February 5, 2015, by editor
The Significance of New Company Registration Policies in China
Written by Keming Yang.
In March 2014, China’s State Administration of Business and Commerce (SABC) announced a series of new policies aimed at easing the process of registration for new firms. They were made public first on 7 February 2014 by the State Council as a framework for reforming the policies on registration and the minimum amount of registered capital for new firms. After briefly introducing the new policies, I shall focus on two important questions: why are Chinese citizens so enthusiastic about setting up their own firms, and what are the implications of the new policies and new firms for China’s economic and political development?
What’s new in the new policies?
The ultimate function of the new policies is to make registering a new firm much simpler and easier. Of the new policies, the most important is the abolishment of registered capital for setting up a new firm. Before, anyone who wanted to set up a new firm in China must show they possess a required minimum amount of capital when registering the new firm at SABC, with the exact amount and the proportion of cash of the registered capital depending on the nature of the firm. Now, except for those listed as one of twenty-seven financial services firms, no minimum amount of registered capital is required. Effectively, one can register a new company with no money or as little as one would wish. In addition, the former annual inspection is replaced with an annual report, which is made available to the public. The registration of business premises is made easier and all registration procedures will be standardized and computerized as much as possible.
It is clear that leaders of the Chinese state, Premier Li Keqiang in particular, realize the enormous entrepreneurial energy that has been locked up behind the administrative gates, and they believe that releasing such energy is consistent with their overall ruling philosophy of economic pragmatism adopted since Deng Xiaoping.
Why are the Chinese people so keen on setting up new firms?
According to SABC, the number of newly registered firms increased by 46% to 3.65 million in 2014, including foreign firms and individual businesses (getihu). From March to December 2014 an average of 10,600 new firms were set up each day. However, SABC does not publish further details, for example, on the number of owners, the amount of initial capital at registration, the main industries, geographical locations, etc. The China Household Finance Survey has generated more detailed estimates. In 2013, 23% of households owned a small or individual business, with an average asset value of 290 thousand yuan. Among them, only 28% have at least one employee and the average number of employees was 2.2.
Clearly, many Chinese citizens would rather employ themselves or a very small number of employees rather than working for an employer, which has puzzled China observers for many years. Results from a national survey conducted on private business owners show that earning more money remains the most popular motivation. Nevertheless, this is still puzzling given that average income among Chinese citizens has increased several-fold over the past decades. A more plausible explanation would be that the newly increased income could not catch up with the increased price of targeted items, including properties, cars, overseas education and many luxurious goods. In addition, it is an idea ingrained in the mind of the Chinese people that working for yourself is always a better deal than being employed because the employer takes away a significant proportion of the income that you should have kept for yourself. The popularity or even predominance of individual and family businesses among the Chinese, either in or beyond China, lends great support to such explanations.
What are the implications?
The new policies appear to be a smart move by the State Council, as they kill several birds with one stone. To begin with, given the slowing down of the Chinese economy, stimulating entrepreneurship could help sustaining China’s economic growth. Lowering entry requirement could also improve employment, although many new firms involve self-employment or employ a very small number of people, the large total number of employees will make a notable difference in helping ameliorate the worsening employment situation in China.
The new policies are not simply about making the registration of new firms easier. A key phrase used is ‘kuanjin yanguan’, meaning wider door for entry but tighter control (once they are in). More new firms mean that the Chinese government at all levels will have to increase their workload of monitoring, regulating and supporting them. To let millions of new firms blossom is only the first step of the long march toward a vigorous, healthy and fair economy. It is thus disappointing that responsibilities of government are restricted to controlling firms alone, for example, by compiling a ‘black list’ of firms in trouble.
Lowering entry requirements is only one of the barriers that domestic private enterprises in China must jump over. Others include limited access to financial credits, raw materials and advanced technologies, and perhaps most importantly to the protection from the Chinese government that state-owned-enterprises enviably enjoy. How far the Chinese state would like to go in removing these barriers is the litmus test of its willingness of helping private entrepreneurs.
Politically, the new policies will weaken the power in the hands of local officials, especially those working for SABC, as the easier and simplified registration process would make it almost unnecessary for those without favourable personal connections (guanxi) with local officials to bribe the officials in order to get their firms registered. Effectively, the new policies serve as an administrative mechanism for tackling corruption, which is in line with – or perhaps even designed as part of – the overall campaign against corruption executed by Wang Qishan. In light of the concept of ‘double entrepreneurship’ that I proposed in Entrepreneurship in China, today’s entrepreneurs in China could invest more of their efforts and resources on the business front rather than fighting on both the business and the government fronts, as their predecessors had to. In this sense, I warmly welcome the new policies.
Keming Yang is a Senior Lecturer of Sociology at School of Applied Social Sciences, University of Durham. He is the author of Entrepreneurship in China and Capitalists in Communist China. Image credit: CC by Cory M. Grenier/Flickr.