China Watch: Beijing’s Uneasy Relationship With The Private Sector

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SUMMARY: Beijing is balancing the need to restore confidence in the private sector against the political imperative to limit the influence of private entrepreneurs. Beijing is courting private PRC businesses to invest in strategic sectors, but the government is unlikely to follow through on promises to improve the regulatory and legal environment for non-state-owned enterprises. Beijing’s transactional relationship with the domestic private sector parallels its approach to foreign businesses in China. While China needs foreign capital and technology, it is pursuing technological self-sufficiency to reduce its long-term reliance on foreign countries.

Beijing is struggling to revitalize the private sector, which is critical to China’s economic recovery. Private investors have been cautious in part because of Beijing’s crackdown on non-state-owned technology, healthcare, tutoring, gaming, and real estate companies, starting in 2020 and continuing in certain sectors. Non-state-owned companies account for 60 percent of China’s GDP, 80 percent of urban employment, and 90 percent of new jobs.

The government in July released a new policy document designed to ease market and credit access and enhance legal protections for the private sector, but the reaction from the business community has been lukewarm, according to Western press reports. Even official PRC media reports have noted that Beijing had issued similar regulations in the past yet major regulatory and financial obstacles remained for non-state-owned enterprises.
Official PRC economic data from August and September suggest that non-state-owned companies grew at a slower pace compared with state-owned ones. Youth unemployment reached a historic high of 21 percent in June, prompting the government to stop releasing youth unemployment figures. Lackluster private sector growth likely contributed to high unemployment because non-state-owned companies create 90 percent of new jobs.
In September, the National Development and Reform Commission (NDRC), China’s most powerful economic ministry, announced plans to establish a new private sector development agency within the NDRC. Experts, however, cast doubt on whether additional government intervention would help spur growth, pointing out that the Xi administration tends to favor market regulation rather than liberalization.

The PRC government is likely to have some success attracting private investors in sectors that Beijing favors, such as semiconductors, artificial intelligence, advanced computing, biotechnology, high-tech manufacturing, new materials, electric vehicles, and renewable energy. PRC officials have referred to growth in these strategic sectors as “high quality development,” which would receive government subsidies and policy incentives. These industries, however, do not create as many jobs as sectors such as retail, e-commerce, healthcare, real estate, and low-end manufacturing, suggesting that the emphasis on strategic sectors is insufficient to address China’s unemployment problems and the fallout from a prolonged real estate slump.

Beijing’s relationship with private entrepreneurs is largely transactional. The government needs private investments in strategic sectors, especially in the face of technological restrictions imposed by the US and its allies, but Beijing will continue to take regulatory or legal actions against leading private entrepreneurs to limit their political influence. A September article in the People’s Liberation Army’s (PLA) official newspaper suggested that Beijing recently removed senior PLA officers in part because they were entangled with business interests.
Nevertheless, many entrepreneurs will respond to Beijing’s call for more private investments in strategic sectors because they see growth opportunities, bolstered by state subsidies and favorable policies. For example, China’s electric vehicle market is poised to grow at a compound annual growth rate of 17.15 percent between 2023 and 2028. US-led semiconductor restrictions aimed at China have created opportunities for domestic chipmakers and investors, leading to an IPO boom for PRC semiconductor companies.
Conversely, Beijing is less likely to support private businesses in non-strategic sectors. Beijing’s reluctance to bail out real estate behemoth Evergrande signals the government’s intent to reduce the economy’s dependence on the property sector and the political influence of private developers. In September, Beijing put Evergrande’s Chairman Xu Jiayin (AKA Hui Ka Yan) under house arrest as part of an investigation into the company’s finances. Xu’s deep ties to Xi’s predecessors and political rivals likely played a role in his detention.

Beijing’s transactional relationship with the domestic private sector mirrors its approach to foreign businesses. While Beijing welcomes foreign investors because China needs access to foreign capital and knowhow, PRC leaders are prioritizing technological self-sufficiency. Beijing has passed several national security-related laws tightening compliance requirements for data transfers and information security. Despite repeated promises from PRC Premier Li Qiang that China will improve the business environment for foreign investors, a recent survey of US companies in China showed significant concerns and little improvement:

According to a US-China Business Council survey conducted in the summer of 2023, 79 percent of respondents were concerned about China’s industrial policy, which promotes domestic innovation and technological self-sufficiency. 35 percent said this policy has caused US businesses to reconsider partnership models in China, up from 23 percent in 2022.
97 percent of respondents were concerned about China’s new legal requirements for data security, privacy, and cybersecurity. These concerns were compounded by the implementation of the revised anti-espionage law in July, which broadened the definition of state secrets.
Despite the concerns, 79 percent of respondents said they did not plan to move any operations out of China because of the importance of the China market, which gives the PRC government leverage over foreign companies.