Worldwide: China Issues New Policy To Boost Private Economy

Background

On July 19th, 2023, the Central Committee of the Communist Party of China (CPC) and the State Council jointly released a detailed policy entitled "Opinions on Promoting the Development and Growth of the Private Economy" (the "Opinions"),¹ consisting of 31 provisions across eight chapters aiming to build a "bigger, better and stronger" private sector.

According to Xinhua, the official State news agency, the private sector has evolved into a fundamental component of China's economic system, playing a vital role in driving sustainable and robust economic growth.² From 2012 to 2021, the share of tax revenue from private enterprises surged from 48% to 59.6%, and the proportion of private enterprises increased significantly from 79.4% to 93.3% of the total number by 2022. Moreover, private enterprises accounted for 50.9% of foreign trade in 2022, having surpassed other sectors since 2019.

Main Contents

The overall goal of the Opinions is to optimize the business environment for the private sector, strengthen the rule of law to protect the legitimate interests of private enterprises and entrepreneurs, and create fair and equal competitive market conditions for the private sector.

Key measures include:

• Eliminate market entry barriers – government agencies will be prohibited from using such administrative procedures or requirements as filing, registration, licensing, approval, annual and other inspections, notarization, certifications and other administrative measures to create market entry barriers (Point 1).
• Ensure fair competition – all types of enterprises with different forms of ownership structure (State-owned or non-State owned) will be treated equally based on fair market competition; reinforce anti-monopoly law enforcement to prevent the abuse of administrative power to eliminate or restrict competition; refrain from granting special franchise or operating rights to designated business operators; establish a "negative list" system to expose conduct impeding fair market competition and eliminate local protectionism, market division and other policies which impede fair market competition (Point 2).
• Improve financial policies – facilitate financing of small and micro private enterprises by establishing a risk-sharing mechanism among banks, insurance enterprises, securities brokers and collateral entities; support private enterprises to participate in the bond market and encourage eligible enterprises to issue "technology innovation" bonds; support qualified private enterprises to seek financing through initial public offerings (IPOs) and subsequent refinancings; and enhance credit rating systems for small and micro enterprises (Point 5).
• Expedite payments owed to small and micro enterprises– strengthen enforcement actions to penalize parties/persons responsible for failure or delay in paying small and micro enterprises; government agencies, quasi-government agencies and large State-owned enterprises are prohibited from using such excuses as internal personnel changes, incomplete internal payment processes, internal approvals and pending audits to delay or refuse to pay private enterprises (Point 6).
• Protect property rights of private enterprises and entrepreneurs - refrain from using administrative or criminal measures to interfere with normal commercial disputes; refrain from imposing measures to seal, seize or freeze business assets beyond what is necessary or a reasonable timeframe; minimize the negative impact of investigative measures on business operations; improve appeal and re-trial processes to effectively prevent and rectify wrongly decided cases (Point 10).
• Continue to combat corruption – continue to prevent and combat corruption in private enterprises, including embezzlement, misappropriation of funds, and bribery; guide private enterprises to establish comprehensive internal audit and accounting systems and enhance compliance training (Point 11).
• Protect intellectual property rights – enhance the protection of IPR in small and micro private enterprises; strengthen the enforcement of punitive damages for IP infringement; establish a system to promptly handle IP infringement cases through judicial and administrative means; and combat activities that infringe commercial secrets and other unfair competition conduct (Point 12).
• Strengthen the stability and predictability of applicable policies and regulatory measures – publicize regulatory standards and rules; adhere to the principles of transparency, fairness and simplification in enforcement actions; refrain from imposing penalties on enterprises that engage in minor violations; and take prompt corrective actions (Point 13).
• Improve corporate governance and enterprise management systems – encourage private enterprises to establish a moderncorporate governance systems; strengthen the regulation of shareholder conduct and internal supervision; separate corporate assets from personal assets of individual shareholders to achieve clearer corporate ownership structures; establish a risk assessment and early warning mechanism to identify circumstances that may significantly impact business operations and create risks to social stability (Point 15).
• Accelerate digital/technological transformation and technological transformation – encourage private enterprises to engage in R&D on digital technologies and invest in data centers and industrial networks; support private enterprises to actively advance standardization to improve product quality.
• Improve the international competitiveness of private enterprises – encourage private enterprises to leverage their strengths, raise brand awareness and actively participate in the design, research and development of high-end core products, and explore opportunities in overseas markets and actively participate in the "Belt and Road Initiative" (Point 18).
• Cultivate a positive media environment that respects entrepreneurship in the private sector – create a media and social environment that encourages innovation and entrepreneurship; encourage positive media reports on successful stories of outstanding entrepreneurs; provide more understanding, tolerance and guidance in case of failure; crack down on activities that exploit negative public opinion for extortion or other unlawful purposes (Point 27).
• Continue to strengthen Party leadership – adhere to the Party's centralized leadership in the economic development of private enterprises (Point 29).

Following issuance of the Opinions, the National Development and Reform Commission (NDRC) released an implementing policy entitled Several Near-Term Measures to Promote the Economic Development of the Private Sector (August 1).³

Please see Appendix 1 for a table summarizing key measures and their responsible government agencies under the implementing policy.

Analysis

Although the government deems that China's economy has great resilience and potential, China's post-COVID economic recovery has lost momentum and requires further stimulus. Private businesses have struggled to fully recover from the Covid pandemic contributing to uncertainty in China's overall economic stability and growth. The Opinions were issued against this backdrop.

According to the National Bureau of Statistics (NBS), China's GDP grew by 6.3% in Q2 off a very low base in 2022. However, when compared to Q1, China's GDP grew by just 0.8% from April to June, much lower than the 2.2% quarter-on-quarter growth in Q1.⁴

In particular, the private sector has experienced a serious decline: the pre-tax profit margin of private enterprises has fallen below the average weighted interest rate of bank loans, and private fixed asset investment saw a cumulative year-on-year decline of 0.2% in June. This downturn has also affected the employment prospects of people aged 16-24, with their unemployment rate reaching a record-high of 21.3% in June according to National Bureau of Statistics data.⁵

The gist of the Opinions is to remove market entry barriers and treat private businesses equally with other enterprises with different forms of ownership structure (especially State-owned enterprises) in such matters as government procurement, public projects, investment, standardization, incentives and financing.

The fact that the NDRC introduced the detailed implementing policies with responsible government agencies expressly designated for each area shortly after promulgation of the Opinions indicates that the Chinese government realizes the significant challenges faced by private business and is determined to boost the private sector. Moreover, local governments and industry regulators are likely to offer additional incentives to private businesses following the central government policies.

Foreign businesses in China, as part of the private economy, in theory should also be covered under the new policies. The principles of transparency, equal treatment and fairness in such areas as market access, procurement projects, accelerated administrative procedures, and access to financing may benefit foreign-invested enterprises in China.

However, whether the new policies will be effectively implemented remains unclear. Overcoming local protectionism and the Party's longstanding preference for State-owned enterprises in market access, government procurement, financing, government subsidies, debt relief and law enforcement present substantial doubts about the durability of reforms favoring the private sector, particularly given recent crackdowns on large private enterprises and entrepreneurs.

The Opinions also include provisions to continue to strengthen anti-competitive law enforcement which indicates that the government retains latitude to constrain the private sector through competition law enforcement -- which has happened in the past.

While the government promises equal market entry to key projects, foreign investors may still face additional barriers if such projects are restricted in the name of national security, industrial policy or other considerations. It is also unclear how to integrate the measures to boost the domestic private sector with such other measures to enhance foreign investment. Skepticism is likely to persist with respect to the permanence of liberalizing policies toward the private sector.

Summer Intern Leo Zhang also contributed as an author to this alert.

Appendix 1 – Implementing Measures

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.