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How large is China's private sector?

Published : Oct 21, 2005 00:00 IST

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Although the private sector displaces the state sector as the dominant player in the economic reform in China, the strategic areas identified as the lifelines of the economy are predominantly in the public sector.

IT is a truism that economic reform in China has meant a substantial expansion of 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 the 1,300 listed companies publicly traded, have all contributed to a substantial expansion of the role of the private sector.

As this process has been unfolding, Western observers have repeatedly sought to assess the relative roles of the private and state sectors 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 a 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 fallout 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 Organisation for Economic Cooperation and Development (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 an enterprise is 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 micro data from the National Bureau of Statistics (NBS) 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 the 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 gross domestic product (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 per cent and 63.3 per cent and 50.4 per cent and 59.2 per cent 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 5 million Chinese yuans), then the private sector's share of valued added has risen from 28 per cent 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, 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, 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 northeastern 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, 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 5.6 trillion Chinese yuans 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.

(This story was published in the print edition of Frontline magazine dated Oct 21, 2005.)

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