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China's private sector facing credit, cost challenges amid expansion

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BEIJING, Jan. 11 (Xinhua) -- A Chinese association representing private enterprises and individually-owned businesses announced Wednesday that the number of registered private companies in China had topped 9 million as of the end of September, up 14.9 percent year-on-year.

Their total registered capital rose 38.6 percent to nearly 25 trillion yuan, the All-China Federation of Industry and Commerce (ACFIC) said in a report released Wednesday.

As of the end of September, the number of individually-owned businesses exceeded 36 million, up 8.5 percent, and their total registered capital rose 21.9 percent to around 1.5 trillion yuan.

The non-public sector of the economy has become the largest among urban fixed-asset investors as its investment reached 14.2 trillion yuan in the first 10 months last year, accounting for 58.9 percent of the nation's total, said ACFIC Party Secretary Quan Zhezhu.

The private sector is also the major job provider in the world's second largest economy, creating around 80 percent of jobs in urban areas. Quan said the sector created more than 8 million jobs in the first nine months of last year. Individually-owned businesses also helped create more than 2 million jobs during the period.

"The private economy, especially the rapid growth of small and medium-sized companies, has become the main source powering employment, the rise of wage-based income for both urban and rural residents, and improvement of people's livelihoods," Quan said in a keynote speech delivered at a conference on the development trend of the country's private economy.

The expansion of the sector was also marked by its fast-growing exports, which surged 33.3 percent year-on-year in the first 11 months of last year to 570 billion U.S. dollars in value, accounting for one-third of the nation's total, according to Quan.

China's customs authority announced Tuesday that the country's exports rose 20.3 percent year-on-year to reach 1.9 trillion U.S. dollars in 2011. Export growth had slowed from an increase of 31.3 percent in 2010.

The ACFIC is a non-governmental chamber of commerce largely representing enterprises and individuals in the private sector.

However, challenges in credit borrowing, rising production costs and thin profits, heavy taxes, and worker recruitment remain, hampering the sector's development, Quan said.

"The biggest problem is the rising production costs. Companies, especially those small ones in manufacturing, have weak capabilities in addressing pressure from rising costs stemming from energy, raw materials, labor, land use, and foreign exchange rates," Quan said.

He also said taxes for small and micro-sized firms remain too high and too complex. Unreasonable taxation policies could lead to "double-taxing," which adds more pressure to their business operation.

Quan added that banks currently still favor large and medium-sized enterprises, which makes financing more costly as businesses resort to private lending options that require much higher interest payments.

However, Quan said the development environment for the private sector has gradually improved in recent years.

Last October, the State Council, or China's Cabinet, pledged stronger financial and fiscal support to small- and micro-sized businesses by reducing their tax burdens and encouraging banks to increase loan support.

The Cabinet's fiscal support measures for small firms include raising the tax threshold for corporate value-added taxes and business taxes, extending a policy to halve business income taxes by another four years, and forgiving banks' stamp tax on lending contracts with small firms for three years.

Lu Zhengwei, an economist with Industrial Bank, said previous tax cuts are particularly important to small firms on what are already thin profits. Structural tax reduction is also necessary in China as the government's fiscal income growth has been much faster than economic growth in recent years.

"Substantively supporting small and medium-sized enterprises will be an important strategic task for the nation," Quan said.

He suggested further raising the threshold for levying value-added taxes and business taxes and setting halving business income taxes for small firms as a long-term policy.

Starting this year, the country is also scrapping the collection of up to 22 items of administrative fees from small and micro-sized companies. The policy will last until the end of 2014. Such fees include charges for companies' registration and tax invoice purchases.

Quan suggested the nation give access to some industries that have been traditionally monopolized.

"Unreasonable market access barriers must be removed so that both state-owned businesses and private businesses can progress," he said.

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