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Private Businesses Struggle to Compete in China - 2003-03-04

As this year's National People's Congress convenes in Beijing, private business people are expected to play an unprecedented role in Communist China's policy-making process. But entrepreneurs still face many obstacles as they struggle to compete with traditional state-owned companies.

Gong Chuanwen's Shanghai company makes high-tech automation equipment for large shipbuilders. It is a model of how far private businesses have come in China's richest city - and a warning of how far they still have to go.

Mr. Gong says he started the Shanghai Sibo Company in 1992 with seven other shareholders, by pooling their individual savings of $1,800 each. His biggest competitors were state-owned companies who received a steady stream of cash from banks.

Mr. Gong says that for many years, his state-owned competitors kept trying to sabotage his business, telling prospective customers not to trust a private company, because the government might shut it down in a year or two. He says a ship is built to last at least 20 years, and many shipbuilders were nervous about doing business with a small company that was not considered politically stable.

Ten years later, Mr. Gong's company is a success. Shanghai Sibo has annual sales of almost a million and a half dollars and 60 employees. Last year, almost half of its orders came from foreign shipbuilders. The company is also politically correct: three of the founding shareholders, including Mr. Gong, are Communist Party members.

Yet in spite of these glowing credentials, Mr. Gong - like the vast majority of China's entrepreneurs - has never been able to get a bank loan to expand his business. State banks are afraid to lend to a company like ours, he says. Mr. Gong hopes to secure his first loan of $60,000 in the next few months. But he admits that small amount will be virtually useless for a business the size of his. He says he may simply return the money without investing it, just so he can slowly build credit history.

Entrepreneurs like Mr. Gong continue to face immense bureaucratic and financial obstacles as China struggles to dismantle its planned economy and move toward a free market system.

A recent survey by the State Economic and Trade Commission found that private companies continue to suffer from institutional biases. Four fifths of private companies say lack of financing is their biggest problem, and only one fifth of private businesses obtained bank loans last year.

Despite their problems, China's more than two million private companies are the most dynamic and fastest-growing part of the country's economy. Jiang Xiao, an official with the Shanghai industrial and commercial administration bureau, says the growth of private business in this rich, coastal city has been explosive. When the government first loosened its restrictions on private enterprise in 1991, 2,200 people registered their own businesses.

By the end of last year, Mr. Jiang says that number had grown a hundred-fold - to almost 230,000 companies, accounting for 11 percent of Shanghai's gross domestic product.

While China's unprofitable state-owned enterprises lay off millions of workers, private businesses create jobs and wealth. The government is slowly waking up to the need to embrace private entrepreneurs as a vital part of the economy, and remove barriers to their success.

At the 16th Communist Party Congress in Beijing last November, leaders revised the constitution to allow entrepreneurs to join the Communist Party for the first time.

Wu Guoguang, a professor at Chinese University in Hong Kong, says that at this year's National People's Congress, record numbers of private business people are expected to take part in policy meetings. Mr. Wu says the rising political participation of entrepreneurs will gradually result in more favorable treatment for private businesses in China.

One policy change being considered by Beijing is whether to allow banks to vary interest rates based on risk factors - therefore making more loans available to small businesses.

In Shanghai, Gong Chuanwen hopes that new policies on private enterprise might lead to better access to capital for his ship automation equipment company. As a longtime member of the Communist Party, he praises last November's amendment of the party constitution to formally embrace private entrepreneurs as a step in the right direction.

Mr. Gong says he used to have to defend himself from jokes and attacks by others, who thought it was ridiculous for a party member to be head of a private company. But he says now even senior leaders admit there is no conflict between loyalty to the Communist Party and running a private business, because he's generating wealth for his country.