share of industrial
value added attributable to the private sector is
as high as 63 per cent, as compared with only 32 per
cent in other regions. Thus there is a considerable
lag in the development of the private sector in central,
western, and north-eastern regions when compared with
the export-oriented eastern coastal region. That implies
the continued persistence of the non-private or state
sector. But there are signs of a faster growth in
private activity in the interior regions as well.
But this is not the only reason why the state remains
important. To start with, the public sector dominates
core or strategic areas identified as the lifelines
of the economy, energy the energy, metals, automobile,
and defence industries. Between three-fourths and
95 per cent of value added in the gas, petroleum,
coal mining, electricity and water supply industries
is contributed by the state-owned sector.
Further, the state share in aggregate fixed capital
formation remains high, making it the prime driver
of growth. Of the total investment in fixed assets
of CNY 5.6 trillion in 2003, 53 per cent was accounted
for by state-owned units and collectives, and the
rest was undertaken in the ''individuals' economy''
or by units characterised by other types of ownership.
But since the role of provincial and local bodies
in the other types of units can be substantial, the
actual role of the state in financing fixed investment
and growth is still crucial.
But these features of state presence are visible in
some market economies as well, making the characterisation
of the Chinese economy and society a knotty issue.
What is clear, however, is that the transition that
has occurred does not seem to have challenged the
supremacy of the CPC and the Chinese government in
any way - as yet.
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