Threats and opportunities faced by private businesses in China

This article presents a comprehensive analysis of the environment experienced by private businesses in China through examining their relationships with the major stakeholders—namely government, supplier, employee, customer, and competitor.Since the announcement of the economic reform in 1978, substantial political and economic power has been delegated from the central government to the regions. Endowed with this power, local governments have crucial influence on the size of the private sector within their jurisdiction. Being outside the state allocation plan, private firms have less access to raw materials and credit. In the volatile political climate of China, they are vulnerable to attack during political campaigns. Maintaining a cordial relationship with local cadres, through paying bribes and various charges, is thus a prerequisite for survival. Having solicited political backing, a private entrepreneur can not only run his business more smoothly, but also may be more tolerated in his illegal activities such as tax evasion, profiteering, and selling banned products. In short, the whole situation can be described as a collusion of local governments and private businesses at the expense of the central government's interest.Under the economic reform, the distribution system has become less rigid than before. It is easier for private firms to secure supplies, whether raw materials or manufactured goods. Labor input is also not a problem for most private firms which are small in size and employ mainly unskilled workers. However, large private enterprises have to compete with state, collective, and foreign enterprises for managerial staff who are in short supply.There have been marked changes in the consumption pattern since the early 1980s. People spend less on staple foods and more on non-staple foods, consumer goods, and services. Moreover, China is experiencing a consumption boom. Altogether this offers great opportunities to the private sector, which has been expanding its share of industrial output and retail sales very fast. On the other hand, competition is becoming much keener. State enterprises are improving their efficiency and giant multinational corporations are rushing in. As there are few entry barriers, private entrepreneurs are also competing fiercely among themselves.The ideological contradiction of having labor exploitation by private entrepreneurs in a socialist country has prevented the Chinese government from actively encouraging private business. The private sector has been assigned a supplementary role in the dominant public economy. This status has led to discrimination against private firms in obtaining factor inputs, accounting partly for their vulnerability to bureaucratic harassment by local cadres. This will continue to hamper private business development. It is concluded that ideological and political reforms, in addition to the economic reform, are required for providing a more conducive environment for private businesses. The Chinese experience of liberalizing the private sector offers useful insights to governments of other developing countries.