There’s usually a serious message when the Central Committee of the Chinese Communist Party (CCP) and the State Council jointly publish a document, as they did just over two weeks ago. Dedicated to the development and expansion of China’s private economy, this particular document’s release came hard on the heels of data showing that the much hoped for economic recovery in China this year had stalled, or become ‘tortuous’ as the Politburo later said.
The members of the Politburo of the 18th CCP Central Committee at the 3rd Plenum of the 18th Congress, November 12, 2013. Credit: CGTN
No one would dispute that restoring confidence and dynamism to the private sector makes sense, but Beijing has said this before. Will this time be different?
Exactly ten years ago, at the 3rd Plenum of the 18th Congress — a political forum often dedicated to the economy — the CCP pledged to give market forces and competition a ‘decisive role’ in the economy and in the allocation of resources. The private economy was upgraded from having a supplementary role in the economy to being a ‘pillar’.
Yet, the reality did not live up to the message. There was no let-up in the dominant role accorded to SOEs. Entrenched interest groups in the CCP, local governments and SOEs resisted reforms. The risk of financial disorder, moreover, that accompanied financial liberalisation was never far away, and duly arrived in 2015-16 largely because of government mismanagement. The crisis at the time terminated the 2013 reform programme and doused the government’s appetite for ‘market forces and outcomes’.
In the second half of the 2010s, the economic interests of private firms started to play second fiddle to ambitious goals of national greatness and self-reliance via much more assertive, concrete and targeted industrial policies which featured plans for advanced science and technology, semiconductors, and AI — including the strategy known as ‘Made in China 2025’.
…even though the government says it wants private firms to step up and spend more on recruitment and investment, it faces an uphill task — not least because of things it cannot or will not do.
The new focus required much greater state guidance and CCP control, the deployment of vastly increased state financial support in the form of special purpose, off-balance sheet funds, and a change in corporate governance so that the interests of private and ‘mixed-ownership’ firms would be aligned much more closely with those of the party. The growth of industrial profits at private firms became overshadowed by those at SOEs, and by 2019, official statistics revised down the private sector’s share of fixed asset investment by an extraordinary 4-5 percentage points.
Credit: CGTN
At a Symposium of Entrepreneurs in 2020, Xi Jinping urged companies to act in accordance not only with their economic and legal duties, but also in line with party-designated social and moral responsibilities. Later in the year, the CCP Central Committee’s ‘Opinion on Strengthening the United Front Work of the Private Economy in the New Era’ called for business leaders to be better educated in matters of government policy, to participate more in state projects, and to be a ‘backbone that can be relied on at critical moments’.
Memories are still fresh of the so-called ‘rectification campaign’ which began in earnest in 2020, and which was aimed at private firms and entrepreneurs especially in the educational, financial and technology sectors. All in all, it is no accident that the share of the private sector’s aggregate market capitalisation among China’s top 100 listed firms has dropped from a peak of 55.4 percent in mid-2021 to an estimated 39 percent in mid-2023, while the so-called state-connected private sector has surged, more than doubling its share of registered capital in the decade to 2020.
The rectification campaign was still being pursued as the zero-Covid policy was being implemented in 2022. But the abandonment of the Covid policy and the weakness of the economy have obliged the government to soften its approach and rhetoric, and to look to private firms for support.
The Central Economic Work Report in December 2022 vowed to restore private sector confidence. The Work Report presented at the National People’s Congress in March 2023 said that it was necessary to boost market confidence, and referred to the rights and interests of entrepreneurs. Now, the government wants to encourage private hiring and investment and ‘strengthen market methods and reforms’.
The Central Committee and State Council’s 31-point plan issued last month set out broad goals to improve the business environment for ‘bigger, better and stronger’ private firms. It said it would do this by removing market access barriers, addressing payment delays, cutting taxes and regulations, fostering an environment of equal treatment with state firms, improving credit allocation, and nurturing the healthy development of platform companies and AI. The National Development and Reform Commission’s 17-point report meanwhile called for more private sector investment in several sectors, including some in the infrastructure space from which private firms had been hitherto restricted.
Yet even though the government says it wants private firms to step up and spend more on recruitment and investment, it faces an uphill task — not least because of things it cannot or will not do.
To start with, there isn’t that much the government can do to instill new dynamism and confidence into the beleaguered and structurally challenged real estate sector, which matters a lot to private firms and entrepreneurs. The housing development sector is becoming increasingly state-dominated, which might mean improved financial stability, but only at the expense of weaker fundamentals and greater misallocation of resources.
The 3rd Plenum of the 20th Congress, to be held in the near future, will be seen as a test as to whether the government is really committed to promoting private firms and consumption…
Nor can Beijing provide a level playing field for private firms with state enterprises, when it insists that the ‘party leads everything’, and that state firms are in pole position to shape the industrial sector composition of the economy in the future, with the relentless emphasis on self-reliance in science and technology.
It is hard to make private firms and entrepreneurs feel more secure when they know that they could receive arbitrary punishment if they are deemed to have spoken or acted inappropriately. While the government speaks sweetly to private firms on the one hand, it wields a big stick with the other: evidenced recently, by the provisions and use of national security regulations and the new anti-espionage law, restrictions of data sharing and transfer, and the random crackdowns on global consultancies, due diligence, and other firms.
Ultimately, the confidence of private firms is contingent on more robust policies to strengthen domestic demand, a re-prioritisation of the role that private firms should play, and a sea-change in governance to promote independent regulatory institutions that are predictable and transparent.
These are likely to continue to prove elusive for a CCP, whose strategic thinking is focused on the opposite. The 3rd Plenum of the 20th Congress, to be held in the near future, will be seen as a test as to whether the government is really committed to promoting private firms and consumption, as well as a raft of necessary fiscal, social and income security, and local government and SOE reforms. For the private sector, the outcome could not be more important.
George Magnus is a research associate at Oxford University’s China Center and at SOAS, and the author of Red Flags: Why Xi’s China is in Jeopardy. He is the former Chief Economist of UBS.
