The Development of Private Businesses in China: 1978-2004

China’s economic development since 1978 has been fuelled largely by a new private sector that has depended on entrepreneurship. In 1978 the private sector virtually did not exist. In 2005 it was estimated that about one-quarter of gross domestic product (GDP) was produced by the domestic private sector. However, the academic discourse on China’s private sector is lagging behind the sector’s actual development. Before the market reforms introduced by Deng Xiaoping in 1978, China relied on state entrepreneurship. When the model of state entrepreneurship began to run out of energy, the Chinese Communist Party (CCP) turned to private entrepreneurship as a way of sustaining and accelerating economic development. What were the driving forces behind this rapid growth? An important reason was raw entrepreneurship. This concept has been introduced in the paper as a way of distinguishing new, green-field private firms from privatised SOEs. The definition of raw entrepreneurship or green-field enterprises included two types of genuine private firms: geti gongshanghu and siying qiye. The gaizhi, or privatised firms, have been deliberately excluded in an attempt to generate a study that focussed on the relatively untold story of private business rather than the much better documented history of reformed SOEs. This paper documents the development, history and the present situation of Chinese private enterprises with emphasis on the private sector in Zhejiang province, because private businesses in that province have been best exemplified by raw entrepreneurship and developed more rapidly relative to many other provinces in China. 1 Corresponding author, School of Economics, University of Wollongong, Tel. : +61 2 42214399; fax: +612 4221 3725, E-mail address: guibin@uow.edu. au . The Development of Private Businesses in China: 1978-2004 As one of the fastest growing emerging markets in the world, China is experiencing a transition from a planned, socialist economy to a market or mixed economy. The emergence of a significant private sector is one of the most important developments of the market-oriented reforms in China over the last quarter of a century. Before 1978 the private sector virtually did not exist, and most of the enterprises were owned by the state or public sector. Since the late 1970s a new type of ownership form has appeared and mushroomed in China’s market-socialist economy. An amendment to the Chinese Constitution, passed in 1999, explicitly specifies this emerging phenomenon as the “private economy,” which indicates that private enterprises have been legally recognized. This paper describes the development, history and the present situation of Chinese private enterprises with emphasis on private enterprises in Zhejiang province, because private enterprises in that province have developed more rapidly relative to many other provinces. More importantly, the paper emphasizes the ownership structure of private enterprises, focusing on the role of government and family. It then provides stylized facts on the characteristics of family businesses. 1 General Backgrounds of Private Enterprises in China Private business was first revived in the period after the Cultural Revolution as a quick way in which the Chinese government could respond to the mounting pressures of unemployment and economic stagnation. Young (1991) noted that private business was first allowed on the fringes of the economy and was initially regarded as a “supplement” to the state and collective sectors. It was allowed to “fill up gaps” left in the economy, especially in areas such as retailing, handicrafts, food and consumer services. By the late 1970s, private business was operating in this way, but without 2 This paper focuses on domestic private enterprises. However, due to the availability of official data, the data cited in this paper covers only those enterprises registered as private enterprises; that is, the data exclude “red-hat” firms. having any real impact on China’s central planning mechanism. Thus the early reform process was consistent with the long-term policy and philosophy of the Chinese Communist Party (hereafter CCP). Since the establishment of the People’s Republic, the CCP had aimed to eradicate the private sector in the economy. Therefore, even the modest changes allowed in the 1980s were in sharp contrast with past ideology and state priorities (Young 1995: 15). These contradictions continue to characterise some of the most important policy debates in contemporary China. Despite the contradiction between the central government’s ideologically-based desire to limit the private sector, and its economically-based desire to promote it, China’s private sector has experienced dynamic growth. Kraus (1991) attributed this growth to the Chinese leadership’s commitment to the resurrection of the private sector in political statements, decrees, regulations and laws. These formal pronouncements have given ordinary citizens the confidence to embark on new business ventures without immediately facing the risk of opposing state priorities. According to Young (1991), the policy changes were being driven by economic pressure to create jobs. By the time of Young’s research, rural reforms had released a great deal of surplus labour from agriculture, and young people who had been “sent down” during the Cultural Revolution began returning to cities and towns. With the state policy of allowing private business to develop, people started to find jobs in this emerging sector (Young 1991: 10). 1.1 The development, history and present situation of Chinese private