Edward Cunningham: What is the future of China’s private sector? (2024)

CHINA’S PRIVATE SECTOR is often summed up with a combination of four numbers: 60/70/80/90. Private firms contribute approximately 60% of China’s GDP, 70% of its innovative capacity, 80% of urban employment and 90% of new jobs. Given the clear centrality of private enterprise to the vibrancy, growth, and stability of China, it is therefore difficult for many to grasp the logic of the Chinese government’s acceleration of placing state power over private enterprise. Are we witnessing a fundamental pivot in the industrial recipe for the nation’s success, in which privately owned market drivers will be muted? How will the CCP’s relationship with the private sector evolve in the medium term?

In attempting to answer these questions, it is important to keep in mind two perspectives. First, the Chinese government’s increasing intervention in the private economy is less a pivot and more the latest installment of a ratcheting of domestic control over specific industries. Second, the state is managing a calculated opening in other industries still in need of foreign know-how and resources. Overall, this combined approach represents a government that will likely preside over greater restrictions on domestic private actors in China’s economy in the medium term, but with important strategic openings to foreign private actors in key industries that merit our collective attention over the next few years.

In 2021, China’s Vice Premier Liu He MC/MPA 1995 spoke at a digital economy forum, promising that “guidelines and policies for supporting the private economy have not changed ... and will not change in the future.” To a great extent, he was right—policy guidelines strengthening state involvement in private industry are nothing new. They began nearly a decade and a half ago, in the wake of the 2008 global financial crisis, marking the end of a short window of liberalization that had followed China’s joining of the World Trade Organization, in 2001. At that time, the government responded to the financial crisis with a fiscal stimulus package that increased money supply by nearly a third, doubled stock prices, fueled massive gains in property prices, and necessitated a series of deleveraging policies that restricted credit—particularly to private firms. Yet demand persisted, and alternative financial institutions emerged to meet such demand through “shadow banking” that was able to navigate a fragmented regulatory apparatus. Regulatory centralization followed, along with a range of policies to rein in private companies in largely consumer-facing industries, including real estate, financial services, technology, and education. By late 2020, Ant’s Hong Kong IPO was suspended after an intervention from Chinese regulators. The education company New Oriental, also listed in the United States, lost 90% of its market value as the private tutoring industry was effectively banned from turning a profit. Didi Chuxing, the ride-hailing company, was delisted from the New York Stock Exchange in May of this year after facing increased scrutiny from regulators.

“Are we witnessing a fundamental pivot in the industrial recipe of the nation’s success, in which privately owned market drivers will be muted?”

Edward Cunningham

In addition to interventions in the rules and market structure of these industries, Beijing has also turned to state-owned investments in leading firms driving these industries. According to Dealogic, public investments in private-sector companies increased from $9.4 billion in 2016 to more than $125 billion in 2020. Seemingly small government “golden shares” that were often overlooked historically in manufacturing industries were expanded into consumer data-intensive industries. For example, China’s internet regulator (Cyberspace Administration of China), through majority ownership in the China Internet Investment Fund, recently assumed a 1% stake in a ByteDance subsidiary that, despite its negligible percentage, granted the power to appoint one of three board members in a unit that holds key licenses for operating the lucrative domestic short-video business. A similar 1% stake in the NASDAQ-listed Weibo had been executed a year earlier.

The scale of such formal interventions and investments has been significant. Chong-En Bai of Tsinghua University and Chang-Tai Hsieh of the University of Chicago have shown that private companies with state-connected investors increased from 14.1% of all registered capital in China in 2000 to 33.5% in 2019. In 2017 the role of Communist Party committees was written formally into corporate articles of association that gave the party oversight of strategic decisions. Of course, longstanding informal mechanisms of Party influence also grew. A September 15, 2021, Party and the State Council opinion on strengthening “United Front Work” in the private sector reflects a major reimposition of ideology on private business.

But things look a bit different when we turn to some of the largest foreign private firms eager to grow their investments in China. These companies are marking significant wins in the area of ownership and investment, despite the seemingly secular trends against the private sector noted above. In financial services, Blackrock, the world’s largest asset manager, recently won approval from Chinese regulators to launch a mutual funds business in China. Investment banks such as J.P. Morgan and Goldman Sachs, whose scope of business has long been restricted in China, are now able to establish 100%-owned securities ventures and are doing so. One of the world’s largest hedge funds, Bridgewater Associates, has announced a major expansion of new onshore China funds. American Express in 2021 became the first foreign payments network licensed to process renminbi transactions in China. Even in the strategic automotive industry, Tesla managed a revolution of sorts in pushing for a change in regulations that allowed 100% foreign ownership of its Gigafactory 3 manufacturing plant. In these industries in which foreign technology and know-how remain critical, and in which foreign firms are viewed by Beijing as potentially useful allies in lobbying for a deescalation of U.S.-China tensions, foreign private interests can gain while domestic private interests may lose.

However, it is perhaps China’s macroeconomy that provides the best roadmap to the future weight of the private sector in the medium term. As Michael Pettis has noted, if Beijing continues to target a GDP growth rate that substantially exceeds the real, underlying growth rate of the economy, “China has no choice but to expand the role of the government in the economy and to reduce the role of the market in allocating resources.” A longstanding but failed series of policy attempts to rebalance income to ordinary households and drive domestic consumption underlines the difficult of avoiding this outcome. The interventions into the private sector and state investments in private firms discussed above only exacerbate such a structural challenge.

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Edward Cunningham, adjunct lecturer in public policy, is the director of HKS’s China Programs and of the Asia Energy and Sustainability Initiative.