Private Companies Fight for Their Commercial Lives in China

Private companies both foreign and domestic are fighting for their commercial lives in China.

Despite pledges and promises from no less than the chief planning body of the country, the National Development and Reform Commission (NDRC), as well as from the almost omnipotently powerful State Council, however, little practical help appears to be on the horizon.

The Chinese economy is sputtering. It’s not showing signs of post-pandemic recovery, and its planners’ only wish is to reach at least a 5 percent growth target for the country by the end of 2023 – a figure that would have been considered ludicrously low in earlier times.

Evidence of the decline of the Chinese economy is everywhere, from low consumption rates – people are hanging on to their savings – to signals from the Chinese government itself. A case in point: The youth unemployment rate, which was last published in June 2023, showed that unemployment among 16-24 year-olds had reached a high of 21.3 percent, or more than one in five of the age group. In August, the National Bureau of Statistics announced that it was suspending publication of youth unemployment data while it improved its survey statistics.

The greatest shock to confidence in the economy came when China Evergrande Group, one of the largest property developers in China, filed for bankruptcy protection in the United States on August 17. The group defaulted on payments in 2021; this latest failure, which is intended to protect Evergrande's holdings and exposure in the U.S. market, could not have come at a worse time.

With all of these economic woes, then, why would China not be scrambling to shore up its private sector market, both among Chinese domestic companies, as well as among foreign investors who are clamoring for greater market access and transparency?

The Power of the Private Sector Economy in China

It is impossible to ignore China’s private sector economy. As Xinhua, the news agency of the Chinese Communist Party, openly admits, “The private economy plays an important role in China’s economic development as it contributes approximately 50 percent of the country’s tax revenue, 60 percent of GDP, 70 percent of technological innovation, and accounts for 80 percent of urban employment.”

The inverse of this statement is that the state-owned economy contributes approximately 50 percent of the country's tax revenue, 40 percent of its GDP, 30 percent of its technological innovation, and 20 percent of urban employment. It begs the question: Why does the bloated state sector still exist? And more importantly, why is it so hard to pry leadership away from preference for an old, sluggish relic of an economy in favor of the newer, proven model that, despite headwinds, dominates and drives the economy?

The short answer is politics.

The permission allowing a private sector economy to exist is enshrined in China's constitution (so are many other permissions that in practice often seem to garner little respect, but that is for another time).

Per a 1999 revision of the Chinese Constitution, Article 11 reads in part: “Non-public economic sectors that are within the scope prescribed by law, such as individually owned and private businesses, are an important component of the socialist market economy.” (Emphasis added by author.)

However, in the 1982 version of Article 11, the language in that section read, “The private economy is a complement to the socialist public economy. The State protects the lawful rights and interests of the private economy, and guides, supervises and administers the private economy. “(Emphasis added by author.)

In other words, from 1982 to 1999, the private sector went from being a “complement” to a “component” of the overall economy, which itself went from “public” to a “market” economy. In the eyes of many traditional revolutionaries, the shift angered, frustrated, and betrayed what they had fought for and believed in. But it absolutely reflected what was happening on the ground.

In other words, even though the state-owned sector, by its own statistics, has largely failed the country and has been mostly replaced by a surprisingly nimble and dynamic free enterprise, market-based private sector, that private sector remains only a component of a “socialist market economy.”

One would think that Beijing would do all it could to promote and support the private sector, for it is with its success that the Communist Party continues to enjoy significant support from the population as a whole. Diminish the sector that makes life worth living, that provides the goods and services that people really want, and by definition, the power of the CCP is diminished, as well. Leadership understands this uncomfortable contradiction all too well.

However, the politics of the story are more complicated. Despite China's private sector having become the primary driver of its economy, it is still a bitter pill to swallow for a Communist Party-led country, which tries to pride itself on the success of a socialist economy.

More Unfulfillable Promises?

Chinese leadership has been promising more support for the private sector for years. In recent months, more measures have been announced that are intended to answer the call of private Chinese investors and entrepreneurs to have a level playing field with their state-owned counterparts.

On June 16 of this year, the State Council of China posted an announcement on its website indicating that the National Development and Reform Commission (NDRC) had “vowed” to implement measures in support of private firms and investment. Specific policies were in the works, it said, that included facilitating financing and access to key projects for private sector firms. The NDRC would “guarantee the use of land, sea, energy, water, [and] capital” for qualifying projects. Real estate investment trusts (REITs) would be developed. The NDRC pledged to “guide and assist private firms” in finding new opportunities and avoiding debt financing risks.

Most importantly, work will be done to create “a fair, transparent, and law-based development environment for enterprises under all forms of ownership,” in what sounds like a surprising admission that such a level platform for private sector enterprises has not existed in the past.

Then on July 19, the CCP's Central Committee and the State Council came out with 31 measures to support both public and private economies in China. Under the new measures, China’s top leadership bodies for both state and party “will insist on the policy of … unswervingly consolidating and developing the public sector and unswervingly encouraging, supporting and guiding the development of the non-public sector,” as reported by the Global Times, a CCP-affiliated news outlet.

By August 1, the Beijing Times reported that 28 measures designed to support the private economy had been rolled out by eight ministries. They “signify the country’s commitment to providing equitable opportunities for private firms to engage in major national projects and technological endeavors,” the paper said, and build on the guidelines issued on July 19.

Yet these seemingly positive developments are being viewed with a skeptical eye.

In an interview carried by The Star out of Malaysia, Jens Eskelund, president of the European Union Chamber of Commerce (EUCCC), was quoted as saying that investors’ confidence in the world’s second-largest economy has been battered by a “perfect storm” of challenges, and that decisive action is needed.

He called upon the Chinese government to offer “much greater certainty” to foreign investors in China. Eskelund noted several steps that need addressing immediately, including an increase in information transparency, an increase in data reliability, reduction in policy ambiguities, and the removal of unfair market restrictions to foreign business (a mantra going back decades).

Eskelund said there is still interest in China's market, but reluctance, as well. He sees a crisis of confidence in the Chinese economy, and insecurity about the future.

A “charm offensive” by the Ministry of Commerce doesn’t solve the problem of seemingly ambiguous policy directives, Eskelund indicated. What is and isn’t allowed in terms of the type and content of information is unclear to foreign investors. As Eskelund put it, “Are companies allowed to study wind patterns off the coast of Fujian if they are investing in offshore wind? If a company is establishing a new factory and taking soil samples to screen for toxins, would that qualify as a state secret?"

Recently released guidelines put out by Beijing to quell the fears of foreign investors don’t appear to be working yet. As Eskelund and others, including this author, have noted, on the ground it is clearly visible that a tide of expats have left China, many of them most likely for good. What goes with them is their investment, but most of all their talent and their technologies.

The X Factor

China is still heavily influenced by the sons and daughters of Communist Party revolutionaries who helped to overthrow the previous government of their country. The policies of the revolutionaries prescribed nationalization of the economy and all of its means of production, management, and distribution. The private sector economy was virtually wiped clean from the face of China.

Many of those important influencers know that the old centrally planned economy didn't work, and its vestiges don't work that well today. But at the same time, like an old sweater with holes at the elbows, it's familiar, comfortable, and harkens back to a simpler time. Throwing the sweater away is unthinkable, but buying a new one is not out of the question, either.