Ownership with Chinese Characteristics: Private Property Rights and Land Reform in the PRC

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Good afternoon. Thank you for the opportunity to address theissue of property rights in China, especially the pace ofenterprise privatization, capital-market liberalization, and theimplications of ownership reform for human rights and civilsociety.

The primary goal of the fourth generation of leaders in China isto maintain strong economic growth and increase prosperitythroughout China. To do so, they will have to confront a number ofserious problems, particularly the debt-ridden financial system andthe inefficiency of state-owned enterprises (SOEs). China's bigfour state-owned banks are technically insolvent, withnonperforming loans (NPLs) estimated to range from 25 to 40 percentor more of outstanding loans. SOEs account for more than two-thirdsof all bank loans but produce less than one-third of the totalvalue of industrial output. That massive waste of capital underChina's socialist market economy cannot be stopped withoutfundamental reform-in particular, privatization and the rule oflaw.

Pumping more funds into state-owned banks to keep them afloatwill only postpone the day of reckoning and increase the overallcost of reform. Likewise, turning SOEs into shareholdingenterprises, with government as the major owner and with mostshares being nontradeable, will not transform those firms intoprofitable entities. History has taught us that without privateownership and the threat of bankruptcy, there is little incentiveto reallocate capital to its most highly valued uses. Until statebanks and enterprises are fully privatized and effective limits areplaced on the power of government, waste and corruption willcontinue.

China's largest SOEs remain under firm control of thegovernment, but many medium- and small-sized SOEs have beenrestructured. Moreover, since 1978, Beijing has allowedexperimentation with different forms of ownership, and there arenow more than 20 types of ownership, including private firms,collective firms (e.g., township and village enterprises, many ofwhich are private), joint stock companies, and foreign-fundedenterprises. The exact scope of the private sector is difficult tocalculate because private firms often "wear a red hat" and concealtheir true identity in order to gain access to state bank loans atsubsidized interest rates and other government favors. A reasonableestimate is that the private sector now accounts for about 33percent of GDP.

The great success of private and cooperative enterprises overthe past 25 years-they now account for more than two-thirds of thevalue of industrial output-has resulted in official recognition ofthe importance of the nonstate sector as an engine of economicgrowth. Article 11 of the Chinese Constitution, amended in 1999,now reads: "Individual, private and other non-public economies thatexist within the limits prescribed by law are major components ofthe socialist market economy."

Private firms were illegal in 1978, and SOEs dominated theeconomic landscape. Today there are nearly 2 million privateenterprises employing more than 24 million workers, and the numberof private enterprises is growing by more than 30 percent per year.In Shanghai and other coastal cities, SOEs are becoming smallislands in a sea of private enterprise. Much of the growth of theprivate sector has been spontaneous, in the sense thatprivatization took place without central direction as opportunitiesfor trade increased, especially in the special economic zones(SEZs). Local jurisdictions were allowed to experiment with newownership forms, and, when they were successful, others sought toimitate that success. Only later did the central authorities puttheir stamp of approval on the institutional innovations.

The growth of private enterprise has occurred despite the lackof transparent legal title and restrictions on access to state bankcredit. Informal private capital markets have evolved to fund theprivate sector, and overseas Chinese have been an important sourceof investment funds. The strong performance of provinces withgreater economic freedom, such as Fujian, Guangdong, and Zhejiang,has created a new middle class and a demand for better governmentand more secure property rights.

Capitalists are now free to join the Chinese Communist Party,and several well-known private entrepreneurs are already members ofthe National People's Congress. As more entrepreneurs join theparty, there will be mounting pressure to change the status quo. Atthe 16th National Congress of the CCP in November 2002, PresidentJiang Zemin gave a clear signal that the private sector is animportant part of China's future. He said, "We need to respect andprotect all work that is good for the people and society andimprove the legal system for protecting private property." Theparty charter now includes "The Three Represents"-a doctrine thatcommits the party to embrace "the fundamental interests of themajority of the people," not just the proletariat.

Chinese citizens can now own their own businesses, buy shares ofstock, travel widely, hold long-term land use rights, own theirhomes, and work for nonstate firms. The depoliticization ofeconomic life is far from complete, but the changes thus far havecreated new mindsets and expanded individual choice. The manyrestrictions and human rights violations that remain should notdetract from the progress China has made since 1978 in raising thestandard of living for millions of people and giving rebirth tocivil society.

China's accession to the World Trade Organization, in December2001, has resulted in a long-term commitment to economicliberalization and legal reform. The policy of engagement isworking to change China's legal system and to better protectproperty rights and, hence, human rights. At the 16th partycongress, Jiang called for improving markets (including "thecapital market" and "markets for property rights"), abolishing"trade monopolies and regional blockades," and deregulatinginterest rates. The outgoing leader of the world's largestcommunist party told the new leaders, "We must give full scope tothe important role of the non-public sector."

That rhetoric should be taken seriously. The nonstate sector isproviding a safety net for unemployed workers from SOEs. Asrestructuring takes place, China will need a rapidly growingprivate sector to maintain strong economic growth. Strengtheningthe private market sector will require a clear commitment by thenational government to giving equal protection to private propertyrights and to liberalizing capital markets so that entrepreneurshave access to domestic capital that is now locked up ininefficient SOEs. Real reform, however, will require more than"revitalizing" SOEs and "recapitalizing" state-owned banks; it willrequire a firm commitment to widespread privatization ofstate-owned assets. Until the government and party are shut out ofbanks and enterprises by privatization, corruption will continueand NPLs will mount. What China needs is real, not pseudo, capitalmarkets with freely tradeable shares, liquidity, and trust.

Markets work best when property is fully protected by the ruleof law and people are free to choose. We should not forget thewords of James Madison, the chief architect of the U.S.Constitution: "The personal right to acquire property, which is anatural right, gives to property, when acquired, a right toprotection as a social right." China is beginning to recognize theright to private property, but only as a right bestowed by thestate not as a natural (inalienable) right. Consequently, privateproperty can never be secure until there is a fundamentalrevolution in political philosophy that places the individual, notthe state, at the center of the moral universe and limits the powerof government.

Recent changes, however, are encouraging:

· Qualified foreign institutional investors will beallowed to buy equity stakes in SOEs through the A-share (localcurrency) stock exchanges in Shanghai and Shenzhen;

· Strategic foreign investors will be allowed for thefirst time to buy the nontradeable shares of listed and unlistedSOEs;

· Foreign joint-venture investment funds will beginoperation;

· Private commercial banks are being established in ruralareas;

· China's first civil code has been drafted, including anentire chapter dedicated to the protection of private propertyrights;

· China's top judge, Xiao Yang, president of the SupremePeople's Court, has called for safeguarding private property rightsand told a national conference in Beijing: "Efforts should be madeto enhance awareness of the need for equal protection of allsubjects in the marketplace."

· Farmers will have more secure land-use rights as aresult of the Rural Land Contracting Law adopted in August2002;

· Shenzhen, the first SEZ in China, is embarking on abold political experiment, with Beijing's approval, to limit thepower of the local cadres, introduce checks and balances, andcultivate the rule of law.

· A new think tank devoted to studying political reformis planned for the Central Party School in Beijing;

· Numerous rules and regulations not in conformity withWTO norms are being scrapped and there are plans to streamline thecentral government's complex bureaucracy.

All those reforms are being driven by the need to be competitivein an increasingly global economy. To attract and retain capital inthe future, China will have to continue to improve itsinstitutional infrastructure.

As China liberalizes its financial sector, removes remainingbarriers to trade, and improves its legal structure, the range ofchoice for millions of Chinese will increase. That increase ineconomic freedom is sure to have a positive effect on creating whatLiu Junning, an independent scholar in Beijing, has called "aconstitutional order of freedom in China."

The United States can help transform China by continuing thepolicy of engagement, ensuring that China honors its WTOcommitments as well as its bilateral trade agreement with theUnited States, and adopting a more liberal visa policy that permitsChinese students and scholars-especially those in law, economics,and the humanities-to learn about and experience firsthand a freesociety.

Recommended Readings

Business Weekly (2002) "State-Owned Firms Open Up." November19-25: 3. (Published by China Daily.)

Carpenter, T. G., and Dorn, J. A. (2003) "Relations with China."In Cato Handbook for Congress: 108th Congress, 577-85. Washington:Cato Institute.

Dorn, J. A. (2002) "Liberalizing China's Financial Sector."Commentary, ChinaOnline(www.chinaonline.com/commentary_analysis/C02120636.asp).

_____ (2002) "The Need to Engage China." Asian Wall StreetJournal, 9 October: A11.

_____ (2003) "The Primacy of Property in a LiberalConstitutional Order: Lessons for China." The Independent Review7(4) (Spring): 485-501 (forthcoming).

Jefferson, G. H., and Rawski, T. G. (1995) "How IndustrialReform Worked in China: The Role of Innovation, Competition, andProperty Rights." In Proceeding of the World Bank Annual Conferenceon Development Economics, 129-70. Washington: World Bank.

Jiang, Z. (2002) "Full Text of Jiang Zemin's Report at the 16thParty Congress." 16th National Congress of the Communist Party ofChina, 2002 (www.china.org.cn/english/features/49007.htm).

Kynge, J. (2003) "Bank Reform May Give China's Farmers TheirPlace in the Sun." Financial Times, 10 January.

_____ (2003) "Chinese Politics." Financial Times, 13 January:9.

McGuckin, R. H., and Dougherty, S. M. (2002) "RestructuringChinese Enterprises: The Effects of Federalism and PrivatizationInitiatives on Business Performance." Research Report R-1311-02-RR.New York: The Conference Board.

Meng, Y., and Shao, Z. (2002) "Private Property Owners Win withReform." China Daily, 24 December: 3.

Oi, J. C., and Walder, A. G., eds. (1999) Property Rights andEconomic Reform in China. Stanford, Calif.: Stanford UniversityPress.

People's Daily (2002) "Chinese Private Economy Seeking WiderDevelopment Space." 7 April.

Pilon, R. (1998) "A Constitution of Liberty for China." In J. A.Dorn (ed.) China in the New Millennium: Market Reforms and SocialDevelopment, 333-53. Washington: Cato Institute.

Restall, H. (2002) "After the Party." Wall Street Journal, 19November: A24.

Shao, Z. (2002) "Justice for All: State and Private." ChinaDaily, 23 December: 1.

Slater, D. (2002) "Opening the Gate." FinanceAsia (November):34-37.

Tsai, K. S. (2002) Back-Alley Banking: Private Entrepreneurs inChina. Ithaca, N.Y.: Cornell University Press.

James A. Dorn

Congressional-Executive Commission
on China Issues Roundtable