The visible hand is not always bad for business

When a chicken restaurant from south-central China became one of the hottest initial public offerings on the New York Stock Exchange last year, the usual explanations were offered: China is a market of 1.3 billion people, with a fast-growing middle class and a newly acquired taste for the kind of Western-style food on offer at Country Style Cooking Restaurant Chain Co. And so on.

But here in this sweaty metropolis straddling the Yangtze River, the success of Country Style Cooking (CCSC on the NYSE) is seen as proof of something else: that the regional government's efforts economic reform efforts are paying off.

Under the leadership of controversial local Communist Party boss Bo Xilai, Chongqing has radically overhauled the state's involvement in the local economy. By shedding assets in the industrial sector and refocusing on infrastructure and finance, Chongqing's state-owned enterprises have started to – gasp! – turn profits. With revenue coming in from other sources, Chongqing has been able to lower its corporate tax rates to 15 per cent, from 33 per cent previously. The new rate has helped attract foreign firms such as Hewlett-Packard and Apple assembler Foxconn -- the sort that once did all their business in China's coastal provinces -- inland.

It also made it possible for a local Chongqing start-up like Country Style Cooking to think big, growing from just a single KFC knockoff in 1996 to more than 130 today across southwest China. The NYSE was impressed, and Country Style Cooking shares shot up 47 per cent to $24.30 in their first day of trading last fall (though it has since slid back down to about $17). The company plans to add another 100 restaurants this year.

"How can the Chongqing government afford to have low taxes on private enterprises? Because Chongqing's state-owned enterprises are very profitable," said Cui Zhiyuan, a professor of public policy at Beijing's Tsinghua University currently working with the Chongqing government.

"In the West, the theory is that state ownership is detrimental to private entrepreneurship. But the Chongqing example shows they can be complementary."