The Chinese government has moved to ease restrictions on private enterprise, in a major ideological shift designed to boost economic growth.

The head of the powerful state development planning commission, Zeng Peiyan, says that private enterprise should be put on "an equal footing with state-owned enterprises" for the first time since the Communists took power in 1949.

He says the government will now "actively encourage and guide private investment" and allow it to operate in all sectors of the economy, except for those involving national security and strategic monopolies like telecommunications.

Under the new arrangements, planning restrictions and discriminatory taxes will be lifted on private companies, and they will be allowed to raise more capital for investment by floating on the stock market or getting loans from banks.

"This is a significant ideological shift .. It shows that the government is desperate to get the economy moving," said Fred Hu of Goldman Sachs in Hong Kong.

Economy slowing down

The move comes as China is struggling to maintain an economic growth rate of around 7%, which is seen as necessary to absorb the millions of new workers who join the workforce each year.

Mr Zeng reaffirmed that growth target, although many private economists believe it will be difficult to maintain.

Consumer spending has been slowing down, and prices have fallen fallen for the past two years as demand has slumped.

In response, the government launched a massive programme of public works to try to boost the economy, financed in part from borrowing from abroad.

Andy Xie of Morgan Stanley Dean Witter said that the public spending added 2% to China's growth, and the real growth rate was closer to 5% - not enough to prevent unemployment from rising.

"That's the nub of the problem.. they need a growth rate of 10% to create jobs for all the people who want them," he said.

China's official growth target will be set at the National People's Congress in March.

Modernising the state sector

Currently, China's bloated state sector produces only 40% of industrial output, yet it employs 56% of all industrial workers and receives 70% of investment.

The World Bank estimates that up to 30m of the 140m workers in state firms are likely to lose their jobs in the next decade as the sector restructures.

The prospect of mass unemployment if the private sector does not absorb these workers is a strong spur to change.

Pressure on the state sector will increase after China joins the World Trade Organisation, under the terms of a deal agreed with the United States in November.

Many of China's basic industries will face intense competition from Western companies who will have better access to the country's markets.

China's constitution was changed last year to say that the private sector formed an "important component" in the economy instead of merely a "component."