China’s Private Economy Grows Up

Share of Gross Domestic Product to Exceed 50 Percent

Reluctantly legalized no earlier than in the mid-eighties, private economy has now grown to become the main power driving China’s economic development. The head organization of Chinese chambers of commerce and industry expects private businesses will contribute more than half to the country’s gross domestic product (GDP) for the first time this year. According to a “2006 Blue Book on Private Economy Development” published by All-China Federation of Industry and Commerce (ACFIC) on September 22, their share already reached 49.7 percent in the end of 2005.

ACFIC carefully distinguished between different definitions of “private economy”. The narrow definition only includes businesses who are officially registered either as private enterprise or as private small business. The wider “domestic non-state economy” also includes mixed companies of private, collective, and state ownership, as long as the state’s share is less than a controlling majority. Finally, the wide definition also includes all foreign-invested enterprises. The expected 50-percent-share of GDP was calculated for the “domestic non-state economy” definition.

Private economy already reached 60.0 percent of fixed assets investment last year, according to the blue book. The state economy took 30.6 percent, foreign enterprises 9.4 percent.

Capital, Production, Sales

Capital, Production, Sales

Development of private economy in the narrow definition was quite amazing during the past 28 years. Official statistics show that in 1978, the first year of China’s economic reforms, 140,000 people were employed by small businesses. The number of small businesses, however, was only listed starting 1981, when the administration of industry and commerce was established and took charge of registration. 1.8 million businesses were registered in 1981, and their number grew to nearly 25 million in 2005.

Enterprises and Employees

Enterprises and Employees

Small businesses were only allowed to employ up to seven people, usually the owner’s family members. If they wanted to grow further, they had to register as branches of state or collective enterprises and thus turned into enterprises “with a red cap”. In the second half of the eighties, a private enterprise law and a limited company law were passed and legalized more sizable private economic activities. But not before 1999, the existance of private enterprises turned into a constitutional right and the general public ceased to view private business owners as criminals.

In 1989, the administration registered 91,000 private enterprises with more than seven employees. This number grew to 4.3 million in 2005. Even more impressive, their retail sales grew from 74.4 billion Renminbi in 1987 to 1.9 trillion in 2005. Within 18 years, their sales grew 26-fold.

But the main reason for private economy to successfully move forward in an otherwise strict socialist system was their contribution to alleviate unemployment. 140.000 employees in the private economy of 1978 grew to 107 million in 2005. Private entrepreneurs are now constituing a powerful middle class. State and party have changed their policy of obstacles into a policy of support for the private economy.

23.09.2006 H. Schoenleber