Capitalism confined
Chinese companies, like companies everywhere, do best when they are privately run. In China, however, the state is never far away.
IN 1992 two Chinese cities, one just south of Beijing, the other just north of Hong Kong, were in desperate shape even by the standards of a desperately poor country. Their municipally run companies were in danger of bankrupting not only themselves but the cities too. Zhucheng, near Beijing, was best known as the birthplace of Jiang Qing, Mao Zedong’s despotic, doctrinaire fourth wife, who died in jail in 1991. Two-thirds of its revenues were being eaten by corporate losses. Shunde, a small city in Guangdong, was buried in debt.
Meanwhile, the authorities in Beijing were becoming concerned that the state banking system, already creaking under the weight of bad debt, would be unable to bear even more. With the quiet acquiescence of the central government, Zhucheng and Shunde ignored doctrine, old laws and 40 years of failed policies in search of a better approach.
In a carefully constructed phrase subsequently endorsed, in 1993, by the all-powerful State Council, the two cities engaged in gaizhi, which means “changing the system” and implies the diversification of ownership. Put more simply, in words that even now the Chinese government cannot bring itself to utter, they started to privatise many of their companies. They thus began one of the Chinese state’s first attempts to change its relationship with its enterprises. Jiang Qing would not have approved.
At first Shunde and Zhucheng turned their firms over to employees. In 1997, again before a broader shift in national policy, the two began selling companies directly to existing managements. Shunde, in particular, thrived. Two of the companies that emerged, a maker of bottle caps and a trader of duck feathers, are now among the world’s largest appliance manufacturers, Midea and Galanz. Other factories have spread like wild flowers among what were once rice fields and fish farms.
Early signs of success led to modification of the rules on the ownership of companies. In 1995 the State Council endorsed a policy to “retain the large, release the small”. In 1997 it approved a huge shift of ownership from the central government to municipalities with the explicit goal of expediting privatisations. These changes provided the foundation for the dramatic efforts in the late 1990s of Zhu Rongji, the then prime minister, that are reputed to have remade China’s economy.
The short version is that Mr Zhu closed thousands of companies and broke the “iron rice bowl”, a guarantee of living standards for the masses, in an effort to shake China out of economic lethargy. Between 1995 and 2001 the number of state-owned and state-controlled enterprises fell from 1.2m to 468,000 and the number of jobs in the urban state sector fell by 36m—or from 59% to 32% of total urban employment.
A longer version is that the process involved many more companies and has never ceased, and that the method has changed constantly. As some companies were transformed or closed, others were created, with various forms of state backing. The result has been non-stop experimentation with incentives and structures.
Privatisation remains a thorny issue in a country where private property became a constitutional right only in 2004 and where the right to own productive assets remains unclear. Many vibrant, purely private companies have sprung up despite this uncertainty, but take care to stay out of the limelight. Meanwhile, China’s various experiments with privatisation have created several categories of companies which still have close ties to the state (see table).
Read more at The Economist
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