China has emerged as a world economic super power, forcing all players to consider new economic models. The growing significance of small and medium-sized enterprises (SMEs) in China’s economy is hard to ignore. Chinese and foreign experts estimate that SMEs are now responsible for about 60% of China’s industrial output and employ about 75% of the workforce in China’s cities and towns.

Private business is the fastest-growing sector of China’s economy, expanding at an annual rate of 20 percent, far above the 9.5 percent average growth of the national economy over the past two decades. The private sector employs millions of people laid off from failing state factories and contributes an increasing proportion of taxes to government revenue. By the end of 2001, China‘s private companies employed 70 million people, generated an output of 1.9 trillion Yuan ($232 billion), and contributed 20 percent of GDP, according to official statistics released in November 2002. Also, China has the highest number of the world’s richest people under age 40 outside of the United States, according to Fortune magazine.

The Chinese government is providing the “enabling environment” for small and medium-sized enterprises (SMEs). During the 16th Congress of the Communist Party of China, at least four entrepreneurs are listed as delegates to the congress – three of them are on Forbes Magazine’s list of China’s 100 richest people. Also, the political theory from the party chief, Jian Zemin, allowed private entrepreneurs to become members. Some observers have hailed the move to persuade capitalists to become card-carrying communists as one of the most significant likely outcomes of the week-long meeting. They say such a result could eventually change the character of the leadership and create pressures for democracy within the party. The party estimates that more than 113,000 of their members already run businesses. Most joined before privatization and formed companies later.

Chinese entrepreneurs bid on antique Rolls-Royces and pay cash for the latest BMWs. They build ostentatious Western-style mansions, including replicas of the White House, the US Capitol, and the Hearst mansion in California. Not many entrepreneurs have any interest in joining a party; however, they are not without social conscience. Many entrepreneurs intend to give shares to their employees in a couple of years. One entrepreneur said: “the profits of my enterprise should be part of my contribution to society. …To get rich together is the final goal of a socialist society.”

Since China entered the World Trade Organization in 2001, committing itself to further liberalizing its economy, China has received the most foreign capital inflows of any nation, surpassing the United States as the world’s favorite locale for investment. For the U.S. Entrepreneur, China presents a great opportunity, but they need to be aware of the barriers and address them as needed.

The history of Entrepreneurship runs long in a country like China. Until the 1980s, entrepreneurship consisted of very small-scale activities in retail and services such as street vendors, businesses known as getihu. For this group, business was a means of subsistence. The second group emerged in the late 1980s, with more highly educated individuals, often engineers or State Owned Enterprise[SOE] managers, operating on a larger scale out of choice rather than necessity. These businesses, known as siying qiye, operated in all sectors, ranging from restaurants to transportation to manufacturing, especially the production of inputs for SOEs (State Owned Entreprises). The third type is the foreign educated or trained Chinese[Overseas] returning to China to start businesses. This type of entrepreneurship has been evident recently in the Internet sector.

Most private companies are still tiny: 90% employ fewer than eight people. Despite such successes, China’s private sector as a whole does not enjoy a level playing field. One fundamental issue is property rights. Also the Chinese propensity to base business on relationships, especially with the Government officials[guanxi], is very critical for the success of entrepreneurs. To continue to develop, China’s private companies need, above all, rational banks and a well-functioning stock market. Yet if the private sector is China’s brightest hope, the financial and accounting systems are their weakest points. While the entrepreneurial spirit has gained social acceptance over the last two decades, the odds are still stacked against startups in China and they must fight to survive in a very harsh economic and political environment where the next day is based on Government policy. Therefore, most Chinese entrepreneurs, including those overseas, tend to emphasize short-term profits and opportunism instead of long-term strategy.

• Measured on a purchasing power parity (PPP) basis, China in 2006 stood as the second largest economy in the world after the US, although in per capita terms the country is still lower middle-income. 130 million Chinese fall below international poverty lines. While overall income is rising, wealth is not equally distributed.
• Chinese executives tend to behave more like bureaucrats rather than entrepreneurs, preferring to maintain stability and the status quo rather than creating value.
  There is a significant culture of aversion to risk.
• “Sea turtles” are the Chinese who spend significant time abroad and then come back to China to “lay eggs” or start new ventures. The government has created incentives to attract them back to China, and is more lenient or flexible regarding new venture formation.
• After Mao Zedong and the Communist Party took over power in 1949, the country made all operations state owned. By 1956 the private sector was completely eliminated. Over the next thirty years entrepreneurship did not exist except for in the very small scale, what many would simply consider self-employed. In the 1980s, constraints on private enterprise continued to exist, notably a law limiting employment in a private enterprise to seven people and the difficulty of finding funding. In 1987 a change of policy and repeals of some old laws began the true re-emergence of the private sector.
• Property rights are insecure and the rule of law is still in its infancy: businesses remain subject to unpublished (neibu) regulations and the caprices of courts. They must deal with local, provincial, and central governments, which often have different and sometimes conflicting agendas and demands.
  Funding for most entrepreneurs comes from personal savings, family, and friends. Lending to private business, bank loans remain rare. Venture capital is only around eight years old in China.
• In 2006 China had the largest current account surplus in the world totaling almost $180 billion.
• Since 1993, China had pegged its currency (Renmenbi) to the US dollar. The stable (and cheap) currency created incentives for foreign investments. In July 2005, China revalued its currency by 2.1% against the US dollar and moved to an exchange rate system that references a basket of currencies. Instead of pegging the RMB to the USD, it is now pegged to a “basket” of currencies of which they will not reveal. Since 2005 the value of the RMB has been on a controlled rise upwards in valuation. The pricier the RMB, the more expensive goods and services from China become.