Rural Industrialization

Proto-industrialization in the countryside emerged in traditional China as a side-line business to farming. It included the processing of cotton and silk, food production, the production of bricks, transport and marketing. The densely populated and highly commercialized and monetized countryside of traditional China allowed the quick return to market structures as soon as this was possible. There are, nonetheless, still regions in China with low endowment of industries.

The Stalinization of Chinese agriculture in the early 1950s dissolved these proto-industries by reducing the countryside to a production ground for grain exclusively, apart from some other staple goods as cotton, silk, peanuts and soybeans. Processing of agricultural produce was not carried out in the villages or townships, but by the state industry. In this way, the countryside was deindustrialized in the early age of Mao, and many specialized handicrafts fell into oblivion.

During the Great Leap Forward, the re-industrialization of the countryside was enforced by the creation of "backyard furnaces" (tufa liangang 土法炼钢) which drained manpower from the agricultural business. The township-and-village enterprises (TVE, xiangzhen qiye 乡镇企业) of modern China go back to small industrial enterprises which were part of people's communes during the "new" or "second great leap forward" in the early 1970s. These enterprises had been established in order to support the commune's self-reliance in economic matters. The commune and brigade enterprises (she-dui qiye 社队企业) established during that time served agriculture by making out the "five small industries" (wu xiao qiye 五小工业), namely iron and steel, cement, chemical fertilizer, hydroelectric power, and farm implements (instead of the two latter, mining, and machines might be enumerated). Yet only 6% of the rural labour force worked in these industries (Naughton 2018: 309).

These commune and brigade enterprises were renamed TVE after the beginning of the reform programme in 1978. During the 1990s, more and more of them were privatized, and from 2000 on, they began to form local industrial clusters, consisting of large core enterprises and countless suppliers.

During the first two decades of the Reform Period, the TVEs, in the beginning still collectively owned, played a crucial role in the expansion of the Chinese economy. With regard to management, the TVEs were given free hand and were allowed to conclude contracts as suppliers of larger state-owned enterprises (SOE). The local governments recognized their importance for economic advance and therefore supported them. Employment in TVEs increased from 28 million in 1978 to 135 million in 1995, when their share in the GDP was 25% (Naughton 2018: 310). Many of them operated in the labour-intensive manufacturing business producing goods for export.

TVEs were not only the motor of the economic boom because of their excellent performance, but also because they constituted competitors for the SOEs which were thus forced to perform better, if they wanted to survive. TVEs possessed several factors giving them competitive advantages over SOEs, namely labour cost being 40% lower (TVEs were not obliged to offer social services), the use of monopolistic advantages in newly opened markets or market niches (like consumer goods or building materials), patronage by local officials (many of whom were shareholders) by lowering taxes to about 6-30%, granting bank capital or giving access to rural credit, access to infrastructure, markets and human capital (particularly in the case of suburban TVEs), and flexibility in management models.

These advantages played out the disadvantages of TVEs as compared with SOEs, mainly the lack of access to subsidized capital, or the decreasing profitability over time.

Yet from the mid-1990s on, changes in economic policy and the economic environment ended the golden age of the collectively-owned TVEs. The market niches were filled by then, the regulations for bank credits became stricter, and consumers demanded products of higher quality. The answer of the government to these new obstacles was quick and thorough privatization. In 1995, about half of the TVS were collectively owned, but this share declined to a few percent in 2010 (Naughton 2018: 320). It was necessary to adapt new management methods and take into account the dismissal of labour force, just as in the SOEs. A particular problem of the TVEs was that managers sought other opportunities to earn money, mainly in the cities.

There were different models by which the TVEs were privatized. "Insider privatization" was one of them, i.e. managers or state officials related to them purchased the majority of shares. This was the most effective way of privatization because it allowed incumbent managers, who knew the business and had local knowledge, to stay with the firm. On the negative side, this kind of privatization occasionally led to corruption and plundering of assets.

The most important forms of privatization were shareholding cooperatives (gufen hezuo qiye 股份合作企业) in which workers were owners of negotiable shares, joint ventures between local state and private management, and "privatization with tail", by which the new management paid a transfer fee and compensation according to the expected performance of the enterprise (lower if restructuring would take time).

After the privatization of most TVEs, the cooperation between and among them and the urban industries intensified. Industrial clusters emerged in many suburbs in which highly specialized production chains were involved. Many of these chains focus on one single product (consumer product, for domestic use and export), and competition among TVEs is high. These clusters are highly efficient and contribute to the competitiveness of Chinese goods on the world market – not the least because of ideal infrastructural advantages.

Quite recently, business-to-consumer (B2C) business has emerged in which private or small producers directly supply markets via new channels, namely the internet marketplace Taobao 淘宝 which belongs to the Alibaba Group. Whole villages ("Taobao villages", Taobaocun 淘宝村) participate in this business model, which is supported by the local administrations.