China's lukewarm capitalist spirit

At the time, $270 was a respectable salary in China: Sun Changlin earned that sum in a year.

But in 1993, the mid-level bureaucrat decided to try to make it on his own. He scraped together about $3,600 and bought a used, bright yellow taxi, called a "breadbox" because of its distinctive shape.

Mr. Sun drove the breadbox, spewing exhaust and bouncing like a rock in an avalanche, 12 hours a day, every day. It quickly netted him a small fortune.

"I bought a house, I could buy a car - but I put 80 percent in the bank," says Sun.

Yet today, because of stringent regulations and a down economy, Sun is no longer willing to venture on the byways of entrepreneurship. His story is a cautionary tale for China's leadership as it tries to shift from a dependence on state enterprises to an economic model that taps the vigor of small businesses and individual ingenuity.

Five years ago, China was coming out from under the shadow of the 1989 Tiananmen Square incident, optimism was returning, and economic reforms left the door open for entrepreneurs with a little cash and lot of gumption.

Sun, a tall, athletically built man with an open face, was part of the vanguard that thrived under the new economic policies of the late leader Deng Xiaoping. In 1979, Deng allowed farmers to sell a portion of their produce, creating a sudden surge in productivity and wealth in the countryside.

Gradually, smaller mom-and-pop stalls, selling everything from tomatoes to videotapes, appeared in chaotic street markets as private enterprise entered the cities.

Although willing to unleash the capitalist spirit on a small scale, Deng and subsequent leaders have been leery of going further. The public sector is still officially the pillar of the economy, even though state enterprises contributed 38 percent of last year's gross domestic product, while the private sector slice - including everything from foreign-funded firms to gum vendors - has grown to 42 percent.

Economic woes

China has had two years straight of deflation, rising unemployment, and plummeting foreign investment. In 1997, Sun sensed the economic crisis in Southeast Asia could spread to China. He sold his cab and contented himself with odd carpentry jobs before becoming a confectionary salesman, earning 1,000 yuan ($120) a month.

The economy continues to grow, but at nowhere near the yearly average 10 percent of the early '90s. The figures have begun to worry everyone - including top leaders who publicly admit that the economy needs to be restructured.

"The focus has pretty much been on state-owned enterprise reform, which they should do," says Shawn Xu, head economist at the investment firm China International Capital Corporation. "Unfortunately, I don't have much confidence in their policy."

Many like Mr. Xu think the real solution may lie with people like Sun. But while millions of first-time entrepreneurs like Sun have gone into business, government policy has not made it easy for them. There's ambivalence toward private enterprise and the whole venture of capitalism in China - here called "socialism with Chinese characteristics."

The biggest problem is getting money for a start-up. While a cabdriver, Sun traded up twice to better vehicles, each time using his own savings. It's a vicious circle: The government-controlled banks shun lending money to private companies because they are seen as credit risks, since the borrowers lack credit history and state backing.

Then there's the legal system and bureaucratic hurdles. In Western countries, establishing a company is a simple procedure with a minimal fee. Here, individuals need to have minimum capital in order to register a company - usually in the millions of yuan. That hurdle is usually cleared with the help of well-placed connections.

Companies are subject to a host of "fees" and other levies that are meted on top of regular taxes. In recognition of the added burden these pose, the government recently announced that many would be cut.

And if that isn't enough discouragement, there is a licensing procedure for everyone from a fruit seller to an insurance company. "If the government decides they don't want me here, they can just shut me down," says one disgruntled bicycle repairman.

There's also no legal protection against property being confiscated or destroyed by the government. So if stores are demolished to widen a street, the only compensation is the money from selling scrap bricks.

"It's a very, very urgent issue," says Xu. "Only once you put in place legal protections, then the private sector will invest more."

Legal ownership

For Sun, the rules meant he could never legally own his cab. Many of Beijing's 60,000 cabdrivers - including Sun - buy their cabs so that they don't have to shell out about two-thirds of their proceeds in rent. But even though the vehicle is apparently theirs, the companies still technically own them. And the cabdrivers have to hand over about $120 a month to maintain the veneer of legality.

While the economy was expanding, that was a bargain people like Sun were willing to make. Now that the economy has contracted - and the government has lowered taxi fares - the deal has soured.

"I'm not going to start a company now," says Sun. "It's too dangerous." Despite having ridden the roller coaster of personal fortune, Sun considers himself well off. He still earns double the average per capita income. After years of careful saving, going back to the days when he and his wife earned a combined $300 a month, Sun's father lives in an apartment his son bought, and the younger Sun has enough in the bank to guarantee the security of his own 11-year-old boy. And unlike growing legions of city dwellers and rural people alike, at least he has a job.

(c) Copyright 1999. The Christian Science Publishing Society