China starts private push to lure more foreign cash

Business Asia, April 5, 1999 by Sarah Davison

China's recent official endorsement of private enterprise is profoundly important, setting the stage for deregulation, structural change and fresh foreign interest in its potentially huge market, according to analysts.

"We cannot expect sudden interest, but I think foreign investors will be more encouraged to acquire Chinese enterprises now because the private sector is going to play a greater and greater role," said Mr Qun Liao, a China economist at Standard Chartered Bank in Hong Kong.

Constitutional amendments adopted earlier this month by China's parliament describe private enterprise as "an important component" instead of just a "complement" to the socialist economy. They have been welcomed as an important stamp of approval for China's reform efforts so far.

The move paves the way towards further trade and market liberalisation that will determine the success or failure of its bid to enter the World Trade Organisation, China economists in Hong Kong claim.

And this greater acceptance of free market discipline will make China that much more attractive to foreign investors, providing yet more support for massive foreign inflows.

China received US$45 billion in foreign direct investment last year.

But that is expected to fall this year due to the Asian crisis's dampening effect on investment sentiment, a perception of overcapacity in China and the growing belief that Chinese investments lose more money than they are worth.

However, private enterprise has managed to explode into a crucially important sector within the socialist economy -- and that growth will now accelerate as discriminatory legislation is unwound and more capital becomes available.

This will help to accelerate a profound structural shift within China's economy, with private enterprise absorbing more capital and workers.

China's non-state sector has more than doubled its contribution to industrial output to 70 per cent over the past 10 years, while the state sector's contribution has dwindled. Within the non-state sector, the collective enterprises made up of both state and private investment are declining, while pure private enterprise -- including wholly -- owned foreign-funded enterprises -- is growing fast.

"Foreign investors will react to this," said Mr Gilbert Choy, China economist at Dresdner Kleinwort Benson. "China will become much more attractive because of this strategic shift."