Beijing knows the private sector is critical to jobs, tech progress and maintaining 'social stability', but will it allow the sector into the tent?
Bolstering the private economy is the latest intractable problem to be put under a 1+N framework. This approach, already applied to carbon neutrality and SOE reform, delivers a guiding document or goal, the ‘1,’ followed by a multitude, or ‘N’, of measures.
The new Opinions on promoting the private sector are the next ‘1’; supporting measures have already dropped.
private sector struggles
Recent economic woes have hit the private sector disproportionally. In 2022, private enterprise profits fell 7.2 percent, while those of SOEs (state-owned enterprises) grew 3 percent. July’s Opinions outlined three broad factors limiting private firms
- discrimination
- unequal access to credit
- weak rule of law
Even after Beijing’s push to affirm the role of private firms, discrimination between the public and private sectors remains, insists Jiang Xiaojuan 江小涓 China Society of Industrial Economics president. Many local-level officials remain biased against private firms, regularly failing to include them in regional initiatives or provide them with services despite calls from Beijing.
They are denied equal access to factors of production and markets, not least in bidding for state projects. Equal treatment is generally not honoured. The anti-monopoly campaign pursued private tech companies, while SOE monopolies in industries like telecoms and transport were left untouched.
State-dominated banks, too, favour SOEs. They comprise 40 percent of existing financing, reveals PBoC data; private firms comprise only 20, despite accounting for the lion’s share of GDP.
Financing costs, too, are hugely imbalanced. The average annual interest rate of loans to SOEs in 2022 was 3.8 percent, while private firms paid as much as 5.6 percent. Poor resource allocation warps the price of capital, complains Wu Haijun 吴海军 Chinese Academy of Social Sciences Institute of Industrial Economics.
Weak rule of law, seen in unequal access and discrimination, further mitigates against the private economy. Officials at various levels are adept at restricting competition, e.g. by slowing registration or excessive inspections. While the market entrance negative list, launched in 2016, simplified registration, many cut-outs and other hurdles remain, laments Wang Yuhui 王玉辉 Zhengzhou University. Fairness in competition is weakly supervised, plagued by arbitrary investigations and inadequate penalties.
new 1+N
The Opinions, the '1' of the framework, set broad policy directions, proposing six ambitious priorities to better support the private sector
- solving business environment issues, e.g. market access and fair competition
- improving private-sector financing
- bolstering private sector property rights and legal safeguards
- guiding the private sector to take part in ‘high-quality development’, including digitising and setting up ‘traffic lights’ for private capital
- ensuring ‘healthy growth’ of private sector personnel
- creating a private sector-supportive atmosphere
As for the ‘N’, NDRC (National Development and Reform Commission) has launched several measures on investment and contract disputes; SPP (Supreme People's Procuratorate) has called for penalising violations against private firms; PBoC has declared a wide-ranging initiative to improve financing conditions.
Local governments have also joined in. Shenzhen and Zhejiang, regions renowned for their vital private sectors, issued complementary private economy measures in August, including
- special funds for SMEs (small and medium enterprises)
- more participation in project bidding
- easing market access
not the first time
Improvements to the business environment have been pledged before, but the private economy now holds an outsized role in top areas of concern: jobs, tech progress and maintaining social stability.
Beijing can force banks to direct more lending to the private economy. But further raising finance and special state-backed funds seem to be preferred. Beijing has taken action to expand investment in equities markets, where tech company listings are proliferating, as well as rolling out the SME ‘little giants’ incubator system.
More bonds, expanded equities markets and additional special state funds can provide the funding private firms need, urges Ren Guozheng 任国征 Zhengzhou University.
Improved financing will not solve unequal treatment. Market economies need rule of law, which can only come if all actors, including cadres, are treated equally, contends Liu Shangxi 刘尚希 Chinese Academy of Fiscal Sciences. Rules must be assessed and improved to follow existing laws. The Administrative and Criminal laws must treat private and state-owned firms equally, and fairness in competition should be honoured. Liu recommended, as others have done, that a central commission should be created to raise the status of private economy reforms and ensure the spirit of the Opinions is followed through in all agencies.
A new private sector development bureau under NDRC was subsequently announced on 4 September 2023. Responding to the need to move fast, an internal bureau could be set up quickly without waiting for the usual administrative processes. Nonetheless, it will not be enough to boost the private economy, argues Tan Haojun 谭浩俊 China Institute of the Private Sector. That will require changes to the overall social, services, and work environment.
Private firms want recognition of their social status and contribution to economic growth, asserts Liu Zhiqin 刘志勤 Chongyang Institute for Financial Studies. Beijing says the private and state sectors are on equal terms, but absence of judicial independence means property rights are easily overruled.
following through
The ‘1+N’ framework indicates that the Opinions are not meant to be a one-off solution. They have recently been applied to carbon neutrality/peaking, clarifying the process to get from point A to B. Carbon neutrality by 2060 is a definite goal. But these private sector Opinions lack clear points A or B: where are they coming from, and what is the aim? There are no private sector-specific goals in the 14th 5-year plan or elsewhere.
2023 should soon see the Third Plenum of Xi’s third term, which typically focuses on economic policy, offering Beijing a platform to address this issue. Beijing’s demands that the private sector contribute to its objectives: tech development, supply chain security, carbon reduction, common prosperity etc., signal opportunities for private firms who fit the bill, but not for those who do not.
economic thinkers
Jiang Xiaojuan 江小涓 | China Society of Industrial Economics president
Absent private enterprise contribution, the PRC will fail to become a moderately developed society by 2035 or an advanced socialist country by 2049. This sector is the most competitive, technologically advanced, and potentially fastest growing. Moving up the value-added chain is possible only if they flourish. Platform firms are critical, providing short-term jobs, vital scitech, and clusters of new niches in which other firms may thrive. PRC entrepreneurs should not be demonised in the same terms as Western capitalists, who owe their wealth to imperialist plunder. Those in China work hard and innovate. Their efficiency and creativity are irreplaceable.
Professor and Dean of Tsinghua University‘s School of Public Policy and Management and a research professor at the Chinese Academy of Social Sciences, Jiang is a National People's Congress Standing Committee member and Vice Chairperson of the NPC Social Construction Committee.
Wang Yuhui 王玉辉 | Zhengzhou University Law School vice president
Existing to allow more productive firms to strengthen and help raise productivity, the market economy should be supported via competitive neutrality, i.e. allowing all market actors, public or private, a level playing field. Market entrance negative lists should reduce entry barriers, be fenced off from manipulation by local officials, and be amended annually. Competitive fairness should be a regulatory focus, raising firms’ transparency and status in the pecking order. Regulatory principles should be applied equally throughout different jurisdictions. Proactive steps may be taken, e.g., solving financing difficulties via special funds and ensuring land access so private firms can compete with SOEs.
A vice president of Zhengzhou University Law School, Wang advises the Henan provincial government and People’s Congress. Her publications include articles and a book on anti-monopoly law and policy.
Ma Jianyang 马贱阳 | People’s Bank of China department of financial markets deputy director
The point of announced PBoC private sector support measures is, argues Ma, to stay in step with the sector’s economic contribution. On notice to set annual service targets for private firms, banks will ‘vigorously’ expand offers of first-time loans to them. As well as bank credit, the PBoC will channel support via tweaks for bonds and equity markets. Banks and institutional investors will be urged to take up private firm bond offerings; regional exchanges and local guidance funds will be called upon to help open equity financing for private firms.
Following an economics PhD from Renmin University, Ma worked for the central bank, rising to deputy director of the Financial Market Department. He oversaw the drafting of policies related to supporting elderly care and financial reform and has published on inclusive financing.