China’s private sector has lost ground while the state sector has gained share among major corporations since 2021
The following contribution is from the Peterson Institute for International Economics (PIIE) website, which is an independent, nonprofit, nonpartisan research organization dedicated to strengthening prosperity and human well-being in the global economy through expert analysis and practical policy solutions.
The Institute is committed to rigorous, intellectually open, and in-depth scholarship and debate. It seeks to anticipate emerging issues and present ideas in useful and accessible formats, to inform and shape public debate. Its audience includes government officials and policymakers, business and labor leaders, managers and staff of international organizations, university scholars and their students, experts from other research institutions and nongovernmental organizations, the media, and the general public.
The authors are Tianlei Huang (PIIE) and Nicolas Véron (PIIE). Tianlei Huang is a research fellow and coordinator of the China Program at the Peterson Institute for International Economics. And Nicolas Véron, senior fellow, joined the Peterson Institute for International Economics in October 2009
Description
This semi-annual PIIE tracker of the respective shares of state-owned, mixed-ownership, and private enterprises among China’s largest companies shows that the private sector has been losing ground while the state has been gaining larger shares among China’s top-ranked corporations in recent years.
Panel a of the chart shows the aggregate market capitalization share of China’s 100 largest publicly traded companies by company ownership, while panel b shows the aggregate revenue share of all Chinese corporations included in the Fortune Global 500, also by company ownership.
This indicator is based on the methodology defined in our 2022 Working Paper
The private sector is narrowly defined as companies with less than 10 percent state ownership. The state-owned sector includes both mixed-ownership enterprises (MEs), in which the state owns between 10 and 50 percent, and majority-owned state-owned enterprises (SOEs).
The share of privately owned enterprises in market capitalization among China’s 100 largest listed companies fell from a peak of around 55 percent in mid-2021 to just 33 percent at the end of June this year, a decline of more than 40 percent in just three years (see panel a).
At the same time, the share of SOEs, i.e. those majority-owned by the Chinese party-state, rose steadily from less than a third to about 54 percent.
Although what panel a shows is an indication of market sentiment, not actual economic performance, and it is about relative shares, not absolute levels of market value, this share price phenomenon is actually not disconnected from economic fundamentals. On the contrary, both factors have been remarkably correlated. Panel b shows that the private sector’s share of aggregate revenues of China’s largest Fortune Global 500 companies, whether listed or not, has also stagnated in recent years since reaching a peak in 2020.
These changes appear increasingly structural
The authorities’ stance since 2020, including regulatory tightening and COVID-19 lockdowns, appears to have inflicted lasting damage on China’s private economy, whose dynamism was a defining feature of its economic miracle over the past four decades.
Almost 20 months after China reopened to COVID-19, the private sector has yet to recover, despite many pro-private business statements and gestures by Chinese leaders. In short, the findings here corroborate the view that China continues to suffer from “economic long COVID.”
The Rise of China’s State-Linked Private Sector
The following contribution is from the Stanford Center on China’s Economy and Institutions, the center for empirical, multidisciplinary research on China’s economy. Our goal is to foster innovative research, create transformative experiences for students, and advance public understanding of China’s economy and its impact on the world.
Insights
Analysis of China’s 37.5 million registered firms reveals that 65% of the 1,000 largest private owners have direct equity ties to state-owned owners. In total, more than 100,000 private owners had equity ties to the state, accounting for 15% of China’s registered equity in 2019.
Large private owners also have significant stakes in smaller firms that in turn invest in other private owners. This results in 3.5 million “indirectly state-connected” private owners, accounting for an additional 18% of China’s registered capital in 2019.
The number of private owners with direct capital ties to the state nearly tripled between 2000 and 2019, and those with indirect capital ties increased 50-fold. The analysis suggests that capital ties to the state may have helped, rather than constrained, the growth of China’s private sector.
Source Publication: Chong-En Bai, Chang-Tai Hsieh, Zheng Michael Song, and Xin Wang (2020). The Rise of the State-Connected Private Owners in China. National Bureau of Economic Research (NBER) Working Paper.
Many observers associate China’s economic transformation in recent decades with the decline of the state sector and the rise of the private sector.
The share of state-owned enterprises in China’s industrial output, for example, fell from 50% to less than 30%, leading many to conclude that China’s growth was largely driven by private sector expansion.
How distinct are the ownership lines between the state and private sectors in China today?
The data. Researchers analyzed all 37,546,000 company records from the State Administration for Market Regulation in 2013 and 2019.
All companies in China are required by law to register with this body and list their immediate owners. This allows researchers to “peel back” the layers of ownership to determine the ownership networks of all registered private companies in the country, add up their registered capital, and map their capital links to state-owned companies and entities.
China’s largest private owners have direct equity ties to the state
Large “private owners” (i.e. private individuals or private business entities) often own many companies. East Hope Aluminum, for example, owns at least 10% of the shares in 236 companies. Researchers found that in 2019, 78% of China’s 1,000 largest private owners have equity ties to a branch of the central or local government or a company owned by the central or local government – i.e. “state-owned owners.”
About 65% of these 1,000 private owners are “directly connected” to state-owned owners, meaning that both the state-owned owner and the private owner have at least a 10% equity stake in the same joint venture.
The other 13% are “indirectly connected” to the state through a joint venture with a separate private owner who in turn has equity ties to a state-owned owner.
The largest private owners by registered capital
The analysis finds that in 2019, there were more than 100,000 private owners in China who had direct capital links with state-owned owners.
These 100,000 private owners collectively account for more than 15% of all registered capital in China. China’s largest private owners also have significant equity stakes in smaller private owners, who in turn invest in other smaller private owners.
In 2019, a total of 3.5 million owners had such “indirect” links with state-owned owners. These smaller private owners, indirectly linked to the state, accounted for a further 18% of all registered capital in China. There is a high proportion of private owners linked directly and indirectly to the state in sectors where the state plays a dominant role, such as mineral extraction.
Owners who remain private
However, researchers have found that most of the companies owned by private owners with ties to the state remain wholly owned by the private owner.
Of the 236 companies that are partially or wholly owned by East Hope, for example, 210 are wholly owned by the East Hope family and 26 are joint ventures. Fourteen of the joint ventures involve direct capital ties with state owners.
Smaller private owners are less connected to the state. China’s smallest private owners are more likely to be indirectly connected to the state or not connected at all.
Specifically, about 40% of owners among China’s 10,000 to 100,000 largest private owners are indirectly connected to the state. Among owners smaller than the 100,000 largest owners, the vast majority (94%) have no capital connection to the state.
Increase in the number of private owners with capital ties to state-owned owners 2000-2019
Proliferation of state-connected private owners. The network of private owners with capital ties to the state has expanded significantly over the past 20 years. The number of private owners with direct capital ties to the state nearly tripled between 2000 and 2019, and those with indirect capital ties increased 50-fold.
During China’s period of rapid economic growth, the size of the state sector decreased and the private sector expanded: the share of private owners in total registered capital increased by 22 percentage points between 2000 and 2019.
However, this analysis also finds that the share of connected private owners in total registered capital increased by 19.4 percentage points over the same period. In other words, almost all of the increase in the share of private owners can be attributed to the expansion of the state-connected private sector. Most of this increase is due to the expansion of private owners who have indirect capital ties to the state versus private owners who have direct capital ties to state owners.
Blurred line between state and private sector
Taken together, these findings indicate that a large part of China’s economy is neither entirely state-owned nor entirely private, but rather lies in a grey area of mixed ownership.
In contrast to the widely held view that state ties hamper private enterprise, the proliferation of state-connected private owners suggests that they benefit from their capital ties to the state. As such, the rise of state-connected private owners may be an important driver of China’s rapid growth.
Edward Cunningham: What is the future of China’s private sector?
The following contribution is from the Harvard Kennedy School website and is authored by Edward Cunningham, an adjunct professor of public policy, who is the director of the HKS China Programs and the Asia Energy and Sustainability Initiative.
Perspectives on China
CHINA’S PRIVATE SECTOR is often summed up with a combination of four numbers: 60/70/80/90. Private enterprises provide roughly 60% of China’s GDP, 70% of its innovative capacity, 80% of urban employment, and 90% of new jobs.
Given the clear centrality of private enterprise to China’s vitality, growth, and stability, many find it difficult to understand the logic of the Chinese government’s acceleration of the placement of state power over private enterprise.
Are we witnessing a fundamental shift in the nation’s industrial recipe for success, in which privately owned market drivers will be silenced? How will the CCP’s relationship with the private sector evolve in the medium term?
To try to answer these questions, it is important to keep two perspectives in mind.
First, the Chinese government’s increasing intervention in the private economy is not so much a turning point as the latest stage in a process of intensifying internal control over specific industries.
Second, the state is managing a calculated opening in other industries that still need foreign expertise and resources. Overall, this combined approach represents a government that will likely preside over greater restrictions on domestic private players in the Chinese economy in the medium term, but with important strategic openings for foreign private players in key industries that deserve our collective attention in the years ahead.
In 2021, Chinese Vice Premier Liu He MC/MPA 1995 spoke at a forum on the digital economy and promised
that “the guidelines and policies to support the private economy have not changed… and will not change in the future.” To a large extent, he was right: policy guidelines strengthening state involvement in private industry are nothing new.
They began nearly a decade and a half ago, in the wake of the 2008 global financial crisis, which marked the end of a brief window of liberalization that had followed China’s accession to the World Trade Organization in 2001.
At the time, the government responded to the financial crisis with a fiscal stimulus package that increased the money supply by nearly a third, doubled stock prices, fueled massive gains in property prices, and required a series of deleveraging policies that restricted credit, particularly to private firms.
Yet demand persisted, and alternative financial institutions emerged to meet it through “shadow banking” that was able to navigate a fragmented regulatory apparatus. Regulatory centralization followed, along with a raft of policies to rein in private companies in largely consumer-facing industries such as real estate, financial services, technology and education.
In late 2020, Ant’s Hong Kong IPO was suspended after an intervention by Chinese regulators. Education firm New Oriental, which is also listed in the United States, lost 90% of its market value as the private tutoring industry was effectively banned from making a profit.
Didi Chuxing, the ride-hailing firm, was delisted from the New York Stock Exchange in May this year after facing increased scrutiny from regulators. Edward Cunningham
“Are we witnessing a fundamental shift in the nation’s industrial recipe for success, in which privately owned market drivers will be silenced?”
In addition to interventions in the rules and market structure of these industries, Beijing has also turned to state investments in the leading companies that drive these industries.
According to Dealogic, public investments in private sector companies increased from $9.4 billion in 2016 to more than $125 billion in 2020. Seemingly small government “golden shares” that were historically overlooked in manufacturing industries expanded to consumer data-intensive industries.
For example, China’s internet regulator (the Cyberspace Administration of China), through majority ownership by the China Internet Investment Fund, recently took a 1% stake in a ByteDance subsidiary that, despite its insignificant percentage, gave it the power to appoint one of three board members of a unit that holds key licenses to operate the lucrative domestic short-video business. A similar 1% stake had been acquired in Nasdaq-listed Weibo a year earlier.
The scale of these formal interventions and investments has been significant
Chong-En Bai of Tsinghua University and Chang-Tai Hsieh of the University of Chicago have shown that private companies with state-linked investors rose from 14.1% of all registered capital in China in 2000 to 33.5% in 2019.
In 2017, the role of Communist Party committees was formally inscribed in companies’ articles of incorporation, giving the party oversight of strategic decisions. Of course, the Party’s former informal mechanisms of influence also grew.
A September 15, 2021, opinion of the Party and the State Council on strengthening “United Front Work” in the private sector reflects a significant reimposition of ideology on private companies.
But things look a little different when we look at some of the largest foreign private companies eager to increase their investments in China
These companies are scoring major wins in the area of ownership and investment, despite the seemingly secular trends against the private sector noted above. In the financial services sector, Blackrock, the world’s largest asset manager, recently won approval from Chinese regulators to launch an investment fund business in China.
Investment banks such as J.P. Morgan and Goldman Sachs, whose scope of business has long been restricted in China, can now set up wholly-owned securities firms and are doing so.
One of the world’s largest hedge funds, Bridgewater Associates, has announced a major expansion of new onshore funds in China.
American Express became the first foreign payment network authorized to process renminbi transactions in China in 2021. Even in the strategic auto industry, Tesla achieved something of a revolution by pushing through a change in regulations that allowed 100% foreign ownership of its Gigafactory manufacturing plant.
In these sectors where foreign technology and know-how remain central and where Beijing sees foreign companies as potentially useful allies in pushing for a reduction in US-China tensions, foreign private interests stand to win, while domestic private interests stand to lose.
Yet perhaps it is China’s macroeconomics that offers the best road map for determining the future weight of the private sector in the medium term. As Michael Pettis has noted, if Beijing continues to aim for a GDP growth rate that substantially exceeds the underlying real growth rate of the economy, “China will have no choice but to expand the role of the government in the economy and reduce the role of the market in allocating resources.”
A series of long-standing but failed policy attempts to rebalance ordinary household incomes and boost domestic consumption underscore how difficult it is to avoid such an outcome. The private sector interventions and state investments in private companies mentioned above only exacerbate this structural challenge.
Merged: The Chinese Communist Party Moves Into China’s Private Sector
The following contribution is from the CNA portal which is an independent, non-profit organization dedicated to research and analysis of the nation’s security. For 80 years, our scientific rigor and real-world approach to data have been indispensable to leaders facing complex problems. CNA employs operations research to address military issues at the Center for Naval Analyses and national challenges at the Institute for Public Research.
The author is Dr. Jeffrey Becker who is the senior research scientist for CNA’s China Studies Program.
Last week, two senior U.S. lawmakers called on the Pentagon to add Chinese battery manufacturer Contemporary Amperex Technology Co., Limited (CATL) to a list of companies that cannot receive U.S. military contracts, due to its alleged ties to the People’s Liberation Army (PLA).
The company defended itself, claiming that CATL is «not controlled by the Chinese government.» But across China’s private sector, the distinction between the state and private companies has blurred over the past decade. Since Xi Jinping came to power in 2012, the Chinese Communist Party (CCP) has methodically pursued a policy of expanded control and oversight of the private sector.
Today, the party has a much greater ability to oversee and influence the decision-making of Chinese private companies. That influence has profound implications for the United States and other Western governments seeking to recalibrate their economic relationship with Beijing.
The government and the party use various approaches to ensure this control and oversight of the business community
CCP cells have expanded greatly within corporate headquarters. Changes in corporate governance, as well as the placement of party officials in the corporate hierarchy, have elevated the party’s role in corporate decisions. Government subsidies and contracts increase the private sector’s dependence on Beijing.
And joint ventures and mixed-ownership investments link private companies to state-owned enterprises. CATL exemplifies all of these approaches to the increasing fusion of state-owned and private enterprises.
Although PRC government officials reject accusations of party control over the private sector
The policy shift has long been acknowledged by some in China’s business community. In 2018, Wang Xiaochuan, CEO of Tencent subsidiary Sogou, spoke about the implications of this policy shift for China’s private entrepreneurs:
We are entering an era where we will be merged. There may be a request to set up a party committee within your company, or you may have to allow state investors to take a stake, you know, as a form of mixed ownership.
If you think clearly about this… you can get massive support. But if your nature is to go your own way, to think that your interests differ from those that the state defends, then you will probably find that things are painful, more painful than in the past.
The Party’s relationship with business under Xi Jinping
The Party’s influence over the business community requires a stronger presence in that community. Xi Jinping raised this issue explicitly in his first year in power, when he referred to the CCP’s foundation within the private sector as “weak” (工作基础薄弱) and stressed the need to “carry out party work and enhance party influence.”
The CCP subsequently stepped up its efforts to integrate into the private sector and promote party building in private enterprises, improving its monitoring capacity.
By 2017, nearly three-quarters of private companies had an established CCP cell, and by 2021, the party had “achieved full coverage” (全覆盖) of the country’s 500 largest private companies.
Once the CCP’s presence in the private sector was firmly established
Both state mechanisms and companies themselves began to elevate the party’s role in corporate governance. Between 2015 and 2018, more than 180 private companies amended their articles of incorporation to formalize the corporate governance role of their CCP organizations.
In 2018, the China Securities Regulatory Commission implemented a revised “Corporate Governance Code for Listed Companies,” which requires all listed Chinese companies to support party-building activities.
The party has also proactively dispatched (派到) officials to serve in leadership roles in private companies. For example, in 2019, the Hangzhou municipal government placed officials in 100 key private companies, including Geeley and Alibaba.
In 2023, the Shaanxi Provincial CCP Organization Department sent 25 first Party secretaries to serve in 25 priority companies across the province.
CATL, a major player in the global EV battery market
It is a prime example of this evolution of the party’s role in the private sector. The CCP has worked diligently to establish a strong presence within the company.
In 2021, CATL’s main headquarters had 28 separate CCP branches. In 2022, CATL’s board of directors amended the company’s bylaws to emphasize the importance of “building party organizations” (党组织的建设) within the company.
CATL’s Party Committee has also actively sought to expand cooperation with external CCP organizations, including those of defense research institutes working with the PLA.
In April 2021, the company hosted a delegation from Beihang University to learn about CATL’s approach to party building and the party’s role in developing the EV battery industry. Beihang is one of China’s “Seven Sons of National Defense” (国防七子), research institutes with direct ties to the PLA and China’s defense industry. The delegation toured the Memorial Hall of the CATL Party Building and, together with CATL party members, made a pilgrimage to a local museum commemorating the code-breaking and intelligence work of a former director of the Second Office of the Red Army Headquarters.
Blurring Distinctions Between Private and State-Owned Enterprises
In addition to embedding itself within private enterprises, the CCP has strategically altered the business environment by blurring distinctions between state-owned and private enterprises.
From 2000 to 2019, the proportion of private enterprises that receive investment from state-owned enterprises or that rely heavily on state capital more than doubled, reaching 35 percent of all registered capital.
Today, enterprises in which the state has directly invested are responsible for nearly half of all private assets in China.
CATL also exemplifies these practical connections between the state and private enterprises. In the first half of 2023 alone, CATL has reportedly received some 2.85 billion renminbi (over $390 million) in government subsidies, making it the largest beneficiary among all publicly traded companies in China. In addition, CATL has established multiple joint ventures with state-owned enterprises.
One of them is with a subsidiary of Guangdong Hongda Holdings, part of a larger state-owned conglomerate that produces advanced military hardware, including the HD-1 supersonic missile.
Although direct evidence of Beijing’s intervention in the specific decisions of private companies is scarce (the system’s design favors indirect influence through incentives and constraints), examples occasionally emerge.
In 2023, Xi met with a group of prominent businessmen, including CATL founder and chairman Robin Zeng, and expressed concern about the risks of CATL’s global expansion:
While it is gratifying that our industries are world leaders, I am concerned that this sudden burst [of growth] could end abruptly.
You [Robin Zeng] mentioned [critical] minerals from exploitation. Countries could “pinch our necks” right from the source… We must avoid a situation where we advance confidently but end up being ambushed and completely defeated. In the context of a zero-sum game with others, we must leave ourselves an escape route!
Days after the meeting, the China Securities Regulatory Commission issued informal instructions to CATL asking it to scale back its plans to raise $5 billion in Swiss global depositary receipts, which CATL had planned to use to fund its European expansion. CATL delayed the listing indefinitely.
To be sure, private companies in China retain agency and remain motivated by financial incentives
They are not mere extensions of the state. While the CCP under Xi Jinping has stepped up its efforts to assert its control over the private sector, Chinese private companies have been creative in their efforts to navigate central policies, often finding innovative ways to carve out operational autonomy in difficult environments.
From a policy perspective, however, the CCP’s efforts to blur the lines between the state and the private sector have profound implications for how the United States and the West should interact with Chinese private companies.
While corporations like TikTok-owner ByteDance, drone manufacturer DJI, or maritime infrastructure firm Landbridge Group may be primarily focused on their bottom line, their ability to push back on CCP requests for information, access, or even direct action is likely limited only by Beijing’s ability to enforce its intended policies.
This reality underscores the need for changes in U.S. approaches toward China’s private sector.
Explainer | China’s private sector crisis: All you need to know about the mess and what Beijing is doing to fix it
The following contribution is from Hong Koin’s South China Morning Post portal and is by Meredith Chen who joined the Post in 2023 and covers China politics and diplomacy. She has a master’s degree in journalism from the University of Hong Kong. Previously, she worked in international and Chinese-language media, focusing on Asian affairs.
Much has been made of the plight of China’s private companies, which have been seeking help for years and are finding it difficult to thrive in the post-Covid environment
Beijing wants to avoid risky stimulus and is instead focusing on dozens of support measures that some analysts say will do little in the short term
Analysts urge Beijing to ignore the ‘moral hazard’ of helping indebted regions
China is making it easier for local governments to sell bonds to fund large-scale infrastructure projects, which could include new rail lines. How high will the fence be? China’s grave concerns over US tech investment restrictions
The latest US restrictions aim to curb venture capital and private equity investments in Chinese companies spanning semiconductors and microelectronics, quantum information technologies and certain artificial intelligence (AI) systems.
China records first debt inflows of 2023, but weak economy will limit longevity
Foreign investors have been selling Chinese debt since the start of the year amid a weaker yuan and a slower-than-expected economic recovery from the coronavirus pandemic.
As part of China’s new stimulus package, the People’s Bank of China (pictured) has included a bond issue worth an estimated 2 trillion yuan to help consumers and encourage local government spending.
China part of ‘every supply chain’ as US, EU struggle to shake off dependency
The US and EU have maintained a level of dependence on manufactured goods from China
Despite a concerted effort to reduce trade in most sectors, according to research by a think tank.
China and EU must reason their way out of dispute over electric vehicles: former Merkel adviser
Former German chancellor Angela Merkel was seen as more open to engagement with China than many of her European counterparts.
Foreign exchange inflows may persist as China’s policy easing gives asset facelift
Beijing asks officials to be ‘bold and firm’ on path to China’s growth goals
China’s latest stimulus measures still not enough
To rebalance China’s economy, a greater share of national income must be transferred to the domestic sector.
Luxury home sales in Shanghai and Shenzhen soar after historic stimulus package
China’s private sector is crying out for help, but will Beijing’s new round of policy initiatives pay off?
China has recently announced a series of initiatives to shore up the country’s private economy, which leaders see as crucial to stemming downside risks to the nation’s economic recovery.
The private sector, which forms the backbone of China’s 121 trillion yuan ($16.8 trillion) economy, was hit the hardest during the pandemic and has remained subdued this year amid a slower-than-expected recovery.
Addressing late payments
The State Council, China’s cabinet, stressed the need to speed up the resolution of the problem of late payments to businesses, with the aim of «stimulating the vitality of private investment.»
Chinese companies were hit by the longest payment delays among major Asian economies, according to a recent report by global trade credit insurance group Coface.
Given higher commodity prices and fierce market competition, customers with a business downturn could face financial difficulties leading to late or partial payments. This weakness was exacerbated by China’s strict Covid control measures and slowing economic recovery. It discourages business operation and investment and could result in more companies being caught in debt situations they cannot resolve.
Meanwhile, a chain of delayed payments forms so-called “triangular debt.”
Companies end up owing money to each other and their banks, to the potential detriment of their credit. This could create a serious bottleneck for China’s economic growth and intensify financial risks.
The National Development and Reform Commission (NDRC), China’s top economic planner, paid particular attention to debts owed by local governments and state-owned enterprises (SOEs) to small and medium-sized enterprises (SMEs), directly responding to widely shared concerns by business owners about difficulties in obtaining payments from these entities.
To improve the government’s credibility and performance mechanism, the NDRC released an announcement on Thursday stating that local governments deemed unreliable would face limitations in accessing financial support from the central budget.
Financial Support and Fair Market Access
Prior to the NDRC’s 28-point action plan, the Central Committee, the ruling Communist Party’s top leadership body, together with the State Council, in the most comprehensive policy package issued since President Xi Jinping began his third presidential term in March, had reiterated their promises to foster an environment of equal treatment, offering strong political backing to break down market entry barriers for private entrepreneurs.
Chinese private entrepreneurs have suffered persistent discriminatory treatment by the Chinese state apparatus, including excessive taxes and levies, reduced access to finance, excessive government oversight, and unfair competition from state-owned enterprises.
According to the NDRC’s latest policy guidelines, private capital will be encouraged to participate in an identified list of key state-owned industries and projects and lead technology programs in essential areas, such as industrial software, artificial intelligence, genetic and cellular healthcare, and chemical energy storage.
Private companies will enjoy a simpler process for obtaining tax deductions for research and development (R&D) and a shorter wait for export rebates.
China’s Ministry of Finance also unveiled a package of tax relief measures
as part of a series of efforts to bolster private sector confidence. The tax relief program, which was initially set to expire at the end of 2022 but was extended to the end of this year, will now be extended by four more years to the end of 2027, the ministry said.
The latest extension follows a total of 927.9 billion yuan in new tax breaks in the first half of the year, of which 76 percent were granted to private companies, the State Administration of Taxation said.
China’s newly appointed central bank governor Pan Gongsheng pledged to direct more financial resources toward the private economy, including expanding debt financing tools to companies that applied for broader bond financing channels.
Biden to introduce new restrictions on US investments in China, declares tech ‘emergency’
Boosting legal guarantees
China’s top legal bodies pledged to provide stronger measures to reverse the suppression of private companies and boost confidence in their development.
China’s Supreme People’s Court is studying and formulating a package of policies and judicial measures to strictly prevent the misuse of administrative or criminal means to interfere in private companies’ economic disputes, including excessive fines or penalties or criminal charges related to abuses.
To promote fair competition, top authorities have vowed to crack down on preventing the inappropriate use of anti-monopoly law enforcement, an issue that has been a concern for internet giants in recent years.
Beijing also stressed improving the intellectual property protection system, to step up the fight against intellectual property infringement and improve guidelines for handling intellectual property disputes involving entities outside China.
Positive business environment and communication
The Communist Party’s watchdog has launched a series of targeted operations to combat the online spread of false information and malicious attacks on private companies and entrepreneurs that could harm their reputation or interests, as part of the range of efforts to promote a fair and stable business environment.
As of August 1, the Office of the Central Cyberspace Affairs Commission had cleared more than 86,000 pieces of false and misleading information, and tackled 8,425 accounts involved, during a three-month period starting in April.
The NDRC has recently held multiple rounds of dialogues with private entrepreneurs to seek feedback on factors hindering private enterprises, and has promised to establish a regular communication mechanism with the private sector.
Beijing also promises to elevate the political status of private entrepreneurs, encouraging “outstanding persons” from the private sector to join legislative and advisory bodies at all levels so they can “play a greater role” in international economic activities.
New boost for China’s private sector
The following contribution is from China Daily’s global edition and the author is Cheng Yu of the staff of this newspaper.
Chinese companies play important role in national projects and on the world stage
At a recent key high-level meeting, China decided to foster a favorable environment for enterprises and create more opportunities for the private sector.
This, government officials and industry experts said, will boost private sector confidence and ensure advanced productivity for future economic growth.
Their comments came after the third plenary session of the 20th Central Committee of the Communist Party of China this month resolved to further deepen reforms in an all-round way to advance China’s modernization.
Han Wenxiu, executive deputy director of the Central Committee’s Office for Financial and Economic Affairs, said at a press conference
in mid-July that according to the resolution, China will improve the long-term mechanism for private companies to participate in large national projects.
The country will also support capable private companies to lead national initiatives to achieve breakthroughs in major technologies and give them greater access to major national scientific research infrastructure, he said.
«As the rule of law provides the best business environment, China will formulate and introduce a private sector promotion law,» he said, adding that more efforts will also be made to remove barriers to market access, so that competitive infrastructure areas are open to market entities in a fair manner.
Liu Junhai, professor and director of commercial law at Renmin University of China in Beijing, said:
«The private economy itself is a symbol of advanced productivity, and encouraging the development of the private economy will inject new productivity into economic growth in a timely manner.
«A proposed new law to boost the private economy, for example, aims to provide private companies with a more stable, transparent, fair, secure and predictable legal business environment. Such a business environment will also help promote higher productivity.”
Expanding, Liu said that promoting the nation’s private economy should push for equal status, common development, fair competition, mutual cooperation, equal supervision and equal protection for private enterprises, so that they can participate in market competition in an open, fair and equitable manner.
CITIC Securities also predicted that China is expected to launch more detailed policies
to treat state-owned and private enterprises equally from an institutional and legal perspective.
A report on the development of the private economy by the State Council, China’s Cabinet, showed that private enterprises accounted for 92.3 percent of the country’s total number of business entities in 2023, a significant increase from 79.4 percent in 2012.
Luo Zhi, director of the research center for the new private economy at Wuhan University, said in an article that some private enterprises have a weak sense of profit, such as in some regions, the public service system for small and medium-sized enterprises is incomplete, leading to high institutional transaction costs for private companies.
Amid these challenges, the planned law on the development of the private economy is expected to be “practical, effective and highly operational,” said Gao Zicheng, president of the China Bar Association.
Gao suggested that measures to protect and remedy the legal rights of private companies should be included in a separate chapter. As well as separate measures to guide mechanisms for law enforcement, inspections and assessments of the private economy.
More detailed measures include implementing tax policies that benefit small and micro private enterprises
“Such as deferred, reduced or exempted corporate income tax and value-added tax for eligible enterprises to reduce the burden on those private enterprises,” Gao said.
He further suggested that the share of private enterprises in government procurement should be increased through measures such as setting purchasing demand standards, reserving purchasing quotas, price evaluation discounts and priority purchasing.
Imports and exports surge
Over the past decade, the import and export volume of private enterprises increased by an average of 11.1 percent annually, with private enterprises accounting for about half of the country’s total imports and exports.
Since 2019, private enterprises have become China’s largest foreign trade entities, according to the report. Wang Peng, a researcher at the Beijing Academy of Social Sciences, said: “More importantly, private companies have undoubtedly taken the lead in technological innovations and the digital economy in recent years, especially in fields such as new energy, information, communication, biopharmaceuticals and artificial intelligence.
“Therefore, the country’s latest call to improve the long-term mechanism for private companies to participate in major national projects will greatly boost confidence and boost their passion for more technological innovations.”
Wang also said the call takes on added significance amid rising geopolitical tensions as the United States and the European Union seek to suppress China’s growing prowess in emerging sectors such as chips and new energy.
Previously, Chinese authorities had identified a group of important scientific and technological areas where private companies can take the lead, such as industrial software, cloud computing, artificial intelligence, industrial internet, genetic and cellular medicine and new energy storage.
Su Meng, chairman and chief executive of Beijing Percent Technology Group Co, a leading private sector provider of data science products
said that the eligibility criteria for companies to participate in major national projects used to be relatively high. “Many private companies generally found it difficult to meet all those criteria,” he said.
“With the latest efforts, private companies are expected to have more opportunities to contribute to major national science and technology projects and make more innovations on a global scale.”
The latest efforts in this direction are in fact a follow-up to recent measures such as a series of support policies to guide the private sector, experts said.
The National Development and Reform Commission, the country’s top economic regulator, unveiled an important guideline to guide the private sector in July last year. It also set up a special private sector development office in September to offer targeted support to private companies.
In recent years, the number of private companies has increased and played a role in major infrastructure projects in transportation, water conservancy and railways.
Thanks to these efforts, Chongqing One-Tale Electric Co Ltd has received special support from the NDRC to set up a sensor technology service platform, said Tian Yongchao, head of research and development at the company, a private electrical equipment supplier.
“After the completion of the platform in June next year, it is expected to help improve the sensor industry chain in Chongqing and southwest China as a whole.”
Song Xiangqing, a professor of government management at Beijing Normal University, said that from now on, private companies are expected to have more opportunities to play an important role in major national projects related to infrastructure, new urbanization, transportation and water engineering.
“The government wants to remove barriers hindering the development of private sector companies and enable them to participate in market competition at a higher level and in a broader field. It would activate the intrinsic ability of private sector companies to innovate and become more competitive on the global stage,” Song said.
Private Enterprises in China in Challenging Times
The following contribution is from the RIETI portal, which is the Research Institute of Economics, Trade and Industry (RIETI) and is a policy research center established in 2001. Its mission is to conduct theoretical and empirical research, maximize synergies with those involved in policy formulation, and make policy proposals based on evidence derived from such research activities. The institute is highly recognized both in Japan and abroad for its activity.
The author of the article is Chi Hung Kwan, who is an Associate Consultant, RIETI and a Senior Research Fellow, Nomura Institute of Capital Markets Research
The Need to Remove Barriers to Entry and Strengthen the Protection of Property Rights
Introduction
In China, a socialist country under the one-party regime of the Chinese Communist Party (CCP), private enterprises are at a disadvantage when competing with state-owned enterprises. In recent years, with the government tightening regulations and the onset of the economic downturn, the performance of private enterprises has deteriorated markedly.
To promote the healthy development of private enterprises, the Chinese leadership has sought to correct discrimination based on differences in ownership systems by removing market entry barriers and strengthening the protection of private property rights.
As part of these efforts, the “Opinions of the Party Central Committee and the State Council on Promoting the Development and Growth of the Private Economy” were released on July 19, 2023, containing comprehensive reform measures. However, the road ahead will be long, hampered by traditional ideology and resistance from vested interests.
Stagnation of the private economy
In China, with the shift to reform and opening up in the late 1970s, private firms that started from scratch, and by extension the private economy comprised of them, rode the wave of marketization and overtook state-owned enterprises in terms of total revenue and employment in the industrial sector (Figure 1).
Figure 1: Share of total revenue and number of employees in the industrial sector
– Private firms versus state-owned enterprises
Figure 1: Share of total revenue and number of employees in the industrial sector – Private firms versus state-owned enterprises
Note: 1. State-owned enterprises are state-owned industrial enterprises with larger state-owned shares than any other non-state shareholder.
Note 2. Number of employees is the annual average.
Source: Prepared by the author from the CEIC database (original data from the National Bureau of Statistics).
However, in recent years, private enterprises have experienced a noticeable slowdown amid tighter government regulations and economic downturn.
In particular, since 2021, the phenomenon of “national advance and retreat” has become more pronounced in the real estate sector, with many private enterprises suffering from a debt crisis.
The number of private enterprises ranked in the “Top 100 Real Estate Developers in China” in 2022 decreased from 46 to 30 and their share of sales from 32.0% to 25.0%, while the number of state-owned enterprises (including mixed-ownership enterprises) increased from 54 to 70 and their share of sales from 68.0% to 75.0%.
Private Enterprises at a Disadvantage in the Socialist Regime
In addition to slowing economic growth and tighter government regulation, the traditional ideology of socialism has also limited the development of private enterprises.
By nature, private enterprise is based on capitalism and private property, and is therefore at odds with socialism (or communism). As Marx and Engels wrote in the Communist Manifesto, “the theory of the communists can be summed up in one sentence: abolition of private property.” This is also the “original intention” of the CCP, founded in 1921.
In China, following the communist revolution in 1949, a planned economy was put in place, centered on publicly owned enterprises, composed of state-owned enterprises and collectively owned enterprises, and the private enterprises that had existed until then were “converted” into publicly owned enterprises. After the reform and opening-up led by Deng Xiaoping in the late 1970s, the right to exist of private enterprises was again recognized. This was justified by the theory of the “primary stage of socialism” proposed by General Secretary Zhao Ziyang in the 1980s.
This theory holds that since Chinese socialism was born out of a semi-colonial and semi-feudal society, and the level of its productive forces is far behind that of advanced capitalist countries, during the primary stage of socialism, which can last for a long time, China needs to make use of capitalist elements such as private property and private enterprise to achieve the industrialization that many other countries have achieved under capitalist conditions.
This stance of the CCP has not changed
In fact, General Secretary Xi Jinping acknowledged at the 20th National Congress of the Chinese Communist Party in October 2022 that China is still in the primary stage of socialism. However, there is no clear policy on how private property and private enterprise will be treated in the future when China reaches a higher stage of socialism, following the rise of productive forces, and this remains a concern for private entrepreneurs.
State-owned enterprises, and by extension the state-owned economy they form, support the communist regime not only in ideological terms, but also in the following respects
First, state-owned enterprises position themselves as the backbone of the Chinese economy and monopolize important industries (e.g., energy, mining, telecommunications, transportation, and finance).
Furthermore, state-owned enterprises provide a large number of jobs and contribute to social stabilization.
Furthermore, they are important players in the implementation of government policies, such as economic stimulus measures. And managers of state-owned enterprises are often high-level Communist Party officials, and their loyalty to the Party and the government is supposed to be stronger than that of managers of private companies.
In contrast to the emphasis on state-owned enterprises, the Communist Party is wary of large domestic private companies as a potential threat.
Therefore, it is trying to strengthen control over them by involving capital, establishing party organizations, etc., along with tightening regulations. However, political interference in business could undermine the vitality of private enterprise.
Due to differences in ownership systems, private enterprises face high barriers to entry as well as various forms of discrimination.
First, state-owned enterprises receive fiscal and financial support from the government, including deficit compensation, while private enterprises do not benefit from this support. In addition, state-owned enterprises have access to land, funds, and other factors of production at a lower cost, while private enterprises must bear higher costs.
In terms of legislation and enforcement of laws and regulations, the phenomenon of prioritizing state-owned enterprises over private enterprises still exists. In particular, private enterprises face institutional or invisible obstacles to entering the market and carrying out management activities because their property rights and interests are not effectively protected.
In particular, the phenomenon of incoming officials reversing their predecessors’ promises is common, which has contributed to a decline in private enterprises’ willingness to invest. Also frequent are cases of prosecutors and judicial institutions abusing their judicial power, violating court procedures without sufficient evidence or legal grounds, and seizing private entrepreneurs’ assets after arresting them on «groundless» charges.
Supporting private enterprises as a priority issue
As the reform and opening-up drive progresses, Chinese leaders have come to recognize the importance of private enterprises in economic development and are seeking to support them while strengthening control over them.
At the 20th National Congress of the Chinese Communist Party in October 2022, a policy was put forward that stipulated «optimizing the development environment for private enterprises, protecting the property rights of private enterprises and the rights and interests of entrepreneurs in accordance with the law, and promoting the development and strengthening of the private economy.»
On July 19, 2023, the «Opinions of the Party Central Committee and the State Council on Promoting the Development and Growth of the Private Economy» were published, containing specific policies for this purpose.
The «Opinions» put forward the following six key tasks:
(1) Continuously optimize the development environment for the private economy based on removing market entry barriers.
(2) Strengthen political support for the private economy, focusing on developing financial support policies and programs.
(3) Strengthen the rule of law guarantee for the development of the private economy, focusing on strengthening the protection of private enterprises’ property rights and the rights and interests of entrepreneurs.
(4) Strive to promote high-quality development of the private economy by encouraging research and development, etc.
(5) Promote the healthy growth of private entrepreneurs by developing a close and clean relationship between the government and enterprises, among other measures.
(6) Continuously foster a social environment that nurtures and promotes the development and growth of the private economy, for example, by inducing society to adequately recognize the important contribution and important role of the private economy.
First, there are many market entry barriers
that prevent private enterprises from expanding in some industries and regions.
The Chinese government has implemented a market entry negative list system to facilitate entry into industries monopolized by state-owned enterprises.
The Market Entry Negative List lists prohibited and permitted entry items. For products not included in the market entry negative list, private enterprises can enter the market on equal terms, in accordance with the law.
The implementation of the market entry negative list system has greatly improved the transparency of the entry system in China, but many entry barriers still persist.
First, the entry criteria and selection process are opaque. Even in industries that are supposed to be open to entry, even if they follow the rules and pass the administrative selection, many unreasonable conditions are actually added.
Despite the shift from an approval-based system to a registration-based system for obtaining business licenses in some industries, in practice, the same approval process must still be followed.
In addition, there are many restrictions related to government procurement and bidding
that discriminate against private enterprises. For example, in some industries, enterprises are classified according to size, assets, number of employees, experience, etc., and small and micro private enterprises that are just starting out are classified so low that they are actually unable to participate in government procurement or bidding. In the future, it is necessary to further reduce market entry barriers, with particular attention to improving the negative list system for market entry.
In addition to restrictions on industrial sectors, private enterprises face the barrier of local protectionism when entering the market.
Local protectionism means policies by which local governments favor local enterprises
to protect their own economic interests to the detriment of enterprises in other regions. Specific examples include policies that favor local companies or set standards and technical requirements to prevent companies from other regions from entering the market.
These measures that hinder fair competition must be corrected.
Second, private companies are hesitant to expand their businesses through investment and other means, mainly because entrepreneurs are concerned about the security of their property.
Companies are less willing to invest funds in R&D, especially when intellectual property rights are not adequately protected.
In some cases, companies’ profits are not reinvested and are transferred overseas.
To effectively protect the property rights of private companies and the rights and interests of entrepreneurs, the principle of equality must be upheld not only in the enactment of laws but also in their enforcement.
Based on this recognition, Chinese leaders are working to correct discrimination based on differences in ownership systems, focusing on removing barriers to market entry and strengthening the protection of private property rights for the healthy development of private companies.
However, the road to achieving this goal will still be long, due to the obstacles of traditional ideology and the resistance of vested interests.