SOEs are usually able to provide (Nouwens and Béraud-Sudreau, 2018). In fact, the Chinese leadership has shown a lot of trust in the private sector’s ability to spur innovation, which is badly needed in order to accomplish the party state’s modernization objectives.
Arguably, the party state believes that the high-tech sector is paramount to materializing China’s ‘China 2025’ development blueprint, according to which China intends to become the world’s leading nation in ten high-tech industries by the year 2025. A study at the MERICS Institute in Berlin has highlighted that without the private sector, particularly small and medium high-tech enterprises, it will be hard to achieve this goal. Likewise, the Chinese leadership has identified SMEs as critical for its 2025 objectives. Generally, private enterprises should help to improve the performance of state-owned firms, if necessary by ‘mega-mergers’ between them. In addition, party organizations in private enterprises shall assist entrepreneurs to pursue technological upgrading and innovation (Zenglein and Holzmann, 2019).
Challenges of Private Sector Development
Despite all assurances by the central leadership, the private sector is still not treated on an equal footing with the public sector. For instance, as was reported in 2018 in the context of China’s debt-cutting efforts, private companies are perishing due to bond defaults, whereas state-owned firms, in spite of heavy debts amounting to more than 70 percent of China’s total corporate debt, are surviving due to massive state subsidies. This shows that, even now, the party state has not yet come to a conclusion on what kind of mechanisms must be implemented to solve the tremendous cash flow problems of Chinese enterprises. The recent crackdown on shadow banking and ‘illegal borrowing’ has only aggravated this problem (Tang, 2018).
In June 2018, the Central Committee of the CCP and the State Council ordered that polluting enterprises should be technically upgraded, transferred to other areas in interior China, or simply be closed (Zhonggong Zhongyang Guowuyuan, 2018). All administrative levels were ordered to take immediate steps to implement this directive, and implementation would become an indicator of cadre performance evaluation. In August 2018, entrepreneurs and business associations complained that a large number of small and medium enterprises (the overwhelming majority of them private) were ordered to stop production or had even been closed. They pointed to the economic importance of the private sector and argued that they were interested in solving the environmental problems of their enterprises themselves. However, nobody would give technical advice or come up with transparent criteria or standards for those technologies considered environmentally friendly or not. The out-come of this would be that local authorities arbitrarily closed down companies, a large number of workers became unemployed, and social stability was negatively impacted.52
The rigid implementation of environmental policies restricts the private sector significantly. Obviously, the party state targets polluting industries, i.e. the more traditional sectors of the Chinese economy, to cease production. At the same time, it fosters high-tech enterprises to push for a modern, innovation-oriented private sector. The discussion on the future development of the private sector was also fueled by an investigative report published in 2016 which predicted that more than 95 percent of China’s private enterprises were going to vanish within the next 5 years, particularly those founded during the 1970s and 1980s. These entrepreneurs, it was argued, wanted to make money but were unwilling to learn how to be innovative. According to the report, the number of private enterprises running losses had increased tremendously, from 41,000 in 2011 to 59,000 in 2015 alone (Shui, 2016).53
In fact, the slowdown of China’s economic growth hit the private sector particularly hard, primarily small- and medium-sized enterprises. In order to support this important pillar of the Chinese economy, which also suffered due to a systemic credit crunch and high tax rates, a State Council executive meeting in August 2018 chaired by Premier Li Keqiang decided that smaller enterprises should enjoy better access to affordable loans. It was argued that financial institutions should be incentivized to be more supportive of smaller businesses, and regulatory oversight should be improved to ensure that credit services are made available for small- and medium-sized private companies. At the same time, it was suggested that taxes for these enterprises should be reduced. Li explained that small businesses play a critical role in creating jobs and that the well-known problems of credit access have to be solved as soon as possible (Guowuyuan, 2018). A few days later the ‘State Leading Group for Promoting the Development of Small and Medium Enterprises’ (Guowuyuan cujin zhong xiao qiye fazhan gongzuo lingdao xiaozu) admitted that small- and medium-sized enterprises in particular are still discriminated against in favor of SOEs and that the ‘Law on Promoting Medium and Small-sized Enterprises’ (Zhong xiao qiye cujin fa) promulgated in 2017 had so far not been properly implemented. A package of measures to solve the most urgent problems of private companies concerning access to bank loans and excessive taxes was then brought on track (Caxin Zhoukan, 2018).54 To underscore the government’s determination to improve the credit situation for small and medium enterprises Li Keqiang visited the Nantong branch of the Bank of Jiangsu in November 2018, praising it as a model for providing such enterprises with low-interest loans.55 A meeting of the Standing Committee of the State Council in December 2018 reiterated this determination.56
In his report on the work of the government during the second session of the 13th National People’s Congress in March 2019, Prime Minister Li Keqiang emphasized that improvement of the business environment of small and medium enterprises is a must, that the bank loan problem must be solved under any conditions, and that private banks should be permitted and fostered.57 Shortly thereafter, the political leadership reiterated measures to be taken in order to raise the confidence of private entrepreneurs, most notably an improvement of market access for private enterprises, facilitation of access to bank loans, simplification of administrative procedures, and the strengthening of market supervision and regulation. The prime minister also emphasized the significance of competition and of equal treatment of private and SOEs which must be guaranteed by the state.58 China’s supreme judge Zhou Qiang promised that the rights of private entrepreneurs would be better protected,59 the first time the private sector was ever mentioned in a work report of the Supreme Court. In mid- July 2019, the National Development and Reform Commission decided upon measures to better protect private enterprises’ intellectual property rights, to guarantee their equal market access and fair treatment regarding public bids and government procurement, and to punish infringements upon private enterprises.60
As a matter of fact, the Chinese government has for years tried to solve these issues, but with limited success. Against the backdrop of the recent economic slowdown and the US–China trade war, small and medium enterprises are facing increasing risks, all the more since private enterprises in 2017 accounted for more than 90 percent of Chinese exports. The number of Chinese entrepreneurs on the Hurun lists’s 2 billion RMB threshold fell by 237 in 2018 from 1,893 in 2017 (Hancock, 2019).
With regard to taxation by private entrepreneurs, Changdong Zhang (2017) argues that due to high tax rates (value added tax 17 percent, corporate tax 33 percent) almost all private entrepreneurs try to avoid or evade taxes by looking for patrons within the party state to protect them, which leads to hiding business income from the tax authorities and outright bribery of officials. The party state, according to Zhang, is not interested in remedying these practices since it allows maintenance of effective political control over private entrepreneurship: In the case of (political) ‘misbehavior’, entrepreneurs could at any time be arrested by being accused of ‘tax evasion’. At the same time, as Zhang further argues, the party state has a ‘strong incentive to keep a large SOE sector for both ideological and instrumental reasons’ (Zhang, 2017: 49). In fact, there is some evidence on this. In September 2018, Li Yang, Chairman of the National Institute for Finance & Development, a think tank of the Chinese government, argued that investment in and the takeover of private enterprises by SOEs had increased substantially. This observation, which has been shared by a number of our respondents in the later stages of our fieldwork, points to a more recent trend in China’s ongoing economic transformation formula which may be called ‘oligopolization under SOE leadership’. State-owned companies at all administrative levels are ‘encouraged’ by local governments to invest in private enterprises to control a majority of shares