The World; Capital Leaps Forward in China (Published: June 3, 2001)
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WANG WENJING, a mild-mannered 36-year-old computer programmer became one of the wealthiest men in China two weeks ago, worth more than half a billion dollars. The source of his sudden riches: China's still fledgling capital markets, which until recently were almost entirely off-limits to private entrepreneurs like him. 

Thanks to new rules, Mr. Wang's software company, UFSoft, was able to go public by selling 25 percent of its shares on the Shanghai Stock Exchange. Hundreds of other private companies are lined up to do the same. 

Like the proverbial butterfly's flutter that grows to a hurricane, the little-noticed change could lead to the most dramatic transformation in China's economy since Deng Xiaoping broke up the country's Maoist communes more than two decades ago. For the first time since the private sector began to reappear in the late 1970's, private businesses have access to public capital. And with capital, they will grow and should eventually eclipse the state-owned enterprises and government-controlled collectives that still dominate China's economy. 

The shift is not entirely welcomed within the Communist Party, which is already struggling with how to handle the new moneyed class. President Jiang Zemin has called for increased party representation in the private sector, but party elders have turned away most of the businessmen who have asked to become party members. 

But longer-term political ramifications are unavoidable. As the private sector grows, it will inevitably become a powerful political constituency. It may not necessarily agitate for change -- like business executives everywhere, those in China crave stability and may not push for democracy. But the interests of at least some are certain to eventually deviate from those of the party. 

Why then are China's most senior leaders willing to unshackle private businesses? They recognize that a capital-backed private sector may be China's best hope for economic survival after the country joins the World Trade Organization, when global competition is expected to squeeze China's state-owned enterprises. If that spills millions of workers into the street, one of the most obvious ways to absorb the excess labor would be to allow private companies to grow. And in any event, private businesses can help keep China's economy from domination by foreign firms, which are expected to easily outmaneuver the country's cumbersome state enterprises.

''To the extent that private companies generate taxes and employment, they will help the party stay in power,'' said Dali Yang, a professor of political science at the University of Chicago. 

For now, the movement remains but a flutter. Though many people cite figures that show China's economy is now mostly private, that data includes foreign-owned companies and collectively owned businesses, most of which are still controlled by some level of government. True private companies, majority-owned by individuals, still account for less than 20 percent of China's economic output and for only about 50 million jobs for its 1.4 billion people. 

But that's changing fast. Collective enterprises, started under Mao to make use of excess labor in commune work brigades and sponsored by local governments after communes were disbanded in the 1970's, are restructuring to clarify property rights. Many enterprises are emerging under individual ownership, and they constitute the largest class of capital-hungry private enterprises in China today. 

Meanwhile, a flood of money into Internet-related startups, networking companies, software companies and high-tech equipment manufacturers has created a smaller, more potent class of entrepreneurs like Mr. Wang. Their companies, based on brain power instead of labor, are inherently more independent of the government than those with a collective heritage. 

Ironically, the new companies that have been sustained by foreign venture capital are the most constrained today, since foreign-invested firms don't yet have access to the country's capital markets. But the ones that are free of foreign ownership and have three years of profitability and at least 30 million yuan (about $3.6 million) in assets can now shop themselves to the country's underwriters in hopes of going public. 

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James Liu, who heads strategic planning at the Shanghai Stock Exchange, said the hundreds of private companies that have already secured underwriters make up about 10 percent of those hoping to be listed. 

Until late last year, the state decided who could list stock on the country's two exchanges, and it rarely granted the privilege to private companies over state-owned firms. But that has changed, first in the so-called B share market, where stocks are denominated in foreign currency, and now in the much larger A share market, where Mr. Wang's UFSoft was the first private company to list under the new rules. 

''The trend is encouraging,'' said Mr. Wang in his utilitarian office at UFSoft's headquarters in Beijing. ''Private companies are growing and the environment for raising capital is getting better and better.'' 

There's plenty of capital available. China's citizens have $800 million in bank savings accounts, and the sliver of that money that has been invested in publicly listed shares has already made China's stock markets the third largest in Asia. 

The government still has the means to tilt the game in the state's favor. All underwriters remain state-owned and they can be pressed to cater to state-owned clients. But as China's courts gradually grow more independent and powerful, the state will face increasing pressure to follow the rule of law. In December, a private company won a lawsuit against the country's stock market regulator, which was ordered to reconsider its refusal to list the company on a mainland stock exchange. 

The country is also working to create a class of serious institutional investors -- mutual funds and pension funds, for example -- that would give the now volatile markets depth and a longer-term perspective. Those investors, though now state-owned, will eventually demand better governance of the companies they invest in, and fewer government limits on their growth. 

It seems likely that the result will be a stronger, more flexible economy, though it will take time. And it will take even longer before private companies or their owners constitute a political force. 

But as any Marxist will explain, political power comes with controlling the means of production, and the party's control will erode as the private sector grows.