How Large is China’s Private Sector?
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.
