Chinas Small Enterprises

By Henrique Schneider

China's propaganda draws a rosy picture of the country's future: ever-bright, growing, pulling the whole world out of recession.

Pundits, on the other hand, take a more grim view: financial detachment, exorbitant real-estate prices and speculation are spotted everywhere from Shanghai to Chengdu. What is the right view?

For starters, it is true that a good portion of the $1.4 billion stimulus in 2009 ― almost half of it ― was used in and by real estate.

But, on the other hand, the country is urbanizing itself. Its economic growth is mirrored by rising standards of living for continuously bigger parts of China's population and therefore in their demand for better housing.

A warmer real-estate market and rising housing prices are the logical consequences of recent macroeconomic trends. However, as logically as this, follows something else. Wherever a market gets hot, speculation is certain.

Chinese authorities are well aware of this. And they are preoccupied, too. Chinese Premier Wen Jiabao recently said that China's growth path is unsustainable, unbalanced and uncoordinated.

Indicators confirm his view: Inflation peaked in 2008 at some 9 percent, fell in 2009 and will regain momentum in 2010 reaching perhaps 3 percent.

Some will say this is still very low and they are right, but for a zero percent-target planned economy interested in boosting savings, it's bad news.

Budget deficit is also open to interpretation. It is, in comparison to Western countries, low, but it is growing from below 1 percent in 2008 to almost 3 percent in 2010.

At the same time, foreign direct investment and even domestic investment is calming. China is expanding its debt basis at a rate of 33 percent but its investment growth was 12 percent; the same number as without debt increase.

All bad news? Not necessarily. China still has 8 percent GDP growth and the 3 percent inflation still looks manageable. Budget deficit is relatively high, but on the level of 2009 and during the economic crisis, acceptable.

Chinese authorities seem to be aware of the potential dangers and their tightening of some rules in banking, especially real-estate related rules, is a sign of increasing preoccupation.

Building up infrastructure is not on the top of the agenda anymore. Stimulating domestic demand as well as developing below-average regions is the new focus of economic planning.

There are two other priorities. Authorities in Beijing want to avoid ``Goufu minqiong" ― a rich state with a poor populace. In order to do so, two pillars of economic planning are being strengthened: social services like education and health care and the private sector of small and medium enterprises (SME).

These are the backbone of any advanced economy. SME provide workplaces and sustainable responsibility for individuals as entrepreneurs.

With a pulsating SME sector, an economy is in better shape to deal with crisis, social discontent and even problems arousing from the social planning.

Small and medium enterprises were virtually excluded from the stimulus package and the following credit bonanza. This is in part due to the Chinese concept of an economy based on big industrial conglomerates.

However, as the Chinese statistics bureau switched to a more fine-grained analysis of the domestic economy, some startling findings came along.

In the last years, the SME sector grew at 11 percent per year, not suffering from the crisis ― even without stimuli. In third-tier cities and below, these businesses account for some 70 percent of all workplaces.

They generate half of the country's taxes and even 60 percent of its gross domestic product (GDP). As these facts come to light, Chinese economic planning is turning toward SME, making them a priority for future development.

Some may ask why we should trust a statistic that is driven and dictated by party needs. The answer may be that if the census reveals something new that goes against the party policy, it can be trusted.

The other, far better answer is pointing toward China's developed neighboring countries like Korea and Taiwan. Both became rich due to the activities of big conglomerates.

And both became socially and economically stable due the activities of small and medium enterprises. China could follow this benchmark.

Henrique Schneider is a traveler in Asia as well as a political analyst. He works as a consultant and analyst in Vienna, Austria, and publishes regularly in German and English on economic and security issues related to China and other Asian countries. He can be reached at hschneider@gmx.ch.