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Getting the China Story Right:

Insights from National Economic Censuses


George C. S. Lin and Fox Z. Y. Hu1

Abstract: Two Hong Kongbased geographers critically interrogate competing interpreta-


tions of the nature and dynamics of Chinas ongoing economic transformation. Based on
the data gathered from Chinas first and second national economic censuses, they examine
the pattern and process of ownership transformation in the Chinese economy, focusing on
employment, capital assets, and output as well as productivity and industrial innovation.
Emphasis is placed on the following critical issues: (1) after three decades of opening, Chinas
national economy continues to be dominated by domestic enterprises (with foreign and over-
seas Chineseinvested enterprises limited to only a few industrial sectors and highly specific
locales); (2) the bulk of capital assets and key large-scale industrial sectors remain in state
ownership; and (3) spontaneous, bottom-up privatization of the labor market has occurred
without a corresponding privatization of the capital market. In examining these and other
issues, the authors argue that the evolving, complex China story can be better understood
only after abandoning reliance on preconceived theoretical models derived primarily from
Western experience. They support their case by first challenging the conventional neoliberal
view of privatization as an independent force or predetermined condition, arguing instead that
it is conditioned by prevailing social and political influences. Likewise, they posit that rapid
expansion of private and individual businesses at the grassroots level has owed more to relaxed
state control than to active state involvement envisioned by the thesis of state corporatism.
Journal of Economic Literature, Classification Numbers: E22, E23, E24, O11, P20. 8 figures,
6 tables, 87 references. Key words: China, economic transformation, transitional economy,
ownership structure, state-owned enterprises, economic census, privatization, capitalism.

INTRODUCTION

G iven the complexity and uncertainty associated with Chinas social and economic devel-
opment, China watchers and even experienced China scholars are sometimes puzzled
by releases of information by Chinese authorities. A good case in point occurred during
the recent assembly of the National Peoples Congress (March 514, 2011) in Beijing. At
a time when Chinas phenomenal rise is widely heralded to be the result of a successful
transition from socialism into capitalism (with Chinese characteristics), in which a decisive
privatization of the national economy has been the heart of market reforms, Wu Bangguo
Chairman of Chinas National Peoples Congress and the second most powerful leader of
the Communist hierarchysurprised many international observers during his annual address

1
Institute of China Innovation (ICI), East China Normal University, and Department of Geography, The Univer-
sity of Hong Kong, Pokfulam Road, Hong Kong (email: gcslin@hku.hk and fzyhu@hku.hk). The work described in
this paper was funded by grants obtained from the Research Grants Council of the Hong Kong Special Administra-
tive Region, China (GRF HKU-747509H and RES-000-22-3000), the National Natural Science Foundation of China
(No. 40701043), and a post-doctoral fellowship from the University of Hong Kong. The authors wish to thank the
anonymous reviewers for helpful comments on an earlier version of the paper.

712

Eurasian Geography and Economics, 2011, 52, No. 5, pp. 712746. http://dx.doi.org/10.2747/1539-7216.52.5.712
Copyright 2011 by Bellwether Publishing, Ltd. All rights reserved.
LIN AND HU 713

to the national assembly. Making an intriguing reference to privatization, Wu affirmed that


China would not carry out (bugaoa tense-less verb meaning not to do something with
ambiguous implications of past, present, or future) privatization given the countrys special
conditions (guoqinga vague term often used to justify things that set China apart from the
rest of the world): On the basis of Chinas special conditions, Wu stated, we have made a
solemn declaration that we will not employ a system of multiple parties holding office in rota-
tion; diversify our guiding thought; separate executive, legislative, and judicial powers; use a
bicameral of federal system; or carry out privatization (Shi, 2011a, p. A8).
Wus declaration, made in such brief, yet unequivocal language, left experienced China
watchers confused and demanding clarification. Certainly, given the timing of the comments,
in the wake of the Jasmine Revolution sweeping North Africa and the Middle East, it might
seem understandable for Beijing to reaffirm its routine rejection of Western-style democ-
racy, values, and power structures. Yet it is Wus firm and un-ambivalent denial of privatiza-
tion as a path for Chinas economic reforms that puzzled Western observers (Shi, 2011b, p.
A8). Has not privatization been actively pursued as the powerful driving force enabling the
Chinese economy to grow out of the plan? Is it not self-evident that privatization has already
occurred throughout the country and that private businesses have now become the mainstay
of the national economy? And is it not clear that the private sector has been the most efficient,
dynamic segment of the economy, outperforming its public- and collective-sector counter-
parts? Finally, is it realistic for China to resist the universal logic and rationale of capitalism,
in which privatization functions as the essential condition for efficient and sustained economic
growth? These questions, which have long concerned and divided China scholars, have now
returned to center stage in response to the intriguing remarks made by Chinas top legislator.
Chinas remarkable economic transformation and its growing geopolitical and economic
weight on the world stage have been among the most important events in the recent history
of global development (Murphy, 2010; Webber, 2010; Lin, 2011). With an average annual
economic growth rate of nearly 10 percent over the past three decades, China has quickly
upgraded its production capacity (as measured by GDP) to become the worlds second-largest
economy in the second quarter of 2010, trailing only the United States (Barboza, 2010).2
During the recent global financial crisis (20072009), Chinas ability to sustain its extraor-
dinary growth rate at above 8 percent per annum further captured the attention of scholars
and policymakers, generating debate over the salient features of Chinas growth model and
the lessons and implications that it may have for other developing and transitional economies
(Serra and Stiglitz, 2008; Whyte, 2009; Kennedy, 2010; Naughton, 2010; Huang, 2010).3
While it is generally agreed that China has made a decisive departure from the state socialism
that characterized the Maoist era, the exact nature and dynamics of the transformation ensu-
ing in the post-reform era remains controversial (Walder, 1995a; Woo, 1999; Naughton, 2007,
2011; Walker and Buck, 2007; Brandt and Rawski, 2008; Huang, 2008; Fligstein and Zhang,
2010; Wu, 2010). Despite the many attempts to get the China story right, fundamental
differences continue to exist among researchers concerning the real foundation for Chinas

2
It has been estimated that China will surpass the U.S. as the worlds biggest economy as early as 2030. However,
China remains a developing economy in terms of its per capita GDP, at a level only one-tenth that of Japan and one-
twelfth that of the United States (Barboza, 2010).
3
A hotly debated issue in both academic and policy circles concerns the merits and deficiencies of two influential
economic growth models, namely the Washington Consensus developed on the basis of American-style neoliberal
economic principles and the recently emerged Beijing Consensus, characterized by experimentation and adaptation
under the political control of a resilient authoritarian regime (Nathan, 2003; Huang, 2010). For a critical assessment,
see Naughton (2010).
714 EURASIAN GEOGRAPHY AND ECONOMICS

economic miracle and the type of economic system that characterizes China now and in the
years to come. Central to the debate and differences of opinion are assessments of owner-
ship structure and property rights in Chinas ongoing economic transition (Putterman, 1995;
Walder, 1995a; Oi and Walder, 1999).
To some scholars, Chinas phenomenal economic growth over the past three decades
has been an exceptional case of progress without privatization (Rawski, 1994) that defies
the basic principles of conventional economic theories and challenges the received wisdom
concerning the necessity of securing private property rights in the process of economic devel-
opment (Nolan and Wang, 1999; Whyte, 2009). Research in this vein has pointed out that
the Chinese economy since the 1980s has shown both a dramatic expansion of production
capacity and remarkable improvements in productivity through increased marketization of
the planned economy and decentralization of decision-making power, but without the mass
privatization adopted by the former Soviet Union and Eastern European countries (Naughton,
1995). According to this perspective, Chinas economic growth has been achieved through
predominantly public ownership, with extensive government intervention in and domination
of market development. The dramatic rise of township and village enterprises (TVEs) under
local state ownership in the 1980s and 1990s has been taken as evidence of the viability of
the market socialism model in the Chinese context.4 Research in this genre has contended
that public ownership is not inherently inferior to private ownership and that publicly owned
firms in socialist countries can operate as efficiently as private enterprise in the capitalist
market economy if they are exposed to the right incentives and constraints (Oi, 1992; Walder,
1995b). From this vantage point, the recent relaxation of ideological and regulatory con-
straints over private ownership and the significant advance of the private economy since the
late 1990s can be understood as a part of a neoliberal strategy adopted by Chinas authoritar-
ian regime to boost its political legitimacy (Nathan, 2003; Ma, 2009). According to this view,
China is still a commanding-heights economy (Huang, 2008, p. 276) despite the well-
documented process of economic reforms, and is likely on its way to establishing a socialist
market economy with Chinese characteristics, in which public and collective ownership
forms remain predominant.
The notion of exceptionalism has been contested by proponents of the convergence
thesis, in which Chinas economic success is seen as the result of its institutional convergence
toward the norm established in the capitalist economies (Woo, 1999). This counterargument
holds that what has happened in post-reform China is the result of using price signals and
clearer property rights to unleash entrepreneurial activitiesa practice not much different
from that in liberal capitalism (Nee and Opper, 2010). This perspective views the dynamic
TVE sector as overwhelmingly privately owned in character, albeit under the guise of collec-
tive ownership. If this is indeed the case, the Chinese economy is believed to have already
moved decisively toward privatization by the early 1990s, and it is precisely in those sectors
experiencing substantial privatization that economic dynamism has been most pronounced
(Nee and Su, 1993; Huang, 2008). Building on the assumption that the existence of well-
defined private property rights is a precondition for the proper functioning of a capitalist mar-
ket economy, this perspective suggests that while public ownership can serve as an effective
institutional solution to an underdeveloped market and institutional environment in the early
stages of Chinas economic transition, the costs of maintaining dominant state ownership

4
Market socialism is a theoretical concept coined by Oscar Lange during the great intellectual debate in the 1930s
known as the socialist controversy. It refers to an economic system in which the means of production are publicly
or collectively owned, whereas the allocation of resources follows the rules of the market. For the relevance of this
concept to Chinese economic reforms, see Wu (2009).
LIN AND HU 715

and delaying privatization eventually will become too large (Qian, 2001; Fan, 2002; Prime,
2004).5 To the supporters of this perspective, the recent shift of TVEs and small and medium-
sized state-owned enterprises (SOEs) to private ownership since the mid-1990s demonstrates
the superior efficiency of private vis--vis public ownership, as well as the irresistible trend
toward marketization with privatization. Meanwhile, the ongoing ownership restructuring
of large SOEs through corporatization and stock-market listing has been understood as a
prelude to further divestment of state ownership and more complete privatization (Zhang,
2004; Yusuf et al., 2006).6 Some have argued that China since the late 1990s had begun to
experience its third economic transformation, led by the burgeoning private sector, and
would eventually develop into a predominantly private market economy similar to that in the
capitalist world (Garnaut and Song, 2004).7
The aforementioned confusion and controversy surrounding the nature and dynamics of
Chinas ongoing economic transformation have brought to the fore a number of theoretical
and practical questions for careful investigation. How capitalist is the Chinese economy? Has
the private sector displaced the state sector as the dominant player in the Chinese economy?
Is there a linear trajectory of ownership transformation from public to private both for the
economy as a whole and across different industrial sectors? What is the relationship between
property rights and economic growth in the Chinese context? Is the cause-and-effect relation-
ship between privatization and efficient economic growth described by neoliberalism univer-
sally applicable, or is it contingent upon the nature and stage of economic development? What
spatial characteristics can be discerned in the recent growth and expansion of Chinas private
sector and how can they be explained? What are the factors that influence the uneven pace of
privatization in different regions? These are some of the questions that intrigue not only China
observers but anyone interested in economic growth and transformation.
Some of the questions raised above have been addressed in one way or another in the
burgeoning literature on SOE reforms, the growth of TVEs, and the expansion of the private
sector in China (Lin and Zhu, 2001; Garnaut and Song, 2004; Garnaut et al., 2005; Tsui et al.,
2006; Yusuf et al., 2006; Kung and Lin, 2007). However, most of these studies were based on
small-scale questionnaire surveys, case studies, documentary research of policies and regula-
tions, and even anecdotal evidence for different locations, economic sectors, ownership forms,
and time periods; as such they have suffered from the problems of fragmentation, isolation,
and discrepancy. What is missing in the extant literature is a systematic assessment of changes
in ownership structure and the driving forces underlying such changes. Moreover, existing
studies of Chinas ownership transformation have been focused overwhelmingly on national
macro-regulatory rules or firm-level characteristics. With few exceptions (Han and Pannell,
1999; Wei, 2004), little research has been done to examine the spatial dimensions of owner-
ship transformation, despite the fact that Chinas economic transformation has demonstrated

5
A notable consequence of delayed privatization in China is the accumulation of non-performing loans in state
banks, which accounted for some 5070% of their loan portfolios by the late 1990s (Lardy, 1998).
6
Ownership restructuring of the publicly owned sector started in 1993 with the official decision at the Third
Plenum of the 14th Chinese Communist Party Congress to establish a modern enterprise system. The process reached
its apex in 1997, when the CCPs 15th Congress lifted ideological constraints to the privatization of the majority of
state and collectively owned enterprises under the guiding principle of grasping the big, letting go off the small
(Zhuada fangxiao). For detailed discussions of the ownership transformation of Chinas public sector, see Lin and
Zhu (2001), Ho et al. (2003), Garnaut et al. (2005), and Oi (2005).
7
According to Garnaut and Song (2004), China experienced its first economic transformation when the peoples
communes were replaced by the household responsibility system in the early 1980s. The second transformation
was characterized by the emergence of TVEs as the main locus of economic dynamism in the second half of the
1980s.
716 EURASIAN GEOGRAPHY AND ECONOMICS

a remarkable degree of local and regional diversity in ownership forms and development
models (Oi and Walder, 1999; Chen, 2004; Tsai, 2007).8
Against the intellectual backdrop identified above, the present paper attempts to under-
take three specific tasks based on a detailed examination and comparison of the latest infor-
mation released from the first and second national economic censuses of China, undertaken in
2004 and 2008, respectively: (1) to examine the current status of Chinas ownership structure
and to identify trends in ownership transformation during the recent decade; (2) to compare
and contrast economic efficiency and industrial innovation among enterprises of different
types of ownership; and (3) to identify and explain the growth of the private sector as one of
the most dynamic elements of the Chinese economy undergoing marketization.
The remainder of the paper is organized in three parts. It begins with a clarification of
the sources of the data used in the research and the framework adopted for analysis. This is
followed by a systematic assessment of the current status of the Chinese economy in terms of
the structural composition of enterprises under different forms of ownership and the variation
in economic efficiency and industrial innovation among enterprises under different ownership
forms. In a third section, attention is focused on the growth and distribution of private firms in
order to understand the internal mechanism of privatization in the Chinese context. The paper
concludes with a summary of major findings and a discussion of their implications for further
theoretical inquiry and policy formation.

DEFINITION, DATA, AND METHODOLOGY

The central question investigated in this study concerns the structural composition and
growth as well as performance of the public vis--vis private sector in Chinas ongoing
economic transformation. Addressing this question will involve the delineation of Chinas
economic sectors by ownership types. This is not an easy task because Chinese-style eco-
nomic reform has spawned a variety of confusing and highly ambiguous ownership forms,
not all of which can be demarcated as either public or private. This difficulty is compounded
by the fact that the Chinese statistical authority has from time to time readjusted the scope and
meaning of certain ownership categories (Holz and Lin, 2001). An oft-used scheme adopted
by the National Bureau of Statistics classifies enterprises in China into eight types:

1. State-owned enterprises (SOEs) are those in which the means of production and income
are owned by the state.
2. Collectively owned enterprises (COEs) are those in which the means of production are
owned collectively.
3. Shareholding cooperative enterprises (SCEs) are limited liability entities owned entirely
or predominantly by the majority or all of their employees, individually or collectively,
in which shareholder voting is based on the principle of one person, one vote (Lin
and Zhu, 2001).9

8
In an interesting study of the growth of Chinas private sector, Tsai (2007) identified five models, namely the
Wenzhou model known for its early start of privatization (e.g., see Wei, 2009), the Sunan model based on collectively
owned TVEs (e.g., see Wei and Gu, 2010), the Pearl River Delta model driven by foreign direct investment (e.g., see
Yeung et al., 2009), the state-dominated model for localities possessing large state sectors on the eve of the reforms,
and the limited development model for less-developed rural areas in much of western and southwestern China that
were believed to have great incentives to develop local private economy to extricate themselves from poverty.
9
Given that SCEs were viewed as least threatening to the socialist ideology, they were promoted as the desir-
able ownership form in the early 1990s, but later abandoned because of their limited effects in reforming corporate
LIN AND HU 717

4. Joint ownership enterprises (lianying qiye) are economic units established by two or
more corporate enterprises or corporate institutions of the same or different ownership,
through joint investment on the basis of equality, voluntary participation, and mutual
benefits. They include joint state ownership enterprises (JSOEs), joint collective own-
ership enterprises (JCOEs), joint state-collective enterprises (JSCOEs), and other joint
ownership enterprises.

5. Limited liability corporations (LLCs) and limited shareholding corporations (LSCs)


are economic units established with investment from two or more investors, in which
each investor bears limited liability to the corporation depending on the share of invest-
ment he/she/it holds in total registered capital; the corporation bears limited liability to
its debt up to the maximum of its total assets, and shareholder voting is based on the
one share, one vote principle. Within LLCs, there is a special subcategory of solely
state-funded LLCs (SS-LLCs), whose investment came from single state investor.

6. Private enterprises (PEs) are profit-making economic units invested, established, and
controlled by domestic natural persons using employed laborers. They include private
sole proprietorships, private partnership enterprises, private LLCs, and private LSCs.

7. Enterprises with investment from Hong Kong, Macao and Taiwan (HMTIEs) include
Hong Kong, Macao, and Taiwan wholly owned enterprises, cooperative enterprises,
and joint ventures.

8. Foreign-invested enterprises (FIEs) include wholly owned foreign enterprises, foreign


cooperative enterprises, and joint ventures.

Almost none these types can be readily identified as public or private, inasmuch as
all involve a mixture of public and private capital. Following Liu (2005), a useful methodol-
ogy for defining Chinas public and private sector is based on the capital structure of different
types of enterprise. Table 1 shows the contribution of five types of investors (state, collective,
individual, HMT, and foreign) to the total received capital (shi shou ziben) of different types
of enterprise in 2004, which provides some clues about the identity of those who control
Chinas firms. Public capital, including state and collective capital, accounted for over three
quarters of received capital in SOEs, COEs, JSOEs, JCOEs, JSCOEs, and SSF-LLCs, which
on this basis can be considered to constitute the public-sector group. On the other hand,
private capitalincluding individual capital, capital investment from Hong Kong, Macao,
and Taiwan, and foreign capitalaccounted for over 80 percent of received capital in PEs,
HMTIEs, and FIEs. These latter three types of enterprises can thus be safely classified as a
private-sector group. For the remaining types of enterprises (including SCEs, other LLCs,
and LSCs), the share of public or private capital in total received capital ranges from 3070
percent. Therefore, these types are grouped together as the mixed-ownership sector. In addi-
tion to these enterprise units, individual/household businesses (getihu) run by either single
persons or family units have in recent years become one of the most dynamic and rapidly

governance and inherent limitations in attracting outside investment. In the new millennium, other ownership types
such as LLCs and LSCs were encouraged to promote the concentration of shares in the hands of management teams
through management buy-outs, based on the argument that effective corporate governance requires a major hands-on
stakeholder (Oi, 2005).
Table 1. Capital Structure of Enterprises under Different Types of Ownership in 2004 (in percent)
718

Public capital Private capital


Ownership
Collective Individual Total
type State capital Subtotal HMT capital Foreign capital Subtotal
capital capital

Total 48.1 7.9 56.0 28.0 7.3 8.7 44 100


SOEs 98.9 0.7 99.6 0.3 0.0 0.1 0.4 100
COEs 3.3 88.2 91.5 7.8 0.5 0.2 8.5 100
SCEs 12.1 24.9 37.0 62.1 0.6 0.3 6.3 100
JSOEs 93.3 3.6 96.9 2.9 0.1 0.1 3.1 100
JCOEs 5.5 74.2 79.7 19.8 0.3 0.2 20.3 100
JSCOEs 45.6 50.2 95.8 4.2 0.0 0.0 4.2 100
OJOEs 19.8 26.9 46.7 48.4 1.2 3.7 53.3 100
SSF-LLCs 98.5 0.7 99.2 0.3 0.3 0.2 0.8 100
Other LLCs 36.2 15.1 51.3 47.2 0.5 1.0 48.7 100
LSCs 52.0 8.4 60.4 32.5 2.6 4.5 39.6 100
PEs 0.4 1.8 2.2 97.3 0.3 0.2 97.8 100
HMTIEs 10.3 3.8 14.1 3.7 73.9 8.3 85.9 100
FIEs 7.6 4.3 11.9 3.2 14.5 70.4 88.1 100
a
SOEs = state-owned enterprises; COEs = collectively-owned enterprises; SCEs = shareholding cooperative enterprises; JSOEs = jointly state-operated
EURASIAN GEOGRAPHY AND ECONOMICS

enterprises; JCOEs = jointly collective-operated enterprises; JSCOEs = jointly state and collective co-operated enterprises; OJOEs = other jointly operated
enterprises; SSF-LLCs = solely state-funded limited liability corporations; LLCs = limited liability corporations; LSCs = limited shareholding corporations;
PEs = private enterprises; HMTIEs = Hong Kong, Macao, and Taiwan invested enterprises; FIEs = foreign invested enterprises.
Sources: Compiled by the authors from LOFEC, 2006, Vol. 2, pp. 29 and the Communiqu on Major Data of the 1st Economic Census in 2004 [http://www
.stats.gov.cn/zgjjpc/cgfb/t20051206_402294807.htm].
LIN AND HU 719

expanding sectors of Chinese economy.10 They can no longer be neglected in any attempts to
measure the size of Chinas private sector.
It should to be pointed out that this definition of the private sector is conservative and
narrow, as it does not include de facto private firms registered as collective firms or those
SOEs and COEs that have been privatized but have retained their previous registration status
(Haggard and Huang, 2008).11 However, it is less ambiguous than the alternatives, and thus
can facilitate the analysis of Chinas ownership transformation over time and across space.
The data used in this study come mainly from the first and second national economic
censuses, of 2004 and 2008, respectively.12 The two censuses covered 19 macroeconomic
sectors and 875 four-digit subsectors, in accord with Chinas national industrial classifica-
tion scheme, and included all legal units and individual businesses engaged in secondary or
tertiary economic activities in the country. As the most comprehensive enumerations of the
Chinese economy, the two censuses reported a wide variety of indicators such as number of
enterprises, employment, received capital, total assets, sales income, and industrial output
value by ownership types and sectors. While the economic censuses are not entirely free of
errors or inconsistencies despite the official effort for verification and correction, the census
results stand out as the most comprehensive and coherent quantification of Chinas economic
activities, which provide more accurate and up-to-date information than heretofore available.
Supplementary information also will be sought from the second basic unit census conducted
in 2001 for comparison.13
Both descriptive and inferential statistics are employed to serve three main purposes.
First, we compiled descriptive statistics to identify and compare the structural composition of
different ownership categories over time in terms of the number of firms, employment, total
assets, gross value of industrial output, and sales income. We also probed into variations in
the degree and pace of privatization by sectors and operational scale, using employment and
sales income as the relevant measures.

10
According to the official definition, an economic entity is an individual/household business if it employs no
more than seven laborers, and one that hires eight or more workers must register as a private enterprise. This dis-
tinction reflects Marxs formulation that when a business owner hires fewer than eight workers, the surplus values
exploited are not his or her main source of income (Bian and Zhang, 2006).
11
It is estimated that in 1995 the number of de facto private firms registering themselves as public enterprises
(referred to as wearing a red hat) nationwide was twice the number of de jure private firms (Zhang, 1999, p. 15,
cited in Bian and Zhang, 2006, p. 27).
12
The purpose of an economic census in China is to comprehensively examine the scale, structure, and efficiency
of Chinas secondary and tertiary economies, to produce accurate data upon which to formulate national economic
and social development plans, and to establish a statistical foundation for better management and decision-making.
Beginning with the first census of 2004, an economic census is to be conducted twice each decade. The two cen-
sus enumerations actually began on January 1, 2005 and January 1, 2009, respectively, and the results adjusted to
the dates of December 31, 2004 and December 31, 2008, respectively. A quality assessment exercise was under-
taken for each census based on the stratified random sampling method. The 2004 census sampled 21,731 legal units
and establishments and 45,623 individual businesses, reporting an error rate of 4.9 per thousand. The 2008 census
sampled 21,843 legal units and establishments and 24,263 individual businesses, producing an error rate of 3.5 per
thousand.
13
The basic unit census (jiben danwei pucha) was conducted in 1996 and 2001 for the purpose of surveying the
structural characteristics of the basic, legally defined units and their affiliated industrial establishments by sector,
ownership, scale, and region. The coverage of the economic censuses is much broader than that of the basic unit
censuses. The economic census is a combination of the industrial census (manufacturing), tertiary industrial census,
basic unit census, and construction industry census, each of which were previously conducted independently by
different state agencies. It should be noted that the classification scheme of enterprises by ownership in the 1996
basic unit census was inconsistent with that utilized in the 2001 basic unit census and the 2004 and 2008 economic
censuses.
720 EURASIAN GEOGRAPHY AND ECONOMICS

Then we calculated two variableslabor productivity as the ratio of sales income to


employment and capital productivity as the ratio of sales income to total assetsin a com-
parative analysis to examine the efficiency of public versus private ownership. Furthermore,
we used two indicatorspercentage of new products in total sales income and number of
granted patents per 10,000 personsas a measure of industrial innovation to compare the
performance of enterprises of different ownership types.
Finally, we calculated descriptive statistics to compare and contrast the relative strength
of the domestic private sector in 2004 and 2008. We grouped Chinas provinces in terms of
the share of domestic private employees within total non-agricultural employment. Snapshot
maps for the three census years of 2001, 2004, and 2008 were plotted using Arcview GIS.
Moreover, we utilized inferential statistics to test the strength and direction of correlations
between the degree of market openness and the socialist legacy on the one hand and the devel-
opment of PEs and individual businesses on the other.

CHINAS OWNERSHIP TRANSFORMATION: PATTERN AND PROCESSES

In the past three decades, China has undertaken significant reform of the ownership struc-
ture of its national economy. In the early period of market reforms (19781992), emphasis was
initially placed on improving the efficiency and productivity of SOEs through decentraliza-
tion of decision-making authority, strengthening financial incentives of individual firms, and
introducing long-term managerial contracts with pre-specified financial targets (Naughton,
1995). During this period, non-state sectors were allowed to grow and expand on a market
track outside of the plan for the state economy. This dual-track reform strategy had limited
effects on the performance of state-owned enterprises. The widening gap in performance
between the state sector and a burgeoning non-state sector led to a reorientation of the reform
strategy in 1993, when the central government explicitly endorsed ownership reform as the
main task toward achieving the declared objective of building a socialist market economy
(Lin and Zhu, 2001). As a result, since the mid-1990s many small and medium-sized SOEs
and COEs were transformed into SCEs and PEs, and development of the private sector was
actively promoted with the goal of making it an important component of the Chinese econ-
omy. Meanwhile, the central government has continued to maintain the dominance of public
ownership in those sectors considered to be the pillars of the national economy. A variety of
corporatization programs have been introduced to transform SOEs from sole public propri-
etorship into shareholding entities that exercise independent decision-making, have diverse
ownership forms, and are fully guided by market forces (Lin and Zhu, 2001; Zhang, 2004).
The shifting emphasis of ownership reforms over the past three decades has provided an
important institutional backdrop against which the pattern of Chinas economic transforma-
tion has taken shape.
Despite the continuing trend of globalization, the Chinese economy presently is over-
whelmingly dominated by domestic enterprises, for which capital is obtained from internal
sources. Domestic enterprises accounted for over 96 percent of the number of firms, 85 per-
cent of employment, nearly 90 percent of capital assets, and over 80 percent of sales income
in the 2008 census (Table 2). Enterprises that are financed by external capital, including
foreign-invested enterprises and those financed by Hong Kong, Taiwan, and Macau capital,
accounted for only the small, residual share of the national economy (less than 4 percent of
the number of firms, 14 percent of employment, 10 percent of capital assets, and 20 per-
cent of sales income). Further scrutiny suggests that externally financed enterprises have a
significant presence only in a few industrial sectors. Among the 30 manufacturing sectors

Table 2. Selected Indices of Economic Transformation in China, 2004 and 2008a

2004 2008 Percent


Enterprise No. No.
Employ- Sales Employ- Sales No.
by enter- Assets enter- Assets Employment Assets Sales income
ment income ment income enterprises
ownership prises prises
type Million Million Trillion Trillion Million Million Trillion Trillion
2004 2008 2004 2008 2004 2008 2004 2008
units person yuan yuan units persons yuan yuan

Domestic 3.1 143.6 86.3 35.4 4.8 187.8 186.3 84.5 95.4 96.2 86.0 85.8 89.2 89.7 80.3 81.1
SOEs 0.2 24.1 30.1 7.1 0.1 22.0 47.7 12.9 5.5 2.8 14.4 10.1 31.1 23.0 16.1 12.4
COEs 0.3 15.2 5.2 1.9 0.2 9.1 4.4 2.2 10.5 3.8 9.1 4.1 5.3 2.1 4.2 2.1
SCEs 0.1 3.8 1.9 0.6 0.1 2.6 4.5 0.9 3.4 1.2 2.3 1.2 1.9 2.2 1.4 0.9
JOEs 0.0 0.9 0.5 0.3 0.0 0.6 0.5 0.3 0.6 0.2 0.5 0.3 0.5 0.2 0.7 0.3
LLCs 0.4 35.0 19.5 10.1 0.6 44.9 42.8 23.4 11.1 11.1 21.0 20.5 20.1 20.6 22.9 22.4
LSCs 0.1 10.6 20.3 5.4 0.1 14.7 59.6 12.9 1.9 2.0 6.3 6.7 21.0 28.7 12.3 12.4
LIN AND HU

PEs 2.0 53.1 8.7 9.9 3.6 91.5 25.7 31.2 60.9 72.6 31.8 41.8 9.0 12.4 22.5 30.0
ODEs 0.1 1.1 0.2 0.1 0.1 2.4 1.2 0.7 1.5 2.4 0.6 1.1 0.2 0.6 0.3 0.6
HMTIEs 0.1 11.9 4.2 3.1 0.1 14.5 8.0 6.7 2.2 1.6 7.1 6.6 4.4 3.9 7.0 6.4
FIEs 0.1 11.5 6.2 5.6 0.1 16.7 13.5 13.0 2.5 2.0 6.9 7.6 6.4 6.5 12.7 12.5
Total 3.3 166.9 96.7 44.1 5.0 218.9 207.8 104.2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
IBs 23.5 45.9 0.5 2.0 29.2 57.8 0.9 3.3
a
ODEs = other domestic enterprises; Ibs = individual businesses. For other ownership forms, see the note for Table 1. Data in the table cover only enterprise
units with the status of legal persons, except for legal-person units affiliated with government agencies and public institutions. Data on the individual business
sector in both 2004 and 2008 comes from Chinas State Industrial and Commercial Administration Yearbook (CSICAB, 2009) and is therefore not comparable
with the economic census data. According to the 2004 economic census, there were 39.21 million individual business units in 2004, with a total employment
of 94.22 million persons and total assets of 1.64 trillion yuan, generating a sales income of 8.69 trillion yuan. The 2008 economic census only reported data
on individual businesses with a registration license. According to the 2008 census data, there were 28.73 million registered individual business units, with a
total employment of 81.95 million persons.
721

Sources: Compiled by authors from LOSEC, 2006, Vol. 1, pp. 108, 131, 200219, 222-241 and LOSEC, 2010, Vol. 1, pp. 106, 129, 198.
722 EURASIAN GEOGRAPHY AND ECONOMICS

classified by the statistical authorities, foreign-invested enterprises occupied a dominant posi-


tion in employment and sales income in only twothe electronics and telecommunication
industry and the manufacturing of cultural and sports products. Geographically, the distribu-
tion of the enterprises financed by external capital has demonstrated a striking unevenness.
Foreign-invested enterprises exhibit a strong presence in Shanghai, Beijing, Tianjin, Jiangsu,
and southern China. HMTIEs were a significant presence only in the two southern provinces
of Guangdong and Fujian (Figs. 1 and 2). This pattern indicates that the Chinese national
economy has been anchored in and driven by domestic capital.14 It also suggests that the
injection of external capital into the Chinese economy has not been as pervasive, uniform, and
coordinated as generally assumed in popular theoretical models. As Zhou et al. (2011) have
recently observed, the (re)territorialization of global capitalism in China has been driven by
different motivations, diverse imperatives of accumulation by dispossession, and multiple
rounds of spatial fixes (see also Harvey, 1985, 2003).
The dominance of domestic enterprises, however, cannot be taken as indicative of a
strong and leading position held by the public sector or state-owned industry in the Chinese
economy. On the contrary, the public sector accounted for only 6 percent of the number of
firms, 14 percent of employment, 25 percent of capital assets, and 15 percent of sales income
in 2008. In fact, the public sector has been shrinking both sectorally and geographically.
Its contributions to the national economy in terms of number of firms, employment, capital
assets, and sales income all declined by around 10 percent between 2004 and 2008 (Fig. 3).
Geographically, the share of state-owned and state-controlled enterprises declined in many
provincial economies, giving way to the private and non-state sectors. As shown in Figure 4,
state-owned and state-controlled enterprises dominated provincial economies spanning more
than half of Chinas territory in 2001, but have since receded to the northwestern and north-
eastern corners of the country.
In stark contrast to the demise of the public sector, the private sector has emerged as one
of the most rapidly growing segments of the Chinese economy. The 2008 economic census
reported that private enterprises accounted for over 70 percent of the number of Chinese
firms, 40 percent of employment, and 30 percent of sales income, despite the fact that their
capital asset holdings constituted only 12 percent of the total. Between 2004 and 2008, the
private sector increased its shares in the total number of firms, employment, and sales income
by about 10 percent, whereas the public sector registered a proportional decline. The mir-
ror-image pattern of waxing and waning displayed by private and state-owned/controlled
enterprises is pronounced when Figures 4 and 5 are compared. It is important to note that the
official classification of private enterprises does not include millions of individual enterprises
(geti jingyinghu).15 Nor does it include enterprises that are owned and run by overseas inves-
tors. If the definition of the private sector is expanded to include individual businesses as well
as enterprises invested by overseas capital, then the private sector outstrips the public sector
by a large margin, accounting for more than two-thirds of Chinas total employment and over
half of the countrys national sales income. This pattern of ownership transformation revealed
from the census data suggests that the recent phenomenon of the state advances, the private

14
In fact, the ratio of foreign direct investment (FDI) to total fixed asset capital investment in China has never
exceeded 20 percent and the ratio of exports to GDP has remained below 30 percent (CSSB, 2010; see also Lin 2011,
p. 5).
15
China had some 39 million individual businesses according to the 2004 economic census, and some 29 mil-
lion registered individual businesses were enumerated in the 2008 census (see the note below Table 2 for more
information).
LIN AND HU 723

Fig. 1. Foreign-invested enterprises in provincial economic output, 2001, 2004, and 2008. Sources:
Calculated by authors from LOSBUC (2003, p. 296297) and LOSEC (2006, Vol. 1, pp. 198199; 2010,
Vol. 1, p. 198).
724 EURASIAN GEOGRAPHY AND ECONOMICS

Fig. 2. HKTM-invested enterprises in provincial economic output, 2001, 2004, and 2008. Sources:
Calculated by authors from LOSBUC (2003, pp. 296297) and LOSEC (2006, Vol. 1, pp. 198199;
2010, Vol. 1, p. 198).
LIN AND HU 725

Fig. 3. Chinas changing ownership structure, 20042008. Public ownership includes SOEs
(state-owned enterprises) and COEs (collectively-owned enterprises). Private ownership includes PEs
(private enterprises), HMTIEs (Hong Kong, Macao and Taiwaninvested enterprises), and FIEs (for-
eign-invested enterprises). Mixed ownership includes SCEs (shareholding cooperative enterprises),
LLCs (limited liability corporations), and LSCs (limited shareholding corporations). Others refers to
other ownership types including JSOEs (jointly state-operated enterprises), JCOEs (jointly collectively
operated enterprises), JSCOEs (jointly state and collective co-operative enterprises), SSF-LLCs (solely
state-funded limited liability corporations), and OJOEs (other jointly operated enterprises). Sources:
Calculated by the authors from LOSEC (2006, Vol. 1, pp. 198199; 2010, Vol. 1, p. 198).

sector retreats (guojin mintui) may not be as prevalent as is believed among the general pub-
lic and in policymaking circles.16
The trend of declining state-owned enterprises and a growing private sector may be
interpreted as the direct outcome of a privatization process through which many state-owned
enterprises have been transformed into private businesses. But is this really the case? Further
analysis reveals an interesting discrepancy between the dominance of the private sector in the
labor market and the privatization of capital assets. China demonstrates a peculiar pattern of
labor market privatization without a massive capital asset privatization. More specifically, the
shrinking public sector has not been immediately replaced by the private sector, but rather
has been accompanied by the emergence of a distinct mixed ownership type that combines
public and private capital.17 This type of mixed ownership includes shareholding coopera-
tives, jointly operated enterprises, limited liability corporations, and limited shareholding

16
Prominent examples of guojin mintui include the case of Rizhao Steel, a profitable private steel company that
is being aggressively merged with the loss-making (state-owned) Shandong steel group; the takeover of many small
private coal mines by large state-owned energy suppliers in Shanxi province; as well as mergers and takeovers in the
airline and real estate sectors (e.g., see von Roda, 2010).
17
The mixed ownership type took shape in the early 1990s, when the Third Plenum of the Fourteenth Chinese
Communist Party Congress convened in 1993 to endorse the establishment of a modern enterprise system as a major
reform designed for the building of a socialist market economy. A key goal of the reform was to convert SOEs
from public sole proprietorship to shareholding entities that exercised independent in decision-making, had diverse
ownership forms (but without serious erosion of public ownership), and were fully guided by market forces (see Lin
and Zhu, 2001).
726 EURASIAN GEOGRAPHY AND ECONOMICS

Fig. 4. State-owned/controlled enterprises in provincial employment, 2001, 2004, and 2008.


Sources: Calculated by the authors from LOSBUC (2003, pp. 296297) and LOSEC (2006, Vol. 1, pp.
198199; 2010, Vol. 1, p. 198).
LIN AND HU 727

Fig. 5. Private enterprises in provincial employment, 2001, 2004, and 2008. Sources: Calculated
by authors from LOSBUC (2003, pp. 296297) and LOSEC (2006, Vol. 1, pp. 198199; 2010, Vol. 1,
p. 198).
728 EURASIAN GEOGRAPHY AND ECONOMICS

corporations. Mixed-ownership enterprises lag the private sector in terms of number of


firms and size of the labor force, but held more than half of the countrys total capital assets
and generated over 35 percent of the national total sales income (Fig. 3). Geographically,
enterprises with mixed ownership expanded rapidly as did private enterprises; however, the
locational pattern has been different. Whereas private enterprises occupied the eastern coast
where global market forces are strongly felt, mixed-ownership enterprises quickly expanded
in the interior (Fig. 6).
Taken together, the information gathered from the first and second national economic
census has shown a distinctive form of economic transformation characterized by the con-
tinuing dominance of domestic enterprises, a phenomenal privatization of the labor market,
and the blending of public and private capital as an alternative to the old socialist economy
plagued by many inefficient SOEs operating under hopeless soft-budget constraints. The
emerging economic landscape is marked by an extremely uneven penetration of overseas
capital favoring only a few large cities on the eastern coast and two southern provinces, a
shrinking production space occupied by SOEs, the rapid expansion of the private sector along
the eastern coast, and the emergence of enterprises with mixed ownership to claim the large
territory previously dominated by SOEs in central and northern China. That the privatiza-
tion of the labor market has not been accompanied by the massive privatization of capital
and land is perhaps one of the most important defining features of capitalism with Chinese
characteristics.

OWNERSHIP STRUCTURE AND ECONOMIC PERFORMANCE

It is generally believed that clearly defined and protected property rights operationalized
through private ownership can provide the necessary security and incentives to producers
for efficient production, leading to better economic performance overall (Demsetz, 1967;
Grossman and Hart, 1986). According to this perspective, private businesses should normally
outperform those in the public sector in terms of economic efficiency. But does this popu-
lar perception actually capture the Chinese reality? The information gathered from the two
national economic censuses has provided an interesting perspective from which to gauge the
relationship between the ownership of firms and their economic performance. Table 3 lists the
results of our comparison of some key economic indicators among the Chinese enterprises on
the basis of the data available in the national economic census. The resulting pattern does not
entirely confirm conventional theoretical expectations.
Between the two census years of 2004 and 2008, the enumerated Chinese enterprises all
reported significant improvements in labor productivity, capital productivity, and industrial
innovation. Increased efficiency has occurred in all sectors regardless of ownership type. The
increase in efficiency and innovativeness was accompanied by the downsizing of individual
firms, with average firm size declining from 51 to 44 employees. This downsizing did not
apply to firms financed by external capital, however. In fact, foreign-invested enterprises,
enterprises established by overseas Chinese, and state-owned as well as state-controlled
enterprises all increased in size. The overall downsizing of Chinese firms has clearly been the
direct consequence of both the SOE reforms through the grasping the large and letting go of
the small (zhuada fangxiao) program as well as the flourishing of numerous small private
and individual firms across the country.
Among the domestic enterprises of various ownership types, limited shareholding cor-
porations reported the highest labor productivity, highest ratio of the sales of new products
to total sales income, and highest number of patents granted per ten thousand employees.
LIN AND HU 729

Fig. 6. Mixed-ownership enterprises in provincial employment, 2001, 2004, and 2008. Sources:
Calculated by authors from LOSBUC (2003, pp. 296297) and LOSEC (2006, Vol. 1, pp. 198199;
2010, Vol. 1, p. 198).
Table 3. Productivity and Innovation in China, 2004 and 2008
730

Industrial innovativeness
Enterprise Average size Labor productivity Capital productivity
(employees)a (thous. yuan)b (yuan/yuan)c New product Granted
by ownership
development (percent)d patentse
type
2004 2008 2004 2008 2004 2008 2004 2008 2004 2008

Domestic 46 39 250 450 0.41 0.45 10.16 9.94 4.88 9.42


SOEs 134 157 300 590 0.24 0.27 7.18 8.47 2.96 6.19
COEs 45 48 120 240 0.36 0.49 9.50 8.31 2.13 2.71
SCEs 34 44 160 340 0.33 0.20 4.92 5.98 4.39 5.16
JOEs 43 59 340 580 0.57 0.68 10.15 14.63 2.30 2.15
LLCs 97 82 290 520 0.52 0.55 13.50 12.93 5.38 11.31
LSCs 177 147 510 880 0.27 0.22 16.09 18.18 11.04 24.67
PEs 27 25 190 340 1.14 1.21 4.75 5.12 4.28 6.79
ODEs 21 20 100 280 0.61 0.56 1.70 9.59 1.18 6.95
HMTIEs 170 181 260 460 0.73 0.84 11.06 12.19 3.02 7.40
FIEs 143 167 490 780 0.90 0.96 16.19 16.93 4.50 8.99
Total 51 44 260 480 0.46 0.50 11.53 11.53 4.58 9.08
IBs 4 3 90 5.30
a
Average size = total employment divided by number of units.
EURASIAN GEOGRAPHY AND ECONOMICS

b
Labor productivity = ratio of sales income to employment.
c
Capital productivity = ratio of sales income to total assets.
d
New product development = ratio of sales income of new products to total sales income in above-scale industrial enterprises. Prior to 2007, above-scale
industrial enterprises included all state-owned industrial enterprises plus nonstate-owned industrial enterprises whose sales income exceeded 5 million yuan.
Beginning in 2007, above-scale industrial enterprises included all industrial enterprises, regardless of ownership type, whose sales income exceeded 5 million
yuan.
e
Granted patents = ratio of the number of invention patents held to total employment within all enterprises of a particular ownership type (per 10,000
employees).
Sources: Calculated by authors from LOSEC, 2006, Vol. 1, pp. 108, 131, 200219, 222241 and LOSEC, 2010, Vol. 1, pp. 106, 129, 198.
LIN AND HU 731

State-owned enterprises, which have accumulated an enormous amount of capital assets, did
reasonably well in labor productivity when compared against the national average, although
their capital productivity and industrial innovativeness were below average (Table 3). In con-
trast, private enterprises did not exhibit a level of labor productivity or new product develop-
ment that surpassed their public counterparts, despite what might be expected according to
conventional wisdom, and ranked below the national average according to both indicators as
well as in patents granted. However, in terms of capital productivity (the ratio of sales income
to total capital assets) private enterprises outperformed all other ownership types.
The peculiar pattern of low labor productivity and high capital productivity demonstrated
by private enterprises can be better understood when situated in the context of the ownership
structure identified in the preceding section, in which private enterprises employed the lions
share of Chinas labor market but utilized only a small portion of capital assets. While the
state has opened up the labor market and allowed the private sector to play an important role
in absorbing the massive number of workers laid off from reformed SOEs, Chinas financial
market is monopolized by the state, which has taken the largest share of existing capital
assets and has continued to pump them into SOEs, leaving private and individual businesses
to depend upon informal channels and internal sources of capital mobilization (Tam, 2004).18
Thus private enterprises in contemporary China are numerous, small, very labor intensive,
poorly capitalized, and less innovative than most of their competitors. There is not yet any
convincing evidence of a definitive cause-effect relationship between privatization and effi-
cient economic performance.
The underperformance of Chinas private sector may be attributed to the heavy-handed
intervention and perhaps distortion of the state when viewed from the neoliberal perspective.
Nevertheless, the evidence existing in China has shown that privatization per se does not
function as a powerful and decisive force shaping efficient economic performance indepen-
dent of the broader social and political context. Instead of being a prerequisite for efficient and
sustained economic growth, privatization has been dependent upon and shaped by prevailing
social and economic conditions (Ho, 2003; Lin, 2009, 2010). As Whyte (2009, p. 386) has
observed, private property rights are not so important per se, but only as one institutionalized
option (although a common and often very powerful one) for fostering positive development
incentives and opportunities for individuals, families, and firms.
If private ownership does not appear to be a force determining economic efficiency,
then what factors do help identify and explain the variation of productivity and innovative-
ness of Chinese firms? Although the data gathered from the national economic censuses are
aggregate in nature, and do not allow for detailed analysis at the firm level, a cross-sectional
and cross-regional comparison can yield some important insights. First, domestic enterprises
were outperformed by those invested and operated by foreign/overseas capital. As listed in
Table 3, foreign-invested enterprises and those financed by capital obtained from Hong Kong,
Taiwan, and Macao registered labor and capital productivity scores that were more competi-
tive than those of domestic firms. This finding holds both for the economy as a whole as well
as for 16 out of the 18 one-digit economic sectors (Table 4). Foreign-invested enterprises
also recorded a higher ratio of sales income of new products to total sales income than their
domestic counterpart. However, domestic enterprises took the lead in industrial innovative-
ness when measured by the number of granted invention patents per ten thousand employees,
with firms established by foreign and overseas Chinese capital ranking below the national

18
In 2008, over 60 percent of financial assets in China were controlled by the state, and only 3.37 percent of short-
term loans made by the banking sector went to the domestic private sector (MOF, 2009).
732 EURASIAN GEOGRAPHY AND ECONOMICS

average. This pattern suggests that the interests of global capitalism in China lie primarily in
the exploitation of inexpensive Chinese labor rather than in original research and develop-
ment. China has been brought into the global arena of capital accumulation as a new site of
low-cost manufacturing rather than as an incubator of innovation or center of technological
advancement. Thus to date foreign and HMTIE capital do not appear to be reliable sources for
putting China on the path of transition from made in China to invented in China. Internal
research and development appears to be the more realistic option for China to engage in inno-
vative technological advancement.
Second, a positive correlation exists between the size of enterprises and economic pro-
ductivity and industrial innovation. Among Chinese enterprises of different ownership types,
limited shareholding corporations, HMTIEs, foreign-invested enterprises, limited liability
corporations, and SOEs had an average size much larger than the national mean. Coincidently,
these enterprises have a record of labor productivity and new product innovation that is stron-
ger than the national average. The only exception was SOEs, whose new product develop-
ment performance was poorer than the national average. The general association between
firm size and economic performance was confirmed by a simple correlation analysis across
373 three-digit economic sectors in 2008. That statistical exercise showed that there was a
significantly positive relationship (r = 0.109) between the average size of a firm and its labor
productivity.19 Further statistical testing revealed a highly significant and positive relationship
between firm size and new product innovativeness across 167 three-digit industrial sectors
in both 2004 (r = 0.374) and 2008 (r =0.311). These results suggest that economies of scale
are still an important factor affecting the productive and innovative performance of business
firms in China, and it may explain why Chinese firms in almost all business sectors show an
unambiguous preference for getting larger and stronger (zuoda zuoqiang).
Third, the economic performance of Chinese enterprises is closely related to the strategic
positions they occupy within the national developmental agenda, as perceived by the state.
Table 5 lists the top-10 two-digit sectors in China in terms of the average labor and capital
productivity of their business enterprises. An interesting observation that can be gleaned from
the table is that most of the top-10 sectors in labor productivity are those involving either the
processing of energy resources or financial transactions, which are firmly in the hands of the
state because of their perceived strategic importance to national interests. Despite decades
of market-oriented economic reforms, the Chinese state still maintains a controlling stake in
those sectors considered critical to national fiscal income and/or macroeconomic stability,
such as tobacco, petroleum, metallurgy, finance, and transportation. The high-ranking labor
productivity of firms in these sectors may not reflect their superior economic efficiency or
market competitiveness, but rather the strategic imperative of the Chinese state to occupy
the commanding heights of Chinese economy under conditions of increasing marketization
and globalization. This pattern suggests that the determinants of economic performance of
Chinese firms cannot be fully understood without taking account of their sectoral specificity
and the pervasive role of the Chinese state in governing the scope, tempo, and processes of
market activities (see Ma, 2009).
Finally, firms regional economic environment may help explain the variation of their
economic performance and innovativeness. As the locus of diverse location factors and vari-
ous types of business and social networks, the region has been proposed by economic geog-
raphers as a key variable shaping a firms productive and innovative efficiency. In addition

19
However, the Pearson correlation coefficient between firm size and labor productivity in 2004 was positive (r=
0.075) but not significant statistically.

Table 4. Labor and Capital Productivity of Domestic and Foreign Enterprises by One-Digit Sectoral Economic Classification, 2004 and 2008a

Labor productivity Capital productivity


(10 thous. yuan/person) (yuan/100 yuan)
Economic sector 2004 2008 2004

DEs FEs DEs FEs DEs FEs

All 24.66 37.22 44.98 63.32 41.03 83.34


Agriculture 2.46 4.00 4.27 19.76 33.52 16.67
Mining 14.38 75.58 38.50 147.10 76.28 103.35
Manufacturing industry 20.29 31.99 42.50 56.08 98.57 117.73
Electrical power, gas, and water 43.11 110.74 85.53 144.48 39.40 41.76
Construction 10.74 23.92 17.22 41.40 95.39 78.74
Transport, storage, and postal 15.61 52.11 31.73 77.39 38.37 44.29
Information transfer, computers, and software 34.57 82.13 39.07 74.31 28.47 60.65
Wholesale and retailing 77.52 199.68 127.40 227.18 178.32 204.88
Hotel and catering 6.51 12.18 9.92 16.20 45.04 42.30
LIN AND HU

Finance 64.15 45.29 106.33 96.67 5.69 4.26


Real estate 35.53 75.71 53.77 100.38 22.82 15.89
Rental and commercial services 17.52 66.48 25.37 92.12 9.31 19.24
Scientific research, technical services, and geology 17.06 32.33 32.45 40.39 39.79 43.32
Water conservancy, environment, and public 11.15 34.51 18.43 40.39 11.13 11.80
management
Community and other services 7.87 11.47 11.52 11.94 34.96 42.51
Education 5.41 13.29 10.70 29.36 38.20 27.06
Health, social security, and social welfare 7.12 20.45 13.15 25.30 58.95 33.43
Culture, sports, and entertainment 14.40 10.60 20.90 15.55 35.98 14.77
a
Definitions of labor productivity and capital productivity are the same as those in Table 4; FEs include both foreign-invested enterprises and enterprises
financed by capital from Hong Kong, Macao, and Taiwan.
733

Sources: Calculated by authors from LOFEC, 2006, Vol. 1, pp. 178197, 200219, 222241 and LOSEC, 2010, Vol. 1, pp. 176217.
734

Table 5. Top 10 Two-Digit Sectors in Productivity, 2004 and 2008

Labor productivity (10 thous. yuan/person) Capital productivity (yuan/100 yuan)


Rank
2004 Value 2008 Value 2004 Value

1 Tobacco 135.10 Petroleum processing 254.24 Wholesale 190.78


2 Wholesale 120.28 Tobacco 238.49 Petroleum processing 173.67
3 Petroleum processing 115.56 Security 196.57 Waste recycling 155.82
4 Other financial activities 78.39 Wholesale 195.47 Food processing 150.96
5 Air transport 69.37 Pipeline transport 145.56 Leather, furs, down and related products 148.94
6 Banking 68.06 Smelting and pressing of 144.57 Retailing 140.74
ferrous metals
7 Pipeline transport 65.24 Banking 135.53 Telecommunication equipment, computer 138.89
and other electronic equipments
8 Telecommunication and other 58.36 Electrical power 104.79 Garments, shoes and hat making 124.99
information transfer services
9 Smelting and pressing of ferrous 57.62 Smelting and pressing of 103.53 Cultural and sports products 121.79
metals non-ferrous metals
10 Insurance 55.93 Oil and gas exploration 102.54 Art products and other manufacturing 118.42
EURASIAN GEOGRAPHY AND ECONOMICS

Sources: Calculated by authors from LOFEC, 2006, Vol. 1, pp. 178197, 200219, 222241 and LOSEC, 2010, Vol. 1, pp. 176217.
LIN AND HU 735

to a number of firm-, industry-, and country-specific factors, many theoretical and empiri-
cal contributions have argued that regional setting matters in the explanation of why certain
firms are more productive and innovative than others (Hu and Lin, 2011a, 2011b). This is
expected to apply in the Chinese case, given that the combination of factors favoring eco-
nomic efficiency (e.g., good transportation networks and greater accessibility, strong market
demand, availability of skilled labor, presence of foreign capital, existence of agglomeration
economies) is not evenly distributed across the entire country, but rather heavily concentrated
in a few regions (Pannell, 1988; Fan and Scott, 2003). The effect of regional variables is
revealed by a map showing spatial variation in labor productivity, capital productivity, and
industrial innovation among Chinese provinces (Fig. 7). In terms of efficiency as measured
by labor and capital productivity, firms in the eastern coast, northeast, and large cities clearly
outperformed their peers elsewhere, simply because of their favorable location, better eco-
nomic infrastructure, and stronger industrial base (see Wu, 2010). In terms of technological
innovation, outstanding performance occurred primarily in large cities (i.e., Beijing, Tianjin,
Shanghai, Chongqing) and the coastal provinces (e.g., Jiangsu, Zhejiang, Guangdong). This
pattern suggests that the productive and innovative performance of Chinese firms has been
characterized by its striking unevenness over space, and this unevenness has been closely
related to both economies of urbanization and the locational advantages of the region within
which the firms are embedded.

THE NEW PRODUCTION SPACE OF CHINAS PRIVATE ENTERPRISES

The analysis in the previous section focused on the changing structure of the Chinese
economy and changing performance of enterprises of different type (ownership, size, indus-
trial sectors, and location). Among the different types of enterprises, those of the private
sector have been the most dynamic segment of the Chinese economy, experiencing dramatic
expansion even though its economic efficiency and industrial innovativeness continued to
lag SOEs and foreign-invested enterprises. Theoretically, the functioning of the private sec-
tor in the Chinese economy has been a highly controversial topic, attracting much scholarly
attention and generating ongoing debate. For this reason, it is necessary to scrutinize more
closely the growth dynamics of Chinas private enterprises based on data available from the
two national economic censuses.
Figure 8 maps provincial variations in the growth of private enterprises, using one, two,
or three standard deviations to group provinces in terms of the percentage of private-sector
employment in the local economy. The pattern displayed is characterized by a high represen-
tation of private enterprises in the local economy in the coastal region and the Yangtze River
Basin, where employment in private enterprises is higher than the national average. Zhejiang
and Jiangsutwo coastal provinces with a well-established tradition of growth in private
businessstand out in particular as positive outliers.
Why have private enterprises experienced greater development in certain places than
others? Is the growth of the private sector closely related to the degree of marketization of
the local economy or is it more related to promotion by the state, which sees the growth
of private enterprises as instrumental in generating the employment opportunities badly
needed to compensate for the massive lay-offs from reformed SOEs? These questions have
already concerned China specialists (e.g., Bian and Zhang, 2006). On one side, the market-
centered perspective has attributed the growth of Chinas private enterprises to the process
of market transition, through which increased marketization reduced state redistributive
control over the economy and provided necessary incentives as well as capital for private
736
EURASIAN GEOGRAPHY AND ECONOMICS

Fig. 7. Productive and innovative performance of business firms in China by province, 2008. Sources: Calculated by authors from LOFEC (2006, Vol. 1, pp.
198199, 220221, 242243; 2010, Vol. 1, pp. 176217). Indicators are the same as those defined in Table 3.
LIN AND HU 737

Fig. 8. Provincial variations in relative share of private enterprise employment (measured by stan-
dard deviation). Sources: Calculated by authors from LOSEC (2006, Vol. 1, pp. 198199; 2010, Vol. 1,
p. 198).

entrepreneurs to grow and expand (Nee, 1989). On the other, the state-centered interpreta-
tion views the growth of the private sector in post-reform China as being closely intertwined
with the persistent influence of the socialist legacy and the political and economic concerns
of Chinas authoritarian regime for employment generation and social stability (Han and
Pannell, 1999; Bian and Zhang, 2006). The information gathered from the first and second
national economic censuses has provided a new opportunity to investigate these competing
interpretations.
Using the data from the first and second national economic censuses (as well as comple-
mentary information gathered from other relevant sources), we conducted a series of correla-
tion analyses to more closely examine the growth dynamics of Chinas private economy. The
growth of the private economy is measured by the share held by private enterprises in the
total employment of the local economy. The degree of marketization of the local economy
is evaluated by a close examination of the efficiency and credibility of state regulation and
the degree of openness in financial, labor, and land markets. More specifically, the efficiency
and credibility of state regulation is measured by three indicators: the ratio of budgetary and
738 EURASIAN GEOGRAPHY AND ECONOMICS

extra-budgetary expenditures to GDP; the extent to which the daily operations of firms are
free from government intervention; and the development level of the legal environment for
protecting industrial producers.20 Data for the first indicator are derived from the Financial
Yearbook of China (MOF, 2005, 2009) and a high value of this indicator means a strong
state control of the local economy and a low degree of marketization. Data for the latter two
indicators comes from the NERI Index of Marketization of Chinas Provinces, and high
values represent a high degree of marketization.21 The degree of financial market openness
is indicated by both the ratio of deposits in non-state owned banks to total deposits in all
banks and the share of loans granted to non-state enterprises in total bank loans. Data for
these two variables also are drawn from the NERI Index and a high value reflects a higher
degree of financial market openness. The degree of labor market openness is measured by the
share of the rural labor force in urban employment and the degree of land market openness
is measured by the share of land area granted through negotiation in total land area.22 A high
value for the former indicator denotes a high degree of labor market openness, whereas a high
value for the latter variable means a low degree of land market openness. The influence of
the socialist legacy is indicated by the share of SOEs in total industrial value added in 1993,
when ownership reform was initiated. Finally, we included the ratio of imports and exports
to GDP and the ratio of foreign direct investment to GDP as proxies for the degree of foreign
openness. The results of our correlation analysis are presented in Table 6, from which several
important points can be made.
First, the empirical evidence generally supports the theoretical prediction of the market
transition hypothesis. As shown in Table 6, the growth of private enterprises is negatively
correlated with the ratio of fiscal income to GDP and positively correlated with the indexes
indicating the development level of state regulatory efficiency. Strong intervention by the
state in the micro-level economic activities of firms and a poor legal environment were found
to be associated with a weak domestic private sector. This somewhat contradictory finding
highlights the necessity for China to initiate changes in the mode of governance from inter-
ventionist to regulatory state during its ongoing market transition. In addition, the significant
and negative relationship between the strong influence of socialist legacy (measured by a high
share of SOEs in total industrial value added contributed in 1993) and the presence of a weak
private sector suggests that the window of opportunity for the growth of Chinas private
economy is more likely to be opened in locations other than the bastions of state socialism.

20
The extent to which a firms operation is free from governmental intervention is proxied by the amount of the
time spent by firm managers in dealing with government staff and personnel. The development level of the legal
environment is proxied by the evaluation scores of firm mangers toward the impartiality and efficiency of local ju-
dicial and administrative agencies. Both of these indicators are drawn from enterprise survey data reported in NERI
Marketization Index (discussed below).
21
The NERI Index of Marketization is a data series released annually by the National Economic Research Institute
(NERI) of the China Reform Foundation since 2001. Designed to gauge the degree of marketization of Chinas
provinces, the NERI Index has been widely regarded as the most comprehensive indicator for measuring the marketi-
zation process of Chinas regional economies. It is a weighted composite index consisting of five components: state-
market relationship, development of the non-state owned economy, development of output markets, development of
input markets, and the development of business associations and the legal environment. Each of these components
is evaluated by more detailed indicators. A total of 23 basic indicators are included in the latest 2009 report of the
NERI index (Fan et al., 2010). The value of each indicator is mathematically standardized in such a way that a high
value denotes a high degree of marketization in each aspect. For detailed discussion of the methodology, see Fan et
al. (2010, Chapter 6).
22
There are four major forms for paid conveyance of the use rights of state-owned land in the Chinese land man-
agement system: negotiation, tender, auction, and quotation. Negotiated conveyance is the least transparent form
among them. For elaboration, see Lin (2009, 2010).

Table 6. Correlation Analysis of the Geography of the Private Sector in China

Private economy
Variable Indicator
2001 2004 2008

State regulation Ratio of budgetary and extra-budgetary expenditure to GDP 0.284 0.256 0.334*
Free from government intervention in daily operation of 0.276 0.314* 0.423**
firmsa
Development level of legal environment for protecting 0.495*** 0.472*** 0.337*
producersa
Socialist legacy Share of SOEs in total industrial value added in 1993 0.709*** 0.594*** 0.491***
a
Financial market Ratio of deposits held by non-state owned banks to total 0.547*** 0.513*** 0.593***
openness depositsb
Share of loans granted to non-state owned enterprises in 0.693*** 0.597*** 0.402**
total bank loansb
Labor market Share of rural labor force in urban employment 0.6*** 0.543*** 0.426**
openness
LIN AND HU

Land market Lack of transparencyshare of land area granted by N.A. 0.229 0.406**
openness negotiation in total land area granted
Foreign openness Ratio of imports and exports to GDP 0.391** 0.289 0.089
Ratio of foreign direct investment to GDP 0.31*** 0.233 0.114
a
Non-state owned banks include all those except for the four state-owned commercial banks (Bank of China, Agricultural Bank of China, China Construction
Bank, Industrial and Commercial Bank of China), three policy banks (China Development Bank, Export-Import Bank of China, Agricultural Development of
China), and the Postal Savings Bank of China.
b
Data for 2008 are not available, and 2007 data are used instead.
*Significant at 0.1 level; **significant at 0.05 level; ***significant at 0.01level.
Sources: Compiled by authors from CSSB, 2005, 2009; MOF, 2005, 2009; LOSEC, 2006, Vol. 1, pp. 198199; Fan et al., 2010; and LOSEC, 2010, Vol. 1,
p. 198.
739
740 EURASIAN GEOGRAPHY AND ECONOMICS

This finding is consistent with the spatial pattern of the Chinese economy identified earlier,
in which regions dominated by expanding private enterprise are characterized by a weak
and retreating state-owned sector. It is also consistent with the state disarticulation thesis,
which views the rapid expansion and phenomenal growth of the private sector as a spontane-
ous, bottom-up, unplanned process that owes little to active state intervention (cf. Naughton,
1995; Lin, 2007). It is interesting to note that between the three census years of 2001, 2004,
and 2008, the correlation coefficients related to socialist legacy declined, suggesting that as
time passes Chinas indigenous private economy is gaining strength and expanding its scope
and depth.
Second, there exists a significant and positive relationship between the importance of
private enterprises in the local economy and the degree of diversity of the financial market. A
diversified financial market with reduced state monopolistic control (measured by a high ratio
of deposits held by non-state owned banks and a high ratio of bank loans granted to non-state
enterprises) co-existed with a relatively strong domestic private sector. This is not difficult to
understand given the fact that current lending policies and practices have been monopolized
by the state, with a strong preference toward big enterprises including reformed SOEs and
even FIEs (Nee and Opper, 2010). Because private enterprises are mostly small, low-tech,
and labor-intensive, they have been unable to present the kind of credit that would warrant a
fair share in the financial market. This finding is consistent with the structural characteristics
of the Chinese economy identified earlier, in which the private sector was found to account
for the bulk of the labor market but only a minuscule share of the capital market. It appears
that Chinas private economy presently is facing tough challenges, despite its great potential
for employment generation. Private enterprises must find ways to survive and compete in a
state-directed financial and institutional system that still works against them.
Third, the strength of private enterprises in the local economy is significantly and posi-
tively correlated with the degree of openness of the labor market. Locations with fewer restric-
tions on rural migrant labor often are characterized by a strong private sector. This finding is
consistent with the sectoral pattern of Chinas private enterprises, which mainly concentrate
in low-tech and labor-intensive industries such as textiles, metal products, food processing,
construction, wholesaling and retailing, and catering, which tend to better match the occupa-
tional skills of rural labor. It seems that the growth dynamics of Chinas private sector is thus
closely intertwined with Chinas distinctive process of migrant-driven urbanization. Thus,
the future growth and spatial pattern of Chinas private sector may be related to institutional
reforms and regulatory changes governing the spatial flow of rural migrants.23
Finally, no consistent pattern has been found for the relationship between the importance
of private enterprises in the local economy and the degree of openness to foreign trade and
investment across provinces. As shown in Table 6, the growth of private enterprises was
positively and significantly correlated with the degree of dependence of the local economy
upon FDI and international trade in 2001. Such a relationship was not significant in 2004 and
2008, however. This tenuous, ambiguous relationship thus does not support Huangs (2008)
observation that the Chinese institutional environment has suffered from privileges and con-
cessions made to foreign enterprises at the expense of indigenous private firms. However,
because foreign enterprises are concentrated in a few selected city-regions along the eastern
coast, whereas the analytical units of this study are the provinces, more detailed analyses at a
finer spatial scale are needed to obtain more conclusive results.

23
On the latter, see Chan (2009, 2010).
LIN AND HU 741

CONCLUSION AND DISCUSSION

One of the important and controversial topics of research in China studies and the
social sciences more generally in recent years has concerned the nature and dynamics of the
profound transformation of the Chinese economy. As China quickly transitioned from an iso-
lated and relatively backward socialist economy to a rapidly expanding global production and
consumption powerhouse, much scholarly attention has been devoted to understanding the
China story, how and why the country has evolved as it has, and what significant theoreti-
cal insights can be drawn from the Chinese experience. Advocates of neoliberalism see the
private sector as the most efficient, vigorous, and self-sustaining force driving Chinas rapid
economic growth. Conversely, those who subscribe to exceptionalism highlight the corporat-
ist role played by the reformed state, which has ushered in a variety of ownership types and
brought about phenomenal economic growth without massive privatization of resources and
capital assets. According to the neoliberal perspective, complete privatization as the prereq-
uisite for efficient and sustained economic growth will be the inevitable outcome of Chinas
clearly defined transition from socialism to capitalism. From the standpoint of state corporat-
ism, however, gradual transformation of the Chinese economy may open up a viable alternative
to wholesale privatization. The ongoing debates thus reflect different values and perspectives,
and have been waged on the basis of limited and selected information obtained from different
sources. Until recently, most of the research on Chinas ownership transformation has relied
upon small-scale questionnaire surveys, interviews, and case studies of selected ownership
forms with the evident problems of fragmentation and lack of standardization. Indeed, cur-
rent studies of Chinas economic transformation have been severely hampered by the lack of
systematic, consistent, and comparable data.
This study engages with the ongoing debates about the nature and dynamism of Chinas
economic transformation through an analysis of systematic and comparable data obtained from
the first and second national economic censuses. Our analysis of the statistics on employment,
capital assets, and output clearly reveals a national economy with enormous resilience. After
three decades of opening to global capitalism, Chinas economy continues to be dominated by
domestic enterprises. Foreign-invested enterprises and those financed by the overseas capital
from the Greater China region (Hong KongTaiwanMacao) have been concentrated within
a few industrial sectors and locations that function either as gateways (i.e., Beijing, Shang-
hai, Guangzhou) or sites of pre-existing social networks (i.e., Guangdong and Fujian). The
penetration of global market forces into the socialist economy has posed major challenges
for the state sector and effectively eroded the foundation upon which SOEs assumed their
dominance, but it has not led to a collapse of the state sector. Instead, competition posed by
the private sector from below and outside has been met with a reformation not just of property
rights and ownership but in decision-making and the incentive system within SOEs, leading
to a return to the market after transformation. It remains a topic for debate whether Chinas
economic transformation should be viewed positivelyas an integral element of gradual
and incremental reforms in the interests of social stabilityor negativelyas an undesirable
outcome of state distortion leading toward an inevitable collapse of the economy. Suffice it to
say that the transformation of the Chinese economy has not been subordinate entirely to the
seemingly irresistible forces of global capitalism.
The resilient character of Chinas economic transformation is further manifested in a
peculiar pattern and process of ownership re-formulation wherein privatization of the labor
market has occurred without privatization of the capital market. While the private sector has
rapidly expanded to become the most important source of employment generation, key capital
742 EURASIAN GEOGRAPHY AND ECONOMICS

assets have remained firmly in the hands of the state. Sectorally, the national economy has
been polarized, with upstream industries monopolized by the state and downstream indus-
tries experiencing rapid privatization owing to low market barriers. Geographically, the new
production space opened up by the retreat of state-owned enterprises has been occupied not
simply by private enterprises but also by a variety of hybrid ownership forms that have blended
the public, collective, and private sectors. Contrary to prevailing theoretical expectations, pri-
vate enterprises have not demonstrated greater economic efficiency or industrial innovative-
ness than public- or collective-sector firms. They are overwhelmingly small, labor-intensive,
low-tech, and geographically concentrated in a few coastal provinces where the tradition of
private and individual business is better established. Further analysis has revealed a private
economy waging a difficult battle with two powerful and formidable rivalsreformed state-
owned enterprises and enterprises financed by foreign and overseas capitalwithin an unfa-
vorable financial and institutional system. There is no linear ownership transformation from
the public and collective sectors to the private economy, and no convincing evidence showing
that the private sector has outperformed its public or collective counterparts. This peculiar
pattern is clearly inseparable from the special political system and social conditions presently
prevailing in China at this particular historical juncture.
The unique character of Chinas ongoing economic transformation identified here chal-
lenges the conventional wisdom of neoliberalism, in which privatization is described as a pre-
requisite for efficient economic growth and as a universally applicable mechanism of societal
transition. Instead of operating as an independent and deterministic force, privatization in the
Chinese context has been effectively shaped by political and social conditions. Moreover, it
has not been implemented by the state from above. Instead, numerous private and individual
businesses have flourished and mushroomed spontaneously from below, subsequent to the
relaxation of state control. This process of economic transformation has cast doubt upon the
adequacy of the popular notion of state corporatism, which tends to exaggerate the role played
by the state and overlook the spontaneous, bottom-up expansion of millions of private and
individual enterprises.24 Our analysis of the data gathered from the first and second national
economic censuses has identified a pattern and process of economic transformation that con-
form neither to the widely subscribed theory of neoliberalism nor the influential thesis of state
corporatism. The story of Chinas ongoing economic transformation appears to be evolv-
ing according to its own logic, which deviates from popular theoretical descriptions. Only
after we have stripped ourselves of all pre-conceived theoretical expectations can we hope to
engage in the meaningful and fruitful venture of getting the China story right.

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