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Doors Open Wider for Private Sector

Just twenty years ago, entrepreneurs in China were mostly hawkers peddling their wares on foot or tricycles in the cities' back streets. The more enterprising opened small restaurants in residential neighborhoods or toiled in their village workshops making simple consumer goods.

In those days, every business was dominated by the behemoth state-owned enterprises. The private sector existed only in the shadows.

As recently as the 1990s, the doors to the nation's key business sectors were closed to the individual entrepreneurs. Even the richest and most successful of them could only stay within the so-called non-pillar industries such as electrical appliances, garments and catering.

But all that is changing. China's entrepreneurs are now a recognized, and even exalted, tribe free to roam the nation's vast economic landscape. They invest in banks, make aircraft, build cars, control airlines. They have muscled into industries, such as steel, aluminum and machinery, that were once the stronghold of the state-owned sector.

The rise of entrepreneurs in China is expected to reach new heights this year, as the nation steps up the liberalization process to keep pace with the opening of its markets to foreign investors according to its commitments to the World Trade Organization (WTO).

"Limited market access, which has been one of the biggest obstacles hindering the development of China's private sector, is fast becoming a thing of the past," said Bao Yujun, a renowned expert in private business and chairman of the All-China Society of Private Economy Research.

Not only has the ban on private capital in many industries been lifted, entrepreneurs in the private sector have been actively courted. For instance, the China Bank Regulatory Commission, the banking industry's watchdog, said in February that it encourages "private as well as foreign capital" to invest in China's commercial banks.

Meanwhile, the Civil Aviation Administration of China has approved, at least in principle, the establishment of the nation's first private airline by Guangzhou-based E & Net Communications Co Ltd, an information technology company.

In some provinces such as Hubei and Inner Mongolia, local governments have introduced new policies to encourage private capital investment in the transportation industry.

Cities such as Chengdu and Beijing have proposed to allow domestic as well as foreign investment in public infrastructure projects.

The car industry, long dominated by state-owned enterprises and their foreign partners, has seen a flood of domestic private capital.

Entrepreneurs such as Wang Chuanfu, chairman and president of the world's largest battery maker BYD Co, have invested heavily in setting up new car manufacturing enterprises. They were inspired by the success of Li Shufu, China's first independent carmaker, who overcame great obstacles to carve a niche for his company in the highly competitive automobile market.

"Market opening is the first step in granting national treatment to private enterprises," Bao says. "But there's a lot more to be done."

Although contributing about one-third of the nation's gross domestic product (GDP) and creating jobs for 200 million people, China's private sector entrepreneurs have been fighting for equal treatment for decades.

They used to be China's economic orphans, being denied a share of life-sustaining nourishment, such as preferential policies and preferential bank loans, long enjoyed by state-owned enterprises. Indeed, treatment of the domestic private sector couldn't even match what was conferred on foreign companies, who enjoyed considerably greater freedom when conducting business in China.

Some key areas, such as banking, insurance and oil, have been open to foreign investors for years, but were still closed to domestic private capital. Only recently has private funding been allowed very limited entry to some of those sectors.

"Private enterprises often have to face stricter approval procedures, a higher entry threshold and tougher government supervision compared to foreign companies," says Tu Haiming, a member of the Shanghai People's Political Consultative Conference.

Zhang Shuguang, a renowned economist and researcher at the Chinese Academy of Social Sciences, has been calling for equal treatment of the private sector for years.

"All those sectors open to foreign investors should also be opened to domestic private investors," he says. "Moreover, talks about the opening should be followed by real actions."

Bao says the true turning point came when a resolution to improve China's socialist economic system was passed at the third plenary of the 16th Central Committee of the Communist Party of China held in October 2003.

The resolution stipulates that private capital can be invested in any economic sector, except those relating to national security specifically forbidden by the law.

"Opening is a must," Bao says. "With foreign investors swarming in, China must give its domestic private firms a fair chance to compete with their foreign rivals."

For domestic private firms, entering into the major industries is an essential strategic move to broaden their profit base. Many of private sector companies have been unable to diversify from their core businesses, although their profit margins have been continuously eroded by fierce competition. The opening of more business sectors to them should provide room for growth.

East Hope Group, one of China's largest private enterprises, is a case in point. After establishing feed production bases nationwide, the company's management spent six long years in search of new business opportunities to sustain growth. "We must do something bigger than what we have been doing in the past," Liu Yongxing, president of the group, says. To take advantage of the liberalization, his company decided to invest up to 10 billion yuan (US$1.2 billion) in the coming years to diversify into aluminium production.

However, the most lucrative business sectors, including banking, oil and aviation, are still tightly controlled by state-owned monopolies.

"These are the business sectors private enterprises wanted most to get into," Bao says.

"Compared with state-owned monopolies, private companies are more flexible and better motivated," he says. "Although seemingly weak and small compared to the large SOEs, private sector companies have the vigor to compete."

But they are hobbled by inadequate capital. Tight credit has been a common problem facing private sector companies for years because the state-owned banks are structured on the financing of state-owned enterprises.

They are reluctant to lend to private sector companies, partly because they lack the expertise in assessing risks in making commercial loans.

The shortage of talented people and inadequate technological prowess have also impede the private sector's development.

Many experts have expressed worries that after market access restrictions are removed, private sector companies may not have the human and technological resources to identify the opportunities and avoid potential risks.

Take the automotive industry as an example. Although many private investors have announced ambitious plans to start manufacturing cars, they seem to have ignored the need to acquire large capital and advanced technology to survive in the market. At this time, most of the funds are focused on the production of low-end products, such as sports utility vehicles and passenger cars, which only generate low profits.

Moreover, increasing the profit margin requires production expansion, which in turn needs huge investment.

"The day when the low-end auto market is saturated will be the day some private car enterprises go bankrupt," says Chen Haijiang, an auto expert and deputy director of the machine-building industry office under the Zhejiang Economic and Trade Commission.

However, Bao is more optimistic.

"Don't worry about them (private enterprises)," Bao says. "Those who need to be worried are those rigid State firms who might not be able to win in the competition with private firms."

He stressed that the problem now is not that the market is opening too fast, but too slow. Unfair treatment of the private sector in bank loans, taxation and land use must be eliminated.

He expects private enterprises will see more market access and better treatment in 2010 when the private sector is expected to produce about half of the nation's GDP.

(China Daily March 8, 2004)

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