The Private Sector and China's Market Development

Zhikai Wang

• Publisher: Chandos Publishing
• Year: 2008
• Print ISBN: 9781843343998
• eBook ISBN: 9781780632322
• Topic: Commerce
• Subtopic: Commerce Général

Based on case studies, this comprehensive review aims to explore the development of the private sector and how it stimulates industrial growth at regional level in China. The book traces the privatization mechanism and how it facilitates the process of industrialization and urbanization in rural China. The Private Sector and China's Market Development looks at the evolution of market transition and the rapid growth of the private sector from aspects of both bottom up and top down institutional innovation. It also provides a commentary of future development and innovation in the private sector. - Covers one of the major parts of the Chinese economy, in the Yangtze River Delta region - Draws on the author's personal experience of the economy, society and development administration in Jiangsu province and academic life in Zhejiang within the field of market transition in the Yangtze River Delta region - Provides detailed studies and a comparison of the two most famous regional development models, of both the South Jiangsu model and the Wenzhou model, in the process of China's market transition and institutional transplantation

1

Introduction

As part of the process of market-oriented reform in China, the private sector has grown from almost nothing to a large-scale economy, providing numerous exciting stories for China’s market transition, regional industrialisation and rural urbanisation. The development of China’s private sector includes the fantastic achievements of development models like the Wenzhou model, the South Jiangsu model and the Pearl River Delta model; each one has its own advantages and has contributed to the creation of a vast land of industrial clusters, giving China the reputation of manufacturer for the world.

Today, Zhejiang is at the forefront of private sector development in China, developing new industries and eliminating traditional and lowtechnology industries, thereby upgrading the region’s industrial structure. As technology is constantly advancing, China’s private sector manufacturing industries have started to transfer from low to high-end industries, following the trend for seeking increased competitiveness and economies of scale. In terms of the evolution and innovation of industrial clusters, the development of the private sector in China has always been based on an innovative way of integrating industrial structure, enterprise structure, product composition and market structures, so as to see them well matched with one another. This was and remains the mechanism for the successful development of the private sector. Development of the private sector has also made a great contribution to China’s industrial growth and regional development. Undoubtedly, the private sector’s role in advancing the development of modern industry has been a vital driver of China’s market transition. Private enterprises are the most active elements of China’s market economy; the private sector is one of the fundamental forces for integration of China’s rural–urban development and for maintaining the stable and sustainable development of China’s economy and society. The private sector also provides the resources and inexhaustible power for China’s ongoing innovation in technology.

Previous studies on the development of the regional economy, agglomerative economy and industrial clusters have always been inseparable from the survey and analysis of geographical conditions, human environment, status of economic and social development, and the specified endowment of natural resources in the given region. Today, studying the development of the private sector and evolution of industrial clusters, we still need to consider such factors, including the maturity of specified regional market development, the initial accumulation of capital, human capital and other factors. The present study, however, focuses more on analysing institutional mechanisms and the effects on private sector development, cognising relations between private sector development and China’s institutional transition, summarising institutional transition and the construction of institutional infrastructure and its impact on the development of industrial clusters in the private sector. The book will also use regional economic theory and the theory of industrial organisation to analyse the private sector and its development of industrial clusters, to understand and acknowledge the status of the private sector and the role of industrial clusters in China’s market development, rural industrialisation and territorial urbanisation. It thus aims to provide better guidance regarding private sector development, and also to provide a possible development path for undeveloped regions to develop their private sector and foster the growth of their industry clusters.

As the reform in China’s economy has become more profound, so a consensus has formed among the Chinese government, economists and academics vis-à-vis the institutional mechanism of privatisation and its impact on the private sector in Zhejiang province. Since 1992, the Communist Party of China (CPC) has promoted the Wenzhou model as representative of the Zhejiang phenomenon of private sector development through institutional innovation and political process. These efforts have resulted in ongoing reforms of property rights brought on by nationwide use of the privatisation mechanism among different ownership sectors. In particular, central government now holds that shareholding is the main form of corporate governance, and will contribute to the building of public ownership. This means that more channels have been opened for the private sector to play an active role in developing the socialist mixed economy. Notably, the Third Plenary Congress of the 16th CPC Central Committee, on the reunification of views on individuals and the private economy, deemed shareholding systems to be an important component of realising socialist public ownership, and key to the development of productivity. This has made it further clear that the development of the private sector (i.e. the non-public economy) will be supported and guided for the long term. The plenary session approved the resolution, which highlighted a banner of five balances: ‘balancing rural and urban development, balancing development in different regions, balancing economic development with social development, balancing domestic economic development with export oriented economy, balancing human development with nature environment protection’ (CPC, 2003). Also highlighted was the scientific view of development based on a people-oriented strategy and comprehensive, coordinated and sustainable development. This provides the political guarantee that the private sector will play a more active role in rural–urban development, regional development, and economic and social development, by taking the five balancing aspects into account and planning development accordingly. The requirements of the ‘five balances’ should also be of benefit to the private sector by further specifying and deepening the developmental objectives and contents of the private sector. The private sector has played and will continue to play a more active role in the promotion of industrial growth and development, in promoting the industrialisation of the agricultural sector, rural industrialisation and urbanisation, as well as in planning as a whole for urban and rural development in a regional context.

Based on this analysis and evaluation, this book will explore the developmental mechanism of the private sector at a regional level and its effects in promoting the evolution of industrial clusters, and will study the interaction between industrial growth in regions and the institutional transition of the private sector and its contribution to China’s market transition by observing, describing and comparing the regional development of the private sector and growth of specified industrial districts within a given region and beyond. Subsequently, the book will give a credible forecast for the future development of the private sector, and recommend some policies for the development of private sector industrial clusters.

The text is divided into eight chapters, the first of which is the introduction. The second chapter describes China’s rural–urban industrial growth in the developmental context of the private sector with a case study of Zhejiang province. The third chapter analyses regional private sector development and institutional transition, including their mutual relationship and the corresponding content. The fourth chapter summarises the positive effects of the private sector in developmental innovation for regional industrial growth. The fifth chapter deals with future trends in developing private sector industrial clusters and the relevant supporting policies. The sixth chapter explores the development of the private sector from the Jiangsu-Zhejiang model to the universal Chinese model. The seventh chapter traces the positive relations between market integration and the internationalisation of China’s private enterprises in a globalising world. The eighth chapter examines the issues of labour rights protection in private enterprises and the sustainable development of the private sector.

2

Rural–urban industrial growth in the private sector: the case of Zhejiang province

The development and growth of China’s private sector has obvious local and territorial characteristics. For example, there are strong differences between the two most famous private sector development models, namely, the Wenzhou model and the South Jiangsu model. Both development models provide empirical support for establishing and perfecting the socialist market economic system with Chinese characteristics. The Wenzhou model in particular has become the typical model for regional economic development throughout the rural areas of China.¹

Industrial development in the private sector entails the following phenomena:

■ industrial clusters appear as agglomerative economies;

■ the private sector advances the development of industrial clusters by ensuring that the industrial mix and market formation are well matched with each another;

■ industrial growth in the private sector is due to the sector’s vitality and its organisational performance;

■ the evolutionary development of the private sector is due to the integration of market development, industrialisation and urbanisation.

The spatial structure of industrial clusters: regional agglomerative economies

Since China’s reform and open door policy was implemented in the late 1970s, there has been private sector development in the Yangtze River Delta region – mainly Zhejiang province and Jiangsu province. This development has been based on the dynamic mechanisms of institutional innovations, and has given the regional economic and sociological development of Jiangsu and Zhejiang obvious institutional advantage in the process of transforming from planned economy to market economy. The development of regional economies was first embodied by the collectively-owned village and township enterprises of the South Jiangsu model. This was followed by the privately-owned family-based industrial plants and manufacturers of the Wenzhou model, and lately the regional territorial economic development mode of agglomerative economies in cooperation with specialised markets. As a so-called agglomerative economy,² there is, within a given regional scope, specialised industry with an obvious specialised production and commoditisation base. This specialised industry drives and controls the development of the territorial economy and society. This is the product of rural industrialisation, and also the market development of the private capital economy in combination with industrialisation and urbanisation. A typical characteristic of this model is the mutually supportive role of a specialised market and the local production base of the specialised industry. Dynamic advantage is created and driven by the private sector development process and the attainment of the best match or cooperation between and among industrial and company structures, product composition and market structures.

Looking at the Zhejiang model, the initial development of the private capital economy depended simply on the family-based industrial plant. Such plants grew gradually, specialising in particular wares, and eventually became the specialised production base in their village. Within specific industries, leading plants ultimately became the centrepiece of their region’s agglomerative economy. This illustrates how the private sector grew from family-based industrial plants to partner enterprises or rural collective enterprises, gradually shaping into enterprise clusters or industrial parks with provincial and ultimately nationwide market advantages. The regional agglomerative economies in Zhejiang province have already become the advanced territorial economies in the whole province; agglomerative economies are now the most common economic phenomenon, with specialised features nationwide.

‘Small merchandise, big market’

Starting with only family-based industrial plants, the private sector was initially short on skills and capital and could only focus development on labour-intensive and low-technology industry. When private sector industry is mainly low-skilled and labour-intensive, products are simple, such as plastics, leather goods, packing goods, textiles, hardware, chemical fibre, stationery, buttons, etc. These are mostly small merchandise or typical daily-use consumer goods with enormous market potential. During the first ten years of reform, China had a severe nationwide problem regarding merchandise shortages – a problem compounded by the political restraint regarding the reforms. The only part of the nation not to suffer was Zhejiang province, which was benefiting from both institutional and market reforms. Premised on this condition, the ‘small merchandise, big market’ grew quickly and realised competitive advantage through distribution centres based on specialised local markets, which subsequently extended their influence to other provinces across China (Zheng, 2003). Since the beginning of the reform and open door policy, the specialised markets of Zhejiang have made it China’s most developed province. For example, the Yiwu small merchandise market and Shaoxing light textile market have both maintained their position at the top ends of their respective markets for several years, and both have developed a business reputation throughout Southeast Asia, which extends to consumers all over the world.

The system of specialised markets in Zhejiang province started to develop in the early 1980s. The structure of specialised markets system was shaped in the mid-1980s, greatly reducing the cost of production and trading. The private sector, which was dependent on specialised markets, developed into agglomerative economies with large-scale production concentrated in thousands of family firms in Zhejiang province. The formation of agglomerations was in line with the growth pattern of a single householder establishing a family plant, which would grow with the support of extended family members. In turn, this would lead to the firm dominating the village and then town, with areas specialising in one kind of production, thus creating industrial agglomerations. These agglomerative economies began to distribute their merchandise on a national and international basis. In combination with the construction and development of specialised markets, agglomerative economies have advanced the development of small and medium-sized towns, and brought about changes in the spatial distribution of industrial clusters. Such specialised development of the industrial economy demands the construction of specialised markets, the development of advanced industry and the construction of towns, as seen in Zhejiang province.

Specialised industrial districts

As discussed, the Chinese private sector has taken the development road of agglomeration and clustering. The integration of family-based industrial plants, specialised markets, raw material suppliers and sales representatives is at the core of the Wenzhou model of private sector development, which has seen the specialised industrial towns and villages grow across the whole Zhejiang province. The extent of this development has been tremendous. In Wenzhou, there are more than 30 towns, each with an output value over 1 billion yuan. The value of the gross output of these specialised towns is more than 60 per cent of Wenzhou’s gross economic output. There are more than 5,000 shoe manufacturers in Wenzhou, between them supplying 20 per cent of the nation’s shoes; more than 150 pen manufacturers, accounting for one-third of the pens supplied nationally; and more than 260 cigarette lighter manufacturers, together supplying 70 per cent of the world’s lighter markets. In the small town of Liushi alone, there are more than 1,000 low-voltage electrical equipment manufacturers, who together supply one-third of the nation’s market for such goods (Wenzhou Bureau of Industrial and Commercial Administration, 2003). Shaoxing has become the national chemical fibre and textile industry distribution centre, with the greatest production, most advanced equipment, and largest specialised market in this industry. Within one county in Ningbo there are more than 660 clothing manufacturers, accounting for more than 40,000 employees. This county supplies one-quarter of the clothing supplies for the top eight clothing manufacturers in the whole of China. Other specialised industrial districts include the Datang sock industry, the Golden Village’s placard and packing goods manufacturers in Changnan county, the Haining leather clothing industry and the Yongkang hardware industry. These popular districts have been forming their own industrial shapes, revealing the effects of agglomeration and clusters for industrial development in the private sector.

The growing private sector

The growing strength of private sector development in the Wenzhou and Taishou areas of Zhejiang province has not only brought about demonstrative influence and distributive effects to other areas in the region, but there is also an imitative tide of learning from Wenzhou and Taishou’s experiments with institutional innovation mechanisms and industrial clusters across Zhejiang province, as well as in periphery provinces around Zhejiang. In the 1980s, private capital enterprises had been mainly centralised or geographically gathered in South Zhejiang in areas such as Wenzhou and Taishou, while economic development in Northeast Zhejiang, including Hangzhou, Jiaxing and Huzhou, focused on imitating and learning from the South Jiangsu m...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright page
• List of figures and tables
• About the author
• Preface
• 1: Introduction
• 2: Rural–urban industrial growth in the private sector: the case of Zhejiang province
• 3: The private sector and China’s market development: case studies in Zhejiang and Jiangsu
• 4: Innovation and market transition at the regional level in China
• 5: Market transition and future developments in China’s private sector
• 6: The development of the private sector from the Jiangsu-Zhejiang model to the universal Chinese model
• 7: Market integration and the internationalisation of China’s private enterprises
• 8: Labour rights protection and the sustainable development of the private sector
• Bibliography
• Index