Wednesday, 5 January, 2000, 13:34 GMT

China eases restrictions on private enterprise


Millions of people join the Chinese workforce
each year

The Chinese government has moved to ease
restrictions on private enterprise, in a major
ideological shift designed to boost economic growth.

The head of the powerful
state development
planning commission, Zeng
Peiyan, says that private
enterprise should be put
on "an equal footing with
state-owned enterprises"
for the first time since the
Communists took power
in 1949.

He says the government will now "actively
encourage and guide private investment" and allow it
to operate in all sectors of the economy, except for
those involving national security and strategic
monopolies like telecommunications.


Under the new
arrangements, planning
restrictions and
discriminatory taxes will
be lifted on private
companies, and they will
be allowed to raise more
capital for investment by
floating on the stock
market or getting loans
from banks.

"This is a significant
ideological shift .. It
shows that the government is desperate to get the
economy moving," said Fred Hu of Goldman Sachs
in Hong Kong.

Economy slowing down

The move comes as China is struggling to maintain
an economic growth rate of around 7%, which is
seen as necessary to absorb the millions of new
workers who join the workforce each year.

Mr Zeng reaffirmed that growth target, although
many private economists believe it will be difficult to
maintain.

Consumer spending has been slowing down, and
prices have fallen fallen for the past two years as
demand has slumped.

In response, the government launched a massive
programme of public works to try to boost the
economy, financed in part from borrowing from
abroad.

Andy Xie of Morgan Stanley Dean Witter said that
the public spending added 2% to China's growth,
and the real growth rate was closer to 5% - not
enough to prevent unemployment from rising.

"That's the nub of the problem.. they need a growth
rate of 10% to create jobs for all the people who
want them," he said.

China's official growth target will be set at the
National People's Congress in March.

Modernising the state sector

Currently, China's bloated state sector produces
only 40% of industrial output, yet it employs 56% of
all industrial workers and receives 70% of
investment.

The World Bank estimates that up to 30m of the
140m workers in state firms are likely to lose their
jobs in the next decade as the sector restructures.

The prospect of mass unemployment if the private
sector does not absorb these workers is a strong
spur to change.

Pressure on the state sector will increase after China
joins the World Trade Organisation, under the terms
of a deal agreed with the United States in
November.

Many of China's basic industries will face intense
competition from Western companies who will have
better access to the country's markets.

China's constitution was changed last year to say
that the private sector formed an "important
component" in the economy instead of merely a
"component."