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From Getihu to "Equal Protection" of Public and Private Property Rights

The resurgence of private ownership in the reform era started out as an outgrowth of the remnant private economic elements on the margins of central planning. Soon after the historic decision by the CCP leadership to reform China’s economic system in December 1978, nonfarm self-employment activities expanded in both urban and rural areas.[1] In the ensuing three decades, such expansion converged with the growth of more formal and sizable private enterprises of different ownership forms. Many factors contributed to this process, which will be discussed later. What I want to emphasize here is that a series of centrally adopted policy changes played a critical part in redefining and broadening the institutional space for private business.[2]

In November 1979 the CCP Central Party Committee decided to remove the political label “capitalist” that had been attached to the activities of self-employed individuals during the socialist transformation in the mid- 1950s. Such a symbolic move to destigmatize those individuals and their families signaled a more tolerant attitude toward the role of self-employment in the Chinese economy. In the following year the SAIC formally legalized self-employment by creating a new category of business licensing: geti gong- shang hu or simply getihu, which means self-employment entities in industry and commerce. It nevertheless limited the size of the workforce in such entities to no more than seven employees, with one to two “helpers” and three to five “apprentices” allowed for each entity. The legality of self-employment was further codified in the 1982 constitution,[3] which stated that “economic activities undertaken by self-employed working people within the boundaries stipulated by law are a supplementary segment of China’s socialist economy based on public ownership. The state shall protect the legal rights and interests of self-employed economic elements.” In August 1987 the State Council issued the Provisional Ordinance on the Administration of Self-Employed Individuals in Urban and Rural Industry and Commerce.[4] It served as the main legal framework for the regulation of getihu until April 2011, when the State Council formally replaced it with the Ordinance on Urban and Rural Industrial and Commercial Self-Employment.

Back in 1979 the government enacted the Law on Chinese-Foreign Equity Joint Ventures. It marked the beginning of the open-door policy that encouraged the return of foreign capital and the expansion of international trade. In the following decade the inflow of foreign (private) capital via joint ventures with public enterprises became an increasingly important force to dilute public ownership in the economy. It received a major boost when the government enacted the Law on Foreign-Funded Enterprises in 1986, which further allowed foreign investors to form wholly foreign owned ventures. In 1988 the Law on Chinese-Foreign Contractual Joint Ventures was enacted to provide greater flexibility for foreign investors and their local partners to negotiate and define the relationship of equity capital to decision rights, profits, and liabilities (Pearson 1991).

In 1988 the National People’s Congress adopted a constitutional amendment, which stated that “the state allows the existence and development of private economic activities within the boundaries of law. The private sector is a supplementary element to socialist public ownership. The state protects the legal rights and interests of private business.” In accordance with this expansion of the legal space for the private sector beyond self-employment, the government lifted the size limit (of employing no more than seven people) on private economic entities by creating a new category in the licensing and registration of industrial and commercial organizations: siyingqiye, or private enterprise. According to the Provisional Ordinance on Private Enterprises adopted in the same year, a private enterprise can take one of three organizational forms: sole proprietorship, partnership, and limited liability company.

The June Fourth Incident in 1989 was followed by a significant slowdown of economic reforms and a more hostile policy environment toward private ownership for nearly three years.[5] Yet the institutional changes that had been introduced with regard to the private sector and foreign capital in the preceding decade were not reversed.[6] Indeed, even during this period of policy retrenchment an event of long-term significance for privatization took place. In 1990 the central government decided to establish two stock exchanges in Shanghai and Shenzhen. Initially all the listed companies were government- owned, and only a very small number of companies in the public sector were allowed to gain access. Nevertheless, allowing private citizens to purchase the stocks of these companies created a new avenue for the dilution of public ownership. Moreover, with gradual relaxation of entry restrictions, the stock market has subsequently grown and become an important venue for private companies to raise capital and expand, and to take over companies with initial predominance of government ownership.[7]

In the fall of 1992 the CCP held its Fourteenth Party Congress. That meeting took place in the wake of paramount leader Deng Xiaoping’s “southern tour” (Fewsmith 2008), when he visited several provinces in South China and along the way made repeated calls for a speeding up of the process of reform and opening that had been stalled following the June Fourth Incident. At the party congress, the CCP leadership redefined the reforming Chinese economy as a “socialist market economy" in which the status of the private sector was elevated from a “supplementary element" as defined before, to an “integral part" of the new economy. Following the party congress, the government also made greater efforts to encourage foreign investment, including relaxation of entry restrictions on a large number of economic sectors, as indicated by a series of measures to further promote foreign investment (Lardy 2002). In 1995 the State Council issued a set of comprehensive and elaborate guidelines on where foreign investment would be encouraged, restricted, and banned. It expanded the sectors for foreign entry and showed clearer directions of opening to investors and gatekeepers.

In 1997 the CCP held its Fifteenth Party Congress. At that meeting it was declared that public ownership could take diverse forms (other than public sole proprietorship), hence formally opening the door for immediate dilution and/or subsequent decline of public ownership through various shareholding arrangements with private ownership. At the same time the status of the private sector was further elevated to “an important [emphasis added] integral part" of China’s “socialist market economy.” This redefinition of the role of private ownership was incorporated in a constitutional amendment by the National People’s Congress in 1999. A concurrent change is that in 1997 the central government adopted a policy called zhuada fangxiao, or “holding onto the large and letting go of the small,” to restructure and eventually privatize large numbers of small and medium-sized SOEs. That move, also known as gaizhi (ownership restructuring), soon spread to the urban and rural collective sector. Within six years, the vast maj ority of the public enterprises that had existed in the mid-1990s were sold off or closed down, as will be shown in chapter 7.

From 1997 to 2007, the State Council made four rounds of revisions to the 1995 guidelines on sectoral entry by foreign investors. In each round of revisions, greater space was granted for the inflow of foreign capital. The most noticeable change concerns the relaxation or removal of restrictions on foreign entry into a variety of service sector activities (e.g., banking, whole sale, professional services), especially after and as a concession for China’s WTO accession December 2001. Another important feature of these revisions is a gradual increase in the sectors in which entry by wholly foreign-owned enterprises is permitted, as will be shown later in this chapter and then in chapter 6.

With the expansion of the private sector, the CCP gave further recognition to the political importance of this new economic force. On July 1 2001,

CCP general secretary Jiang Zemin delivered a keynote speech at the celebration ceremony for the eightieth anniversary of the founding of the CCP. During that speech, he formally welcomed private business people to join the CCP, which ironically has the ultimate goal of building a society without private ownership. To give further assurance to private owners, the National People’s Congress adopted another constitutional amendment in 2004, which emphatically stated for the first time in the history of the PRC that “citizens’ lawful property rights are inviolable.”

In February 2005 the State Council issued “Guidelines on Encouraging, Supporting, and Guiding the Development of Self-employed, Private, and Other Nonpublic Economic Entities.” Its basic spirit was to relax restrictions on the entry by domestic private economic entities to sectors that had been monopolized by SOEs, such as power, telecommunications, railway, air transport, oil, public utilities, infrastructure, social services, financial services, and even defense industries. It granted “equal” entry rights to foreign and domestic private companies to “legally allowed” sectors, correcting a longstanding entry policy bias in favor of foreign companies (Huang 2002). Both foreign and domestic enterprises were also encouraged to take part in SOE ownership restructuring and economic development in the western (underdeveloped) region of the country, whereas the government promised more fiscal, financial, and social service support for these entities. These guidelines were reiterated and further elaborated in a follow-up document issued by the State Council in May 2010, entitled “Guidelines on Further Encouraging and Directing Healthy Development of Private Investment.” It also encouraged domestic private entities to take active part in global expansion and competition.

In 2007 the National People’s Congress enacted the Real Right Law (wuquan fa), which is also translated as the Property Law in Western media. The drafting of the law started in 1993 and underwent eight rounds of rewriting amid considerable controversy and objections raised by conservative scholars and officials. It covers both publicly and privately owned entities. The most noteworthy part of the law is that in Article 3 it explicitly states that “the state shall oversee a socialist market economy and shall protect the equal [emphasis added] legal status and development rights of all market subjects,” which include entities owned by the state, collectives, and private citizens. This represented the culmination of a series of changes that combined to form and institutionalize a new legal-regulatory framework for private ownership following the landmark decision in 1997 to downsize the public sector.

  • [1] The agricultural sector was reorganized during 1979-1983, when family farming was restored toreplace collective farming and the commune system at large (Perkins 1988; Yang 1996; Zweig 1989).
  • [2] This account complements the various studies that emphasize the role of entrepreneurs in privatization. It, however, should not be taken to imply that the central leadership has taken a passive attitudeto the decline of public ownership. As I will show in the following chapters, these changes are oftenresponses to unsuccessful attempts by authorities at all levels of the state system to continue to rely onpublic enterprises to address essential policy concerns.
  • [3] The constitution of the PRC was first enacted in 1954. It subsequently underwent substantial amendments three times—in 1975, 1978, and 1982 respectively.
  • [4] The State Council is the command center of the executive branch of the Chinese state. It is also calledthe Central People’s Government.
  • [5] Huang (2008) argues that the impact of this policy entrenchment lasted for more than a decade.Evidence presented in this book does not seem to be consistent with that view, though I do agree thatprivatization in China should not be seen as a linear process.
  • [6] To weather the sudden change in political climate, however, some private business owners resortedto a practice known as “donning the red hat”—falsely registering their companies as public enterprises,oftentimes with the help or consent of local officials (Shi Xiammin 1993; Young 1995).
  • [7] Currently private or predominantly private companies account for about two-thirds of the listedcompanies (totaling some three thousand) in mainland China and overseas. Lists of domestically listedcompanies with and without controlling stakes held by the state are available at the official site of theChina Securities Index Co. (http://www.csindex.com.cn/sseportal/csiportal/xzzx/queryindexdown-loadlist.do?type=i).
 
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