Farewell, Red Hats(2)

Today, no one can say for certain how many Red Hats are left. But as early as 2003, survey by the Academy of Science's Private Industry Research Center and the National Industry and Commerce Association revealed that 50-80 percent of collectively-owned businesses were actually Red Hats. And in 1994, an MIC survey claimed that 83 percent of registered township-owned businesses were actually privately owned. 
   
A Page in History 
In the 1980's, "township-owned" businesses were blooming, numbering in the millions. "According to convention, a township-owned business is classified as collectively-owned. But in actuality, at that time many were owned by a single person or were opened by families with zero investment by the collective." Says Zhang Wenkui, assistant director at the State Council Development Research Center.

Why would a business wear a Red Hat? Recalls Zhang, "There's the example of one business that ran restaurants in Henan province: after registering as collective-owned, they saved 2,800 yuan in administrative expenses, were exempt from 6,300 yuan worth of taxes, and saved 3,530 yuan in adjusted personal taxes.

In Hebei province, a shoe and hat factory needed more financial backing due to financial difficulties. By becoming a subordinate branch to another collective-owned firm, they were able to apply for collective-ownership and receive a bank loan of 180,000 yuan.

In Liaoning province, a factory that produced high-quality thermal blankets in large amounts was prohibited from joining a distribution network of state-owned businesses. Instead, it first had to sell its products to an intermediary that could then directly sell to department stores.

The second wave of Red Hat companies occurred in the years before Deng Xiaoping's 1992 southern tour. Zhang explains, "They were afraid that there would be another round of "stomping out capitalism", so private businesses lined up to register as collective-owned." In Guangdong province during the early nineties, approximately 80 percent of proprietors sought to change their ownership status from private to collective.

Deng Xiaoping's southern lecture tour was indeed a turning point. By the mid-nineties, businesses all over China were hanging up their Red Hats. According to an official with the Zhejiang Private Industry Economic Associations, due to changes to Zhejiang province's economic system in the last half of 1999, over 3,000 businesses changed their status to private-ownership as part of a scheme to have all businesses own up to their status within three years. Today, 80 percent of Zhejiang's collectives have already done so.

Simultaneously however, businesses began to re-register as collective-owned. According to Zhang, at that time the political environment had improved enormously, and few private businesses worried about property rights. But in real economic terms private businesses still faced many obstacles.

After the mid-nineties, the new flood of private businesses went to work. But foreign trading rights were not completely opened to them and government rules for requisitioning land was also unfavorable. Furthermore, there were still difficulties obtaining loans that state-owned and collectively-owned businesses did not have.

"People were overjoyed to hang up their hats when Deng Xiaoping visited. Everyone felt that it was perfectly justifiable; what they earned was theirs. There was no longer a need to masquerade. But after they changed status, they realized that the difficulties of private-ownership were still there. Thus, the new wave of Red Hats began again." says Zhang. "Many of these businesses had very little but highly diversified capital when they first formed. As they developed and increased their assets under one manager, it became more and more difficult to concretely distinguish ownership over the firm’s assets. Knowing that a difficult dispute would arise, many still have held off deciding.