Private Economy Burgeons

By LAN XINZHEN

Private Economy Burgeons

By LAN XINZHEN

Privately owned enterprises (POEs) now represent the biggest sector of the Chinese economy—by number of companies—as well as the major source of innovation, according to a report released on January 18 by the Chinese Academy of Social Sciences (CASS). It’s the seventh report on the private economy released by the CASS since 2005.

Private economy now represents 30 percent of investment in nine major industries among 19 in total, said Huang Mengfu, Chairman of the All-China Federation of Industry and Commerce. In addition, private investment has also increased in statecontrolled industries, such as fnance and the military industry, as well as hi-tech industries such as information transmission, computer services and software.

All-round achievements

According to the CASS report, during the past fve years, the number of registered POEs in China, growing at an average annual rate of 14.3 percent, has reached 8.4 million, representing 74 percent of the total. Registered capital of POEs has exceeded 1.9 trillion yuan ($288.32 billion).

The private economy has made a great contribution to job creation. According to the report, by the end of 2010, more than 180 million people worked for POEs, 60 million more than at the end of 2005, representing an annual increase of 9 percent over the period. During the past fve years, large and medium-sized POEs have been strengthening corporate management and personnel training, and attracting and nurturing a great deal of talent. Small POEs have also played an important role in creating jobs and improving people’s livelihood.

Huang said POEs—although seriously affected by the global fnancial crisis—tried hard not to reduce salaries or lay off employees. They helped the government overcome the crisis and maintain social stability.

In the past fve years, private companies have also accelerated their overseas activities, with Lenovo’s acquisition of IBM’s PC business and Geely Holding Group’s acquisition of Volvo Car Corp. attracting the most attention. “Daring to acquire world leading brands shows the strong will and power of Chinese private economy regarding overseas development,” Huang said.

The CASS report shows that in the past fve years many POEs’ overseas businesses have expanded from less developed areas in Africa and Latin America to developed areas, including North America, Oceania, Europe, Japan and South Korea.

The private economy has also become a new force in innovation and economic restructuring. POEs have taken the lead in strategic emerging industries and hi-tech sectors such as biopharmaceuticals, new energy and next generation information technologies, with their number far exceeding their state-owned counterparts.

“Founders of many small and mediumsized private science and technology companies used to work in the science and technology area,” Huang said. “By starting their own businesses, they have transformed their research into actual products and switched their role from researchers to entrepreneurs. While realizing their own individual value, they have also created a large amount of wealth for all society,” Huang said.

Government support

Zheng Xin, Director of the Small and Medium-Sized Enterprises Department of the Ministry of Industry and Information Technology, said Chinese POEs could not make rapid progress without supports from the government.

Private economy could make breakthroughs during the past five years, firstly because the policy environment has been greatly improved. For example, in 2003 the Chinese Government promulgated the Law on Promotion of Small and Medium-Sized Enterprises (SMEs). Most of the POEs are SMEs. Since 2005, the State Council has also issued several offcial opinions about the private economy and has regarded promoting the development of the private sector as one of the country’s major tasks.

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“As a series of policies have been formulated and implemented, SMEs and non-state economic sector have experienced stable and rapid development,” Zheng said.

Zheng said the Chinese Government has also removed barriers of POEs’ entry into sectors formerly monopolized by the state-owned enterprises, such as railways, the military industry, civil aviation, telecommunications, finance, culture and urban infrastructure construction. POEs have now entered almost all industrial sectors.

GUO BIN

However, financing has always been a bottleneck impeding the development of POEs. To make fnancing easier for them, the People’s Bank of China, the central bank, has encouraged private capital to join in establishing rural banks and micro-credit companies. According to data from the People’s Bank of China, by the end of 2010 China had more than 2,300 micro-credit companies, providing 162 billion yuan ($24.58 billion) in loans. In addition, by the end of 2009, more than 5,500 credit guarantee institutions had collected guarantee funds of 338.9 billion yuan ($51.43 billion) and offered guarantees to 370,000 SMEs, including POEs.

In addition, the central bank has specifed that growth of loans to SMEs should not be lower than loan growth in general. The China Securities Regulatory Commission has also set up an SME board and growth enterprise board—ChiNext—at the Shenzhen Stock Exchange to help support fnancing for these enterprises.

Zheng said during the past fve years the government has also strengthened its fscal and tax support to the private economy. In 2010 the Central Government allocated 12.3 billion yuan ($1.87 billion) to support SME development, 2.7 billion yuan ($409.71 million) more than the allocation for 2009. These funds have helped many SMEs improve technology, upgrade products, save energy and reduce emissions, make innovations, expand markets and improve services. The government also issued a series of tax regulations to reduce the burden on SMEs. For example, the corporate income tax on small companies whose annual tax payable is less than 30,000 yuan ($4,552) has been cut in half. The government has also abolished more than 100 kinds of administrative fees, reducing the burden on companies by 36 billion yuan ($5.46 billion) each year.

Crucial period

Huang said the next fve years (2011-15) will be a crucial period for the development of China’s private economy.

U.S. quantitative easing will increase fuctuations of exchange rates and the price of bulk commodities in the international market. Some countries are likely to continue to intensify trade, investment and fnancial protectionism, and continue to adopt anti-dumping and antisubsidy measures. All these actions will create big difficulties and risks for export-oriented POEs in China, said Huang.

In addition, some developed countries—for political, economic and security considerations—have restricted transnational investment and acquisitions by emerging markets, especially in the energy and resource sectors and other key industries. Developed countries have also selectively blocked or restricted exports of advanced technologies and equipment to some emerging and developing countries. Such moves have hindered the overseas expansion of Chinese POEs, and limited their capacity to gain advanced technology and equipment, he said.

In the domestic market, rising production costs and labor costs, a severe shortage of talent, a heavy tax burden and fnancing diffculties are still restraining the SMEs from restructuring and changing growth models, said Huang.

In the future, China will continue to curb the blind expansion and disorderly development of some industries, as well as eliminate obsolete production facilities. Mergers and acquisitions among enterprises will also become more frequent. Huang pointed out all these will increase the survival pressure of small POEs with outdated technologies. Development of a green economy and the application of low-carbon technologies will also put considerable pressures on POEs that are slow in transforming to more energyefficient, low-emission production. Huang said the government should offer more preferential policies to the private sector, due to its importance in rebalancing economy and ensuring people’s livelihood.

Privately owned enterprises are becoming an important force in China’s economy