A number of China's private manufacturers are experiencing growth as they reinvent themselves after years of struggle with rising wages and low foreign demand, Bloomberg reported.
Dakang Holding Co, a chair manufacturer from Anji County in Zhejiang Province, for instance, has reported a 20-percent surge in annual sales and 8 percent increase in its profit. The company produces 70 million chairs annually but has to struggle with cheaper Vietnamese rivals and rising production costs. In 2013, Dakang invested 71 million yuan ($105 million) on automation, restructured its management and shifted to making gamers chairs.
"Our order book is full through 2020," Yuan Guofei, the company vice president, said.
In contrast, the country's state sector firms have a different experience as they have to restructure to increase the productivity in old industries. State firms also have very limited competition while Dakang has to contend with about 800 chair manufacturers in Anji alone, according to Yuan.
"These kind of restructurings are what you get when industries are exposed to genuine competition and global standards for quality," Andrew Polk, head of China research at Medley Global Advisors, said. "China's government hasn't done well implementing those types of measures and should be more focused on them rather than propping up struggling and outdated state-sector firms."
Fielding Chen and Tom Orlik, economists at Bloomberg Intelligence said that state-owned enterprises (SOEs) account for about 40 percent of China's industrial assets and 18 percent of employment. But these enterprises only posted an estimated 2.8 percent return on assets in 2015, pulling down growth, compared to 10.6 percent from private firms.
In addition, private firms in China have to restructure and innovate to survive, unlike SOEs which do not have to undergo the reform processes.
At the Canton Fair in Guangzhou last week, most Chinese private firms interviewed at the biennial event point to innovation as an essential key to growth. About 25,000 exhibitors and 180,000 foreign buyers joined the event.
Yu Jinling, a sales manager for Rogerlin, a bag maker based in Quanzhou in Fujian Province, said that they create 60 designs a year to attract attention at the fair. He said that the company has invested in printing machines to cut labor costs and enhance the quality of their products.
On the other hand, Fan Miaochang, a senior sales representative of clock maker Dannol Electronics Co. said that they have added features such as temperature and humidity gauges in their clocks, and obtained licensing rights for clocks featuring soccer teams and Disney characters.
Policymakers pledged to speed up reform in the state industry as last month, the government released the guidelines for reducing corporate debt, stating that it does not have final responsibility on company borrowing. The move is now expected to make borrowing difficult for SOEs.
A study commissioned by the country's top policy-making agency has recommended some reform proposals which included giving private companies with greater access to restricted industries, protections for investors, less government meddling and participation in business policy making.
"We're starting to see state-sector restructuring begin, but it's slow, lumbering and without a clear endgame," Michael Every, head of financial markets research at Rabobank NA in Hong Kong, said. "The private sector is ahead of the game."
Restructuring in the private sector has allowed China to maintain its share in world exports despite the rising cost of wage and materials and competition from other countries.
However, the state-sector needed restructuring, according to Frederic Neumann, co-head of Asian economics at HSBC Holdings Plc in Hong Kong.
"The two are interlinked," Neumann said. "Private activity will not revive unless some of the privileges state firms currently enjoy are pruned. Conversely, the government will be reluctant to accelerate public sector restructuring unless there are signs that private companies will carry growth. In the end, what matters is that China unleashes another burst of productivity growth."