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 Province of China. 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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