New Interpretations on the Development of China’s Non-Governmental Enterprises

When we take the powerful growth of China’s economy—even under the influence of the recent global financial crisis—in combination with the country’s ongoing process of industrialization and urbanization, the shift in economic development models, and policies for the promotion and advancement of science and technology (especially those marked by encouraging new energy sources and materials), one thing is clear: China’s economy has already entered a new stage of development, completely different from anything previously seen in the past.

A non-governmental economy is essentially one in which economic activities and investments are made, benefits are enjoyed, and risks are taken by the citizens; or, in more common language, it refers to the economic activities that involve private investment, private benefits, and private risk-taking. Strictly speaking, such an economy should be better named a “civilian economy” or “private sector of the economy”.

Industrial transformation and upgrading is rich in implications. There are three levels of a complete industrial transformation and upgrade. The first is structural adjustment—or transformation and upgrading within an industry—which is a process of promoting the value chain of enterprises’ products and the accompanying escalation and extension of enterprises’ value chain from manufacturing to development and design, branding, and the marketing of products. The second is cross-industrial upgrading, which entails structural change among different industries and the transformation from traditionally labor-intensive, low processing, low value-added manufacturing to that of emerging industries. The third level is the adjustment of the structures and positions of the primary, secondary, and tertiary industries in the national economy. Essentially, industrial transformation and upgrading includes both the rationalization and advancement of the industrial structures overall. It is an ongoing process that starts with the product escalation within an enterprise, proceeds to the flow of resource stocks between industries that impels the changes of industrial scales, to the transformation of industrial structures from the lowest level to the highest level, and finally ends with the adjustment and transition of the industrial organizations and structures.

The monopolistic industries hold the dominant position in China’s national economy. Sustained high relative prices directly lead to high profits for China’s monopolized industries, such as telecommunications, petroleum, tobacco, finance, electricity, water, and gas. On August 20, 2010, SASAC (the State-Owned Assets Supervision and Administration Commission) released the Table of Central Enterprises’ Respective Operations of State-Owned Assets 2009, which includes 108 of the 129 central enterprises. According to the table printed here, the total net profit attributable to the parent companies of these 108 central enterprises came out to RMB 398.96 billion, and China Mobile, CNPC (China National Petroleum Corporation), and Sinopec Group ranked as the top three companies, with net profits of RMB 79.63 billion, 70.17 billion, and 39.32 billion, respectively. As reported by The Beijing News on August 30, 2010, the four major state-owned banks were far ahead of the industry in terms of net profit; their net profits added up to RMB 255.9 billion, 74.5% of the total net profit of the 16 listed banks; with its net profit of RMB 84.603 billion, ICBC (Industrial & Commercial Bank of China) was the most profitable of all. Many studies show that the fat profits of monopolized industries come from their privileges, rather than any kind of improvement of economic efficiency in the technological sense (Bai Ming and Lei Jingqing 2006; Yu Chunliang and Zhang Wei 2010). According to data put forward in the Report on the Development of China’s Information Society 2010, the average broadband expenditure was 7.4% of China’s per capita GDP in 2008, ranking 71st of all 99 countries compared in the study. The figure was 1.15% in South Korea, which ranked 9th, but the per capita national income of South Korea was 6.9 times that of China, which means the broadband expense of a Chinese individual was 124 times that of a South Korean. The high profit of these monopolized industries ensures much higher incomes for their employees than for those employed in other industries. Through a comparison of the employee wages between the post and communications industry and other industries, Xie Di (2007) discovered that, each year, the average wages of the post and communications industry are 70% higher than those of other industries, and over 160% higher than that of agriculture, forestry, animal husbandry, and fishery, and that the gap is widening yearly (Table 4.1). Wang Junhao et al. (2010) also pointed out that the average employee income within the monopolistic industries is much higher than the national average, and the income gap is growing. In 2005, the average wage in telecommunications and other information transmissions was RMB 36,941, 101% higher than the national average. In 2003, the average income in the production and distribution of electricity, gas, and water was 34% higher than the national average, while in 2005 the gap had widened to 37%. Similarly, the income gap between the transportation, storage, and postal services industries and other industries had grown from 14% to 16%. Now that monopolies are not conducive to efficiency but, rather, cause huge losses of efficiency (Yu Chunliang and Zhang Wei 2010), it is of great significance to a country’s Pareto Optimality in terms of the economy and social welfare to break existing monopolies.

As many research findings have revealed, it is beneficial in terms of ongoing and future enterprise performance for NGEs to adopt a governance model that fits best with their development at different stages and under circumstances, and, furthermore, that there is no fixed, optimal model of governance. Hence, the governance model of enterprises must change in accordance with the corresponding changes in their development and environment. Otherwise, it will inevitably impede the promotion of enterprise performance and even hamper potential development and growth. Globally widespread, the governance model of family enterprises can promote NGEs’ growth at particular stages of development. Even when an enterprise has succeeded in listing on the stock market and appears as a public enterprise, it can still achieve excellent performance under the family control if the details of its governance model are arranged appropriately.

As NGEs are one of the most active microscopic entities within the market economy, the rational expansion of their scale can enhance the vitality of the socialist market economy, meet diversified market demands, and contribute to the optimization of China’s industrial structure and the promotion of its international competitiveness. In terms of input, NGEs’ expansion of scale takes the form of an increase in the quantity of production factors under their direct ownership and indirect control; in terms of output, the expansion of scale manifests as the promotion of NGEs’ output levels.

Since China’s reform and opening up and with the development of China’s economy under different types of ownership, domination of state ownership has been broken while the market-oriented “non-public sectors of economy” has grown significantly. By June 2009, there were 6.9 million NGEs nationwide, accounting for 70% of all enterprises in China; and they provide over 85% of urban jobs and more than 90% of rural employment , and NGEs had absorbed and accepted 75% of China’s working population. It can be said that the private sectors of the economy are already playing the dominant role in China’s economy overall. But during the rapid development of the private sectors of the economy, labor-capital conflicts and contradictions have been accumulated and have worsened, of which the “Foxconn Incident” is a typical example. As economic interest is the most basic unit of the labor-capital relations, it is crucial to determine a reasonable proportion of income distribution between labor and capital among NGEs. The report of the 17th National Congress of the CPC proposed to “gradually increase the proportion of residents’ income in national income distribution and raise the proportion of labor remuneration in the primary distribution.” Chinese State Councilor Ma Kai pointed out that, currently, the proportion of resident income represents too small a share in the national income, and so is labor remuneration in the primary distribution. He proposed structure adjustment to of the distribution of national income and, while retaining the continued growth of the enterprises and their normal income, that efforts be made to raise the proportion of labor remuneration and keep income inquality in check so as to ensure that the income growth of both urban and rural residents is no lower than the rate of economic growth, and that labor payment is not lower, but perhaps even slightly higher, than the growth rate of China’s economy and corporate income. Therefore, this chapter will study the construction of a reasonable income distribution system for the harmonious development of the labor-capital relations in NGEs—“an important part of the national economy”—in the new stage.

China’s NGEs have developed and grown under a dual track system in the process of reform. Judging by their initial conditions, NGEs did not have any particular developmental advantages in technologies, funds, or institutions. Experience shows that it has been the country’s cheap labor that has most contributed to the large-scale development and expansion of China’s NGEs. On the processing and OEM chains of the labor-intensive industries, China’s NGEs have completed their period of capital accumulation and leapfrogged development by use of the cheap labor available at this particular stage of China’s development. Even in the capital- and technology-intensive industries, China’s NGEs are still inclined to use labor in place of capital and technology. In 2004, the major economic areas—such as the Pearl River and Yangtze River Deltas—were faced with a looming labor shortage, and cases of labor disputes repeatedly appeared in some areas. In the long run, China’s NGEs will unavoidably face a new challenge of labor costs arising concurrently with the ongoing trend of China’s demographic transition, which will undoubtedly hinder their competitiveness.

Technological innovation is the inevitable choice for transforming models of economic growth and optimizing the economic structure; additionally, the promotion of NGEs’ capacity for technological innovation is a measure of China’s ability to meet the demands of economic development in the new period. The 11th Five-Year Plan of China for National Economic and Social Development proposed to “accelerate the establishment of a technological innovation system based around the centrality of enterprises, with the market as the orientation, and the integration of production, education, and research, and formulate a basic institutional framework of independent innovation.” The Decision on the Implementation of Science and Technology Development Plan and Enhancement of Independent Innovation Capabilities released by the State Council clearly states its intention to “practically make enterprises the principal part of research, development, and investment, the subject of technological innovation, and the main implementer of innovation,” and “to value and fully utilize the role of technological NGEs as the driving forces behind independent innovation and the development of high-tech industries, to create a fair competitive environment, and encourage NGEs to grow both larger and stronger and to participate in international competition.” During the 12th Five Year Plan, the Chinese Government will give full support to the cultivation of the independent innovation capacities of the country’s enterprises, and China’s NGEs are likely to welcome the golden opportunity for technological innovation. During this period, in the face of fierce competition with SOEs and FFEs, only by relying on efficient technological innovation can China’s NGEs gain competitive advantages in the future.

In recent years, supported and guided by a series of scientific and technological programs, as well as by the reform of the country’s scientific and technological system and related policies, China’s high-tech industries have made rapid progress. Many enterprises, however, are still weak in independent innovation and the industrialization of scientific and technical achievements. Meanwhile, China’s NGEs are on the rise and gaining in strength, and have become an important force for leading the innovation and development of China’s high-tech industries.

Ever since the global financial crisis, China’s NGEs have experienced many changes in their transnational operations and development, such as issues related to the environment, policies, and their own capacities, and have, as a result, entered a new stage of transnational operations and development. As the financial crisis has brought China’s NGEs such problems as a shrinking overseas market, an increase in receivable accounts, more difficult financing, and the reoccurrence of international trade protectionism, it has simultaneously provided them with new opportunities to accelerate resource integration, adjust their industrial structure, and improve their comprehensive strength for transnational operations.