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Private participation encouraged on SOE reform

China Business Weekly

[The author is the former vice-chairman of All-China Federation of Industry and Commerce]

Private enterprises are qualified to take part in the reform of State-owned enterprises (SOEs) in various ways and several factors are needed to escort such participation.

According to official statistics, private capital contributed about 62.3 per cent to China's gross domestic product (GDP) growth in 2002. In some regions where the private economy is especially prosperous, this ratio could reach 80 to 90 per cent.

It can be observed in practice that in regions where the private sector thrives, local economy grows faster, the community is more stable and the people are more affluent on average.

The municipal government of Shanghai set up several incubators for private business years ago and now Shanghai is witnessing a high speed growth in private sector. In 2002, the private sector created 26.3 per cent of Shanghai's GDP and handed in taxes worth 35 billion yuan (US$ 4.2 billion), 50 per cent plus of the total taxes.

After the 16th National Congress of the Communist Party of China in 2002 eased the limits upon private investment, private investors seized the opportunity and showed enormous potential.

Figures from the National Bureau of Statistics said the total investment in fixed assets was 4.32 trillion yuan (US$520.5 billion) in 2002 and the investment from the private sector was 1.22 trillion yuan (US$146.99 billion), 28.8 per cent of the total.

As a matter of fact, the private economy created 62.3 per cent of the national GDP, 52.69 per cent of total assets, 64.42 per cent of tax and 55.04 per cent of export in 2001.

The private sector in China started when the market economy was first introduced and began growing in step with the market.

During the process, private business forged its own development strategy, managing style and way of allocating resources, all of which fit the market need well.

These elements create an atmosphere among private business which could encourage enterprising people to work towards their goals and stimulate the potential of the business to create more wealth for society.

This is the source of vigor driving private business ahead all the way.

Now private enterprises have occupied considerable positions not only in traditional service sector, but also high tech ones, virtual economy and capital-intensive industries.

With better policies offered by the government, private owners have more room to develop their enterprises, which enables them to better participate in SOE reform.

On the one hand, such participation can activate State-owned assets and the rich human resources in SOEs.

It is also a platform for private owners to boost their business.

Currently, private enterprises' participation happens primarily through the following methods.

First and the most frequently used are mergers and acquisitions (M&A). After M&A, private enterprises have access to resources which used to be unreachable for them and establish managerial mechanisms in the new companies to propel their growth.

The consolidated companies can bring the advantages of the former SOEs into full play and the private owners can develop at a low cost.

The second means is entrusting the management of SOEs to private owners. Under this method of co-operation, the ownership of SOEs does not change while private entrepreneurs take charge of managing the SOEs under agreed terms.

Such a contract is less risky and needs less capital for private owners.

Some private enterprises have started to accept such contracts as their core business, providing professional managerial services.

The third is absorbing private owners into SOEs as shareholders. They are mostly used in enterprises that are under State control or monopoly, like finance, high-tech industry and natural resource exploration. Private business with adequate capital and rich operating experience would see a boost in their wealth through it.

The fourth is renting, especially renting of fixed assets. Private businesses often resort to this practice when they are fledgling, for it is both convenient and inexpensive. SOEs view renting as a relatively safe way to make full use of their assets.

As a matter of fact, the above are only several among many flexible means available for private enterprises to take part in SOE reform. But the success of such participation relies on many factors other than the methods, most of which have produced a rigid social and economic system or old mind set.

Judging from the situation in most cases, the support of local government is the key.

Governmental consent is a must for mergers and acquisitions at SOEs.

Generally, the new company usually performs better than the money-losing SOE. It will not only supply positions and maintain social stability, but also offers a bigger stage for private owners. The government should try to solve the problems in the process and give full support.

No matter what method is used to consolidate SOEs, private business must finish necessary paperwork with utmost transparency. Any under-the-table deals may cause trouble later.

Private owners should pay special attention to contracts which stipulate the investment percentage and responsibilities of involved parties, the right of using land, road and other resources.

The liabilities of the original SOEs and due compensation to employees can also involve disputes if not dealt properly.

Of course, the essence of SOE reform is to improve the efficiency of existing assets. That is to say, it is a must to consolidating resources in the new business to achieve this goal.

Letting private economy into the State-owned sectors is an emerging issue under the market economy in China. Conditions are mature for the practice though there would be some problems arising. With the support of all levels of government, it will pursue a sound track towards success.

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