Research Report No 131, 2003

Not long ago, the author went to make a survey on the private investment in Zhejiang Province with the study tour of All-China Federation of Industry and Commerce (ACFIC), headed by Mr. Huang Mengfu, Chairman of ACFIC. Following is a summary of the survey.

I. The Current Situation and Trend of Private Investment in Zhejiang Province

Note: "private investment" in this article refers to the part of total investment after deducting the state-owned (including state-owned holding) and foreign enterprises’ (including Hong Kong, Macao and Taiwan) investment.

Since the reform, private economy has developed rapidly, and private investment has kept expanding. Private investment has become a main force driving the fast economic development of this province. In the two decades from 1980 to 2002, the private investment saw an annual increase of 25.2 percent, 2.5 percentage points higher than state investment. Starting from 2000, pushed by the proactive financial policy, private investment in Zhejiang Province entered a new round of high-speed growth. In the three years from 2000 to 2002, the province’s GDP grew by 12.6 percent. Private investment contributed 4.48 percentage points. In the first half of 2003, Zhejiang Province realized 412 billion yuan of GDP, a rise of 12.7 percent. Total investment reached 185.7 billion yuan, a year-on-year increase of 38.8 percent, of which private investment accounted for 58.4 percent.

Our survey showed some new development trends for the private investment in the province:

1. The investment fields have been expanding from traditional industries to projects for infrastructure and the burgeoning service trades.

For a long time, the private economy in Zhejiang Province has been concentrated in the traditional processing manufacturing, wholesale, retail and catering industries while the other sectors take up a very small proportion. In recent years, with the development of market economy and improvement of investment environment, private enterprises have started to actively adjust their business strategies and move towards new investment fields. At present, the private investment involves such areas as manufacturing, real estate, transportation and telecommunications, agriculture, forestry and water conservancy, culture, sports, education and public health, property management, marketing planning and financing guarantee. At the same time, some trial investment activities (such as private hospitals, schools and tourism resorts) have been gradually increased after the experience has been collected. In addition, with the advance of urban renovation plan of local governments at various levels, private investors are more and more involved in projects for infrastructure investment.

2. The investment projects are developing from small to large in scale and from dispersed to concentrated development.

Compared with state investment, private investment activities are mostly of small scale and their projects are scattered due to weak financial strength and other restrictions. But in Zhejiang Province, with the growth of private economy and improvement of investment environment, the small-scale and dispersed investment is being changed to large-scale and centralized investment. Some typical investment cases have emerged in private investment. Some local governments created the model of building industrial parks and zones characterized by "government assistance and enterprise operation". Such policy has not only attracted a great deal of private capital, but also greatly improved the efficiency of industrial zone construction. For instance, the Government of Taizhou city provided 2 square kilometers of land to an enterprise group, which took the lead in building an industrial zone. The 1.6 billion yuan needed for the construction of the zone was all covered by private enterprises. The government only offered assistance in terms of residents relocation and business promotion. Under such a model, the leading private enterprise would attract some enterprises that produce upper-reach and lower-reach products or relevant products on the basis of one or several core products (services) and its marketing network and personal relations. As a result, a large number of investment projects are concentrated in a relatively small area, thus forming scale development and product cluster effect. This has guaranteed the economic profits of such projects.

3. The investment is expanding beyond the city, the province and the country.

The private economy in Zhejiang Province has been highly export-oriented. Where there is investment opportunities, there will be private entrepreneurs. In recent years, the export-oriented type of investment tends to be accelerated due to the rise of land price and fierce market competition in the province. In Shanghai alone, the investment from Taizhou City has totaled 30 billion yuan. More than 300 Taizhou enterprises have made investment abroad. This is even more common in other regions such as Wenzhou city.

II. The Characteristics of Private Investment in Zhejiang Province

1. Good investment environment is a realistic basis for the booming development of private investment in Zhejiang Province.

Unlike inland provinces, Zhejiang, on the coastal front, has received not much investment from central finance. It falls far behind Guangdong, Shanghai and Jiangsu in attracting foreign investment. Since reform and opening up, the province’s economy has been pushed forward by private economy to a great extent. So the governments at various levels have always held an open and supportive attitude towards private investors. In recent years, they have made much effort in creating an investment environment for a fair competition among various sorts of market competitors.

First, actively transferring government functions and speeding up the marketization reform in the field of investment. In recent years, the Government of Zhejiang Province has taken measures to promote private investment by opening more investment fields, reducing examination and approval links and improving efficiency of administration. It does not set any limitations on the development proportions, speed, modes and scale of private economy. In addition to a fair policy environment for private investors, the investment project management departments have taken the lead in reforming the project examination and approval system which bears a strong colour of a planned economy and has been practiced in the country for many years in order to simplify the examination and approval links and standardize examination and approval procedures.

Second, expanding financing channels and improving the finance service to private investors. To alleviate the difficulty of private small and medium-sized enterprises in obtaining loans, the financial institutions in Zhejiang Province created and spread 10-plus credit products and launched nearly 20 capital trust products. Some commercial banks have optimized services through reforming the traditional credit management patterns as well as credit modes and formalities. Supported by the government, the province has formed 110 credit guarantee institutions for small and medium-sized enterprises. The total amount of guarantee has nearly reached 10 billion yuan.

Third, building a good credit environment. To deal with market competition after China’s entry into the WTO, Zhejiang Province launched a "Project for the Credit of a Million Enterprises" in January 2002. The gist of the project is to solve the prominent problems that have damaged the credit of the province and to establish the enterprise credit system including credit record, punishment for breach of faith, warning and incentives. Starting from June 10, 2003, Zhejiang became the first in setting up the country’s largest online credit inquiry system at the provincial level, which collected the first batch of 500,000 enterprises’ "credit files". As a result of substantially improved credit environment, the assets quality of commercial banks have seen an overall improvement. According to government officials, local banks reported an average of less than 5 percent of bad assets.

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