Infringements, institutional splits & invisible barriers: private economy quandary in China
Shi Jinchuan, Professor at Zhejiang University illustrates hurdles to private economy development in China and ways to remove them
Shi Jinchuan is a professor of economics at Zhejiang University of China and visiting professor at the University of Chicago, Columbia University, and the London School of Economics. He sits on the the Social Sciences Committee of the Ministry of Education and the Advisory Committee of Zhejiang Provincial Government.
The following is Shi’s speech at a roundtable with entrepreneurs and fellow economists in June 17th, originally published on Zhejiang Economy, Issue 7, 2023. It can also be found on the WeChat blog of Zhao Wei, Professor at the Zhejiang University, who was moderator of the event.
Judicial tools overreach their functions, resulting in "takeovers" and "encroachments"…
…access is nominally relaxed but still prohibitively strict in practice.
Oversteps such as "administration superseding law" remain…
Significant Challenges Facing the Private Economy
Xi Jinping emphasized during this year's two sessions: "Private enterprises and private entrepreneurs belong to our own family, and they can develop their businesses without any hesitation." This not only encourages the development of private enterprises but also fully illustrates the current reality of insufficient confidence in their growth.
So, what are the specific limitations on the development of private enterprises? Generally speaking, they can be categorized into three aspects: quantitative expansion constraints, hindered upgrading, and innovation suppression.
The trend of expansion is weakening. The fluctuations in the number and proportion of private enterprises are the most direct reflection. According to data from Wind Information, since 2022, the number of newly established private enterprises has noticeably decreased in Zhejiang, Jiangsu, Guangdong, Shandong, and Shanghai. The proportion of new private enterprises among all new enterprises has gradually declined. Taking Zhejiang as an example, the number of newly established private enterprises decreased from 511,900 in 2020 to 464,200 in 2022; the proportion of new private enterprises among all new enterprises decreased from 97.33% in 2020 to 96.53% in 2022.
Looking at industrial value-added, the overall situation in Zhejiang is also not favorable. The growth rate of industrial value-added in large-scale private enterprises is comparatively lower than that of large-scale industrial counterparts. The absolute growth rate is decelerating, and the relative growth rate is negative. Looking at investment and exports, since 2022, the growth rate of private investment in major provinces with robust private economies has notably slowed down, and in some cases, even regressed. Taking the private investment growth rate in Guangdong as an example, since 2018, the growth rate of private investment has been weaker compared to that of fixed asset investment, resulting in an increasing gap among major provinces with strong private economies. Overall, the export growth rate for large-scale private enterprises has shown a significant decline.
Vertical upgrading is impeded while horizontal competition intensifies. From a structural perspective, the number of private enterprises in industries such as non-metallic mineral mining and selection, railway, shipbuilding, aerospace and other transportation equipment manufacturing, and energy supply has decreased. In terms of performance, indicators such as total industrial output, total assets, total profits, value-added tax payable, and the proportion of cost-to-profit ratios in private enterprises are not optimistic in many industries. These metrics suggest that private enterprises are confronting a twofold challenge of obstructed vertical advancement and heightened horizontal competition. External firms encounter barriers to entry into the industry, while internal enterprises contend with fierce competition within the sector.
Innovation and performance exhibit both positive and negative elements. This dilemma is related to vitality, which is generally assessed from an innovation perspective. By comparing the innovation status of Zhejiang's industrial enterprises above a certain scale in 2017 and 2021, including large-scale and medium-sized industrial enterprises, we can observe that the innovation performance of private enterprises is a mixed picture.
Causes Behind Private Sector Development Quandary
The current struggles facing private enterprise growth stem from diverse factors, with three prominent causes:
Gaps and oversteps coexisting in private property rights protections.
De facto barriers persisting for private firms accessing markets.
Oscillating market supervision policies toward the private sector.
Gaps and oversteps coexist in private enterprise property rights protections. Property rights protection is foundational for optimizing institutional environments and enabling market mechanisms. Report of the Supreme People’s Prosecurate to the Fourth Session of 13th National People's Congress (NPC) showed 23,000 people in 2020 had been prosecuted for infringing private enterprise rights, up 2.9% year-on-year. The report to the 20th National Congress of the Communist Party of China (CPC) called for improving private sector development environments and legally safeguarding private property rights and entrepreneur interests. In recent years, private economy protections have strengthened, yet institutional gaps in property rights persist, with administrative orders lacking concrete constraints on actual protections. For instance, East China’s Jiangsu Province mandated drastic shutdown of chemical firms from 4,000 to around 1,000 in two years due to pollution and safety issues related to suburban chemical firm clusters. Forced shutdowns disproportionately impact private enterprises and directly damage private entrepreneurs’ confidence. Meanwhile, oversteps such as "administration superseding law" remain. Existing procedures provide inadequate protection for the rights and interests of private enterprises and entrepreneurs. Judicial tools also overreach their functions, resulting in "takeovers" and "encroachments", such as the recent Sanya Haiyun Group takeover in which administration overrides the rule of law.
[See below the notice issued in May, 2022, by Sanya’s Leading Group for Combatting and Rooting out Organized Crime to Sanya Haiyun Group informing “takeover” due to organized crime concerns.]
Gaps and oversteps in private property rights protections both hinder high-quality private enterprise growth. Institutional protection gaps need filling and oversteps require exposure and warning. The root cause of gaps and oversteps is "cognitive bias" — insufficient and skewed understandings of the private economy and market economy, lack of recognition of law-based protection over the private sector, and inadequate awareness of fair competition and equal development.
To improve institutional safeguards, actions could include:
legally protecting private enterprises' business autonomy.
harshly punishing encroachment of lawful private property.
legally safeguarding private entrepreneur personal and asset security.
innovating and optimizing market oversight and services for the times.
Institutional barriers to private enterprise industrial expansion. The institutional barriers facing private enterprises expanding into new industries are multidimensional. The first dimension is "approval but no entry" arrangements in some sectors, where access is nominally relaxed but still prohibitively strict in practice. High approval thresholds and complex procedures deter private firms from even trying to enter. For certain access items, "filing in name, review in practice" prevails, meaning even though approval processes have nominally changed to just filing, enterprises still go through the same process. Some bidding scopes are "broad on paper, narrow in practice", where high prerequisites, enterprise classification schemes, or extra "repository" steps indirectly narrow participation and raise costs for private players.
The second dimension is the existing as well as new institutional fragmentation across regions impeding market access. Local protectionism causing market fragmentation has long hindered private firms from expanding nationwide. “Locals-first” is the most conspicuous barrier, like courts visibly favoring local firms or governments adopting preferential industrial policies. Closed operations also persist. For example, many local highway maintenance markets are still exclusionary. Regulatory discrepancies across regions is an additional barrier. It is chiefly seen in new economy sectors where supervision lags business needs, resulting in the common phenomenon of “one industry, multiple certificates”.
The third dimension is mixed ownership access being "nominal but insubstantial". It's easy for State-owned enterprises (SOEs) to attract private shareholders but hard for private players to enter state domains. Mixed ownership reforms so far haven't sufficiently cut entry barriers, boosted private enthusiasm for new sectors, or sharpened competitiveness in existing industries via institutional steps. In mixed ownership, minority private partners inherently occupy unequal footing, struggling with decision-making and profits.
So how can we break down institutional barriers to industrial expansion? Actions could include:
Creating an efficient, standardized, fair-competing, fully open unified national market.
Establishing a fair, standardized, efficient market regulation system to reduce non-market factors influencing market aggregation.
Expediting factor price marketization reforms, advancing comprehensive pilots for marketized factor allocation, lowering institutional transaction costs in factor allocation, and enabling market supply-demand to fully determine factor pricing.
Fully implementing fair competition review systems.
Building external supervision mechanisms, strengthening fair competition, opening complaint/reporting channels for private firms to enable closed-loop fair competition review and feedback, adhering to principles of encouraging innovation and market effectiveness, and advancing anti-monopoly work in accordance with laws and regulations.
Applying digital technologies, advancing bidding system development and e-bidding adoption to implement more transparent, scientific, efficient, standardized bidding rules and procurement.
Oscillation in market supervision policies targeting the private economy. Policy adjustments happening too rapidly, intensely, and frequently have created "problem areas" in policy implementation. According to a report by the South China Morning Post, data released by the Ministry of Industry and Information Technology (MIIT) on January 31, 2023 showed that in 2022, internet and related services companies above designated size accomplished 146 billion yuan (20.02 billion U.S. dollars) in internet business revenue, a year-on-year decline of 1.1%. This is the first-ever decline since the official release of relevant data in 2017.
In the past three years, platform economy regulation and anti-monopoly efforts have put continuous pressure on China's internet industry. New issues have emerged not just in policy design, like excessive policy shifts and insufficient guidance for setting market expectations, but also in on-the-ground implementation, like inadequate communication with the market, leading to substantial "misreading" and "misunderstanding", which has dampened corporate confidence.
On the one hand, private enterprises employing capital in different industries can bring technological efficiency gains. On the other hand, they can also yield institutional dividends. However, when faced with conflicts between new technologies, new models, and old systems, the government failed to take a sufficiently comprehensive and proper stance toward private sector innovation. For the government, new technologies have dual effects on old systems and institutions – reasonable impacts bring about improvements in laws, regulations and policies, while unreasonable ones warrant intervention. Of course, the government must make appropriate interventions in an appropriate way. In practice, institutional innovations in the private sector tend to be inseparable from technological and business model advances.
In recent years, the sudden rollout of some tightening policies has sharply escalated policy uncertainty. This has hampered signaling mechanisms for encouraging, guiding and supporting the private sector, and stacked with the COVID’s impact, leading to greater uncertainty for enterprise production. The development of the private economy faces "three new simultaneous tasks" [three simultaneous tasks in official documents refer to slowdown in economic growth, difficult structural adjustments, and the effects of previous economic stimulus policies]. Externally, the private economy is struggling to reshape comparative advantages; internally, mindsets are shifting; and temporally, it is working to absorb earlier uncertainties. The private economy needs steady market regulation now more than ever before.
Policy Recommendations for the Private Economy
It is far more difficult yet much more important to make private entrepreneurs stay at the forefront than reach the forefront. Below are some recommendations to optimize the institutional environment for the development of the private economy, consolidate the judicial environment for protecting the legitimate rights and interests of the private sector, and stabilize the policy environment for the development of the private economy.
In terms of optimizing the institutional environment for the development of the private economy, we should accelerate formulation of private enterprise protection laws and revisions to relevant basic regulations, so as to improve the legal environment for the high-quality development of private enterprises. Relevant basic regulations include the Anti-Unfair Competition Law, Anti-Monopoly Law, etc. SOEs and private enterprises shall be treated equally in terms of market access, approval and licensing, business operations, bidding and tendering.
In terms of consolidating the judicial environment to protect the legitimate rights and interests of the private sector, first, we must consolidate the "four major organs of the Supreme People’s Prosecurate", and continue to improve the legal supervision mechanism. Second, we must exercise prudence and ensure strict accordance with the law when adopting measures such as seizure, sequestering, freezing, etc. Third, we must continue to advance compliant reforms for enterprises involved in legal cases. Fourth, we must take severe action against the infringement of the lawful property rights of private enterprises, and put in place effective mechanisms for preventing and regularly correcting injustices in cases involving enterprise property rights.
In terms of stabilizing the policy environment for the private economy, we must ensure that policy defers to law, and that policies remain steady, continuous and consistent from drafting through implementation. We must enhance policy credibility by delivering on the promised policies over the long-term and ensuring genuine implementation.
In terms of improving the innovative environment to incentivize R&D by private enterprises, we need to optimize supporting policies and relevant procedures, such as establishing market-oriented science and technology incentive policies, formulating future industry policies undertaken by private enterprises, implementing matching income tax incentive policies for high-tech personnel, reforming talent program selection mechanisms, simplifying technology project and fund management procedures, merging science and technology programs between the MIIT and the Ministry of Science and Technology (MST), guiding project priorities towards technology-oriented private enterprises, etc.
In terms of creating a public opinion environment that supports private enterprises, we need to continue guiding positive opinions and increase publicity efforts for the development of the private economy. A favorable public opinion environment can support private entrepreneurs, but the current environment is less than ideal. Under normal circumstances, we should hear private entrepreneurs voicing their perspectives on industry markets, policies, and domestic and international technology and industrial trends, especially views from leading private entrepreneurs. However, these types of voices are rarely heard nowadays. At the same time, we should strengthen political guidance and political incorporation, nominate outstanding private entrepreneurs as People's Congress or Chinese People's Political Consultative Conference (CPPCC) representatives, and continue recognizing outstanding private entrepreneurs. Only by giving more private entrepreneurs a voice on the global stage, China's private enterprises can make greater strides worldwide.
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