FINANCIAL TIMES - February 4 1999
CHINA: Beijing fillip for private sector By James Kynge in Beijing
China's announcement this week that it will alter its Communist constitution to elevate the official standing of private and non-state businesses was hardly a bold foray into the capitalist unknown.
Even allowing for confusing and inconsistent statistics, it has been clear for at least two years that China's ailing, socialist state sector has relinquished its position as the mainstay of the national economy.
Nevertheless, the planned amendments are important because they signal a realisation that as growth slows and unemployment balloons, China can no longer afford to marginalise the most dynamic area of its economy. It is far from clear, however, to what extent a constitutional acknowledgement of the private sector's importance can be translated into better treatment for private enterprises, officials and analysts said.
The constitution is to be altered at a session of the National People's Congress in March to note that "the individual, private and other non-state sectors are an important component of the socialist market economy". The present constitution says "the private sector complements the socialist public ownership system".
"This could set the stage for the next round of economic growth. But all this will depend not on how the words are written, but on how these changes are carried out," said Dong Tao, senior economist at CSFB in Hong Kong.
Private entrepreneurs have long complained China's "big four" state banks, which together control as much as 90 per cent of total banking assets, seldom lend to them. This has caused some obvious distortions. Companies such as Huawei, a high-tech telecoms equipment manufacturer which has seen sales double almost every year for the last four, still has trouble in securing loans from state banks. The big four banks extend loans to China Telecom, the dominant state telecoms company, to facilitate the purchase of Huawei's equipment but are reluctant to lend directly to the profitable equipment maker.
Stone Rich Sight, a leading internet portal company and the maker of China's top Chinese-language software, has never received a loan from a state bank, said Wang Zhidong, the company's chief executive officer. "They cannot assess prospects based on intellectual property," said Mr Wang.
In contrast, loan growth to the predominantly loss-making state sector was around 16 per cent last year, analysts said. Officials at the People's Bank of China, the central bank, said that Beijing hoped to address one of the more inefficient allocations of capital in the world.
But it will not be easy. The consequences of withdrawing the syringe of state lending to ailing state companies would simply be to hasten their demise, and throw millions more unemployed on to the streets. China, rocked in recent weeks by several bomb explosions in public and instances of rural unrest, is increasingly concerned with maintaining social stability.
Nevertheless, some steps are being taken to help private enterprise. Twenty private companies were given permission last month to conduct foreign trade directly, rather than having to pay state-run trading companies to handle their imports and exports. This permission is to be expanded to more private companies this year, officials said.
The government is also preparing to support the development of private high-tech companies, officials said. A joint-venture venture-capital company is expected to receive official approval soon. High-tech companies - mostly private - are to be given priority in listing on China's stock markets, and the country's 242 main state research laboratories are to be allowed to commercialise research by spinning off private companies, officials said.
Another concrete effect of the constitutional amendment may be to help clarify the murky ownership structure of "collective" companies. Many such companies are in fact private but call themselves "collective" because the word has a socialist-sounding ring to it, and because it implies the equity participation of some local authority.
But with the banishment of official prejudice against private endeavour, collective enterprises may feel at liberty to doff their "red hats" and reveal their true nature. As the ownership of collectives becomes less opaque, banks may feel more confident in lending to them. Mergers and acquisitions would also become easier because the actual owners of collective companies may become identifiable, analysts said.
"There could be many opportunities for asset restructuring in the collective sector," said Wang Shiyu, managing director of China M&A management.