Further opening-up to private enterprise will be for the public good

In a series of speeches since taking up his post in March, Chinese Premier Li Ke-qiang has clarified his position regarding state-owned enterprises, the role of government and the Chinese private sector.

He has said repeatedly that government in China is too big and is involved too widely in the economy, and room for economic growth using the old export and infrastructure investment model is limited.

In May, Li said "the market is the creator of social wealth and the well-spring of self-sustaining economic development".

Li is worried that China's economy, which has performed so well in recent decades, will not be able to go on generating steady, significant increases in employment and living standards.

Population increase has added 1 to 2 percent of annual economic growth since China's opening-up began more than 30 years ago. But the demographic dividend is going into reverse.

By 2025, the combined population of those under working age and those retired is forecast to be about 650 million, supported by a working population of 750 million. With the so-called dependency ratio starting to move against China, workers must become steadily more efficient, just to stand still.

Creating the wealth to satisfy the aspirations of the growing Chinese middle class will require another mini-revolution in Chinese productivity.

Many countries have entered the middle-income zone that China now occupies, but since 1960, only a few, like Singapore and South Korea, have succeeded in becoming high-income countries.

These success stories have hugely outperformed many other resource-rich low and middle-income countries. The key to their success is economic efficiency and productivity growth. How can China copy them?

China's success has also been built on productivity gains, particularly in the export sector, which has been able to withstand salary costs that since 2005 have doubled or tripled, and a yuan exchange rate that has appreciated against China's main trading partners by as much as 40 percent.

The state-owned sector, revived by Zhu Rongji's reforms in the 1990s, has played its part in this success. In recent years, though, productivity gains have increasingly depended on additions of new capital.

Outside the export sector, the other sources of higher productivity, which involve creativity and include innovation and improvements in human capital, have been weaker contributors to productivity growth.

Fair competition between enterprises creates a vital spur for the constant invention and improvement that will drive the productivity growth China needs. A large body of research and practical experience from many different countries shows that in a competitive system, privately-owned companies respond more quickly and more effectively to the needs of customers and produce higher efficiency.

To drive innovation and productivity growth, China needs to allow the private sector to enter key industries, which would benefit from more competition. The case is strong for allowing private companies to compete broadly in China within a government-regulated industrial structure.

Of course, the private sector is already well established in China's economy. The government began to recognize the importance of private enterprises in 1999. In 2004, the constitution was amended to guarantee private property rights. As early as in 2003, the private sector overtook state-owned enterprises and foreign-invested companies as the largest overall employer and economic contributor, accounting today for more than 60 percent of GDP and most of China's growth in output and employment.

Large private Chinese companies such as BYD, Alibaba, Wanda and Geely have become, with their leaders, a byword for boldness, innovation, enterprise, hard work and financial success.

But important barriers remain to the development of private enterprise. The involvement of private entrepreneurs in key sectors of the economy, such as telecoms, energy and financial services, is not allowed.

In other parts of the economy, private involvement is allowed but discouraged. Although the Chinese constitution recognizes the rights of private business alongside state-funded and state-managed companies, Chinese law and Chinese banks may not treat private business people as well as they treat a company that is controlled and managed by local or central government.

Local governments do not recognize or support strongly enough, as a matter of course, the rights of Chinese individuals to own and control corporate assets. Local officials often use the issue of business licenses as a way of interfering in the local economy and enrich themselves.

"Wearing a red hat" was an expression used to describe private entrepreneurs who hid their businesses in companies controlled by local collectives or local governments. Private business people were scared to show themselves.

That started to change, but China's business and social culture still strongly favors enterprises supported by the government.

As its population ages, China faces a huge challenge to achieve its economic potential. Private enterprise has a vital role to play in enabling China to overcome the economic difficulties that lie ahead. It should be allowed to play its part.

The author is a visiting professor at Guanghua School of Management, Peking University.

(China Daily European 07/05/2013 page9)