The private sector will gain more focus in China's economy, as was reaffirmed in the report delivered during the 20th National Congress of the Communist Party of China. It stated that authorities "will provide an enabling environment for private enterprises, protect their property rights and the rights and interests of entrepreneurs in accordance with the law, and facilitate the growth of the private sector".
Such a statement reflects how important the private sector is for policymakers. Indeed, in the past 40 years, the country's rapid economic growth has been inseparable from the outstanding contributions made by private-sector enterprises, which have developed into an important part of China's economy. Between 2012 and 2021, the number of private enterprises quadrupled from 10.86 million to 44.58 million.
Key role for China
With the strong government support in recent years, private enterprises are showing strong resilience in their development progress. From the beginning of 2020 to the end of August this year, the number of private enterprises increased by about 11.85 million, accounting for one-third of the total net increase in the past decade. The private economy has become the largest enterprise group and investment body in China, as well as an important force for independent innovation.
As a major force in innovation, private enterprises play a key role in helping the nation achieve high-level development. According to a September report by the All-China Federation of Industry and Commerce, the total planned expenditure in research and development logged by the top 1,000 private enterprises this year stood at 1.1 trillion yuan ($154.4 billion), accounting for 39 percent of the national total and 50 percent of the total expenditure of enterprises in China.
The development of private enterprises has made regional economic development more balanced. Though most private enterprises are still based in eastern regions, there are many that have found new growth points successfully operating in the central, western and northeastern regions, utilizing benefits generated from the nation's regional economic development strategies. This has not only provided strong momentum for the rapid growth of these regions, but also promoted the optimization of China's economic structural layout and the coordinated development of regional economies.
The development of the private economy is an important means to expanding global market presence. There are currently 28 Chinese mainland private enterprises listed among the Fortune Global 500, a significant increase from only one in 2010. In recent years, more and more private enterprises have participated in the building of the Belt and Road Initiative, established international marketing and logistics service networks, and carried out overseas investment projects, becoming the nation's backbone in expanding international market visibility.
The private economy also plays a key role in carrying out social responsibility. By the end of November 2020, a total of 123,000 private enterprises had provided targeted assistance to nearly 140,000 poor villages in China in a campaign initiated by the federation, benefiting a total of 17.79 million people living in poverty.
In addition to economic growth, job creation, tax revenue and innovation, private enterprises have also made contributions to optimizing economic structure and narrowing the wealth gap. In general, the private economy has become an increasingly indispensable part of China's economy and society, and plays an important role in the development of the socialist market economy and high-quality economic development. People's livelihoods have thus become increasingly robust.
Hurdles seen
The external demand has been weakening, leaving a certain impact on private enterprises. Since the third quarter, exports have shown a downtrend. In September, China's exports in US dollar terms recorded an annual growth rate of 5.7 percent, a slowdown from August. The reasons, as we see, are the better performance in the same period of last year and the weakening global economy, which further weighed on external demand. With a recession likely to take place in major economies including the United States and the European Union, the external demand may face more pressure in the future. Also, the impact of monetary tightening on demand in major overseas economies will gradually weigh on export performance.
Private enterprises account for a large proportion in the overall export of domestic enterprises. According to Customs data, private enterprises have since 2019 surpassed foreign-invested enterprises to be the largest foreign trade entity in China. Since the first half of 2018, the proportion of private enterprises in China's total foreign trade value has increased from 39.7 percent to 49.6 percent in the first half of 2022. Such an increase reflects an improving private economy, but export declines will undoubtedly impact private enterprises as they are generally smaller in scale and more prone to risks.
Domestic pressures have also been on the rise. Since the beginning of this year, COVID-19 resurgences have been weighing on labor mobility between regions, which present challenges for private enterprises in finding labor and sustaining production. In addition, the services sector, which mainly consists of smaller private enterprises and is dominated largely by offline face-to-face scenarios, has been hit more severely.
Another segment facing pressure in the private sector is real estate. Property has been going through a tough time recently, not only because the sector, cyclically speaking, has been on a downward track after over 20 years of flourishing in China, but the aging population is making a reversal of the downtrend extremely difficult. And with the sector's high proportion of private enterprises, even greater pressure is being seen.
Under such a scenario, in the first eight months, market share of the top 50 private property enterprises fell by 13 percent year-on-year, with sales totaling 2.07 trillion yuan, a year-on-year decline of 58 percent. Although their financing costs in the first half were reduced, financing volume has continued to see negative growth, lagging behind that of centrally administered State-owned enterprises. Measures to further guarantee reasonable financing needs of private enterprises have been unveiled, though it will take some time for the implementation of these policies to take effect, and financing issues of private enterprises will still exist over the short term.
A way out
Tax cuts and fee reductions should be furthered. Favorable policies to this end had been focusing on micro, small and medium-sized enterprises before the COVID-19 pandemic broke out. Since 2020, apart from previous measures, more policies tending to focus on smaller firms have been put forward, such as allowing social security deferrals for smaller firms seriously affected by the pandemic and encouraging reduction or exemption of their operating rents. The supportive attitude of government departments toward private enterprises has been encouraging, especially when the nation is facing weakening expectations for the private sector, and effective policies are very much needed. However, some policies like those improving the business environment feature long-term institutionalized implementation and will take a certain amount of time to achieve results.
Looking ahead, the government should continue to reduce the tax burden and optimize the tax burden structure. The tax rebate policy has proved effective when looking at economic performance, but there is still room for continuous efforts. Local governments can provide more targeted tax support for their respective core industries in accordance with regional industrial advantages. Implementation of tax rebates, tax reductions, tax breaks and other policies should be monitored at every level, kept transparent and fully carried out to effectively help enterprises achieve profit growth, which ultimately will drive the development of the overall economy.
In terms of financing, multichannel financing should be further enhanced to support the development of private enterprises. Some such cases have produced positive results. In terms of equity financing, the establishment and opening of the Beijing Stock Exchange last year was a major move to facilitate a financial support system for private enterprises. As of Nov 14, the BSE had 123 listed companies, of which private enterprises accounted for 86 percent. In terms of bond financing, the China Securities Regulatory Commission and the National Development and Reform Commission have issued measures to promote the bond market to better support the reform and development of private enterprises. According to the National Association of Financial Market Institutional Investors, in the first three quarters, private enterprises issued bonds worth about 428 billion yuan, an increase of 14 percent year-on-year, and the net financing amount was about 29 billion yuan, an increase of about 37 billion yuan year-on-year.
In terms of other financing support, it is recommended that the People's Bank of China — the central bank — and policy banks put forth more policy-based preferential loans to provide interest-free loans to smaller firms, which are in need of bailouts to help them tide over difficult times.
Apart from the above efforts, favorable measures for private enterprises such as widening investment access as well as improving market regulation and supervision will work to help shore up the sector amid economic headwinds. But all in all, the task of overcoming difficulties still relies heavily on the efforts for individual enterprises. Deepening innovation in pursuit of higher quality should be the core solution at any time.
According to a survey by the federation, even among the top 500 private enterprises, it can be seen that research and development expenses are still mainly self-financed, and the proportion of external funding support is low. Policy support to this end can be put forward to encourage R&D help for private enterprises and attract or cultivate more high-tech talent at home and abroad to directly promote R&D progress and business operations.
UCLG-ASPAC Committee on the Belt and Road Local Cooperation
CONTACT US
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The private sector will gain more focus in China's economy, as was reaffirmed in the report delivered during the 20th National Congress of the Communist Party of China. It stated that authorities "will provide an enabling environment for private enterprises, protect their property rights and the rights and interests of entrepreneurs in accordance with the law, and facilitate the growth of the private sector".
Such a statement reflects how important the private sector is for policymakers. Indeed, in the past 40 years, the country's rapid economic growth has been inseparable from the outstanding contributions made by private-sector enterprises, which have developed into an important part of China's economy. Between 2012 and 2021, the number of private enterprises quadrupled from 10.86 million to 44.58 million.
Key role for China
With the strong government support in recent years, private enterprises are showing strong resilience in their development progress. From the beginning of 2020 to the end of August this year, the number of private enterprises increased by about 11.85 million, accounting for one-third of the total net increase in the past decade. The private economy has become the largest enterprise group and investment body in China, as well as an important force for independent innovation.
As a major force in innovation, private enterprises play a key role in helping the nation achieve high-level development. According to a September report by the All-China Federation of Industry and Commerce, the total planned expenditure in research and development logged by the top 1,000 private enterprises this year stood at 1.1 trillion yuan ($154.4 billion), accounting for 39 percent of the national total and 50 percent of the total expenditure of enterprises in China.
The development of private enterprises has made regional economic development more balanced. Though most private enterprises are still based in eastern regions, there are many that have found new growth points successfully operating in the central, western and northeastern regions, utilizing benefits generated from the nation's regional economic development strategies. This has not only provided strong momentum for the rapid growth of these regions, but also promoted the optimization of China's economic structural layout and the coordinated development of regional economies.
The development of the private economy is an important means to expanding global market presence. There are currently 28 Chinese mainland private enterprises listed among the Fortune Global 500, a significant increase from only one in 2010. In recent years, more and more private enterprises have participated in the building of the Belt and Road Initiative, established international marketing and logistics service networks, and carried out overseas investment projects, becoming the nation's backbone in expanding international market visibility.
The private economy also plays a key role in carrying out social responsibility. By the end of November 2020, a total of 123,000 private enterprises had provided targeted assistance to nearly 140,000 poor villages in China in a campaign initiated by the federation, benefiting a total of 17.79 million people living in poverty.
In addition to economic growth, job creation, tax revenue and innovation, private enterprises have also made contributions to optimizing economic structure and narrowing the wealth gap. In general, the private economy has become an increasingly indispensable part of China's economy and society, and plays an important role in the development of the socialist market economy and high-quality economic development. People's livelihoods have thus become increasingly robust.
Hurdles seen
The external demand has been weakening, leaving a certain impact on private enterprises. Since the third quarter, exports have shown a downtrend. In September, China's exports in US dollar terms recorded an annual growth rate of 5.7 percent, a slowdown from August. The reasons, as we see, are the better performance in the same period of last year and the weakening global economy, which further weighed on external demand. With a recession likely to take place in major economies including the United States and the European Union, the external demand may face more pressure in the future. Also, the impact of monetary tightening on demand in major overseas economies will gradually weigh on export performance.
Private enterprises account for a large proportion in the overall export of domestic enterprises. According to Customs data, private enterprises have since 2019 surpassed foreign-invested enterprises to be the largest foreign trade entity in China. Since the first half of 2018, the proportion of private enterprises in China's total foreign trade value has increased from 39.7 percent to 49.6 percent in the first half of 2022. Such an increase reflects an improving private economy, but export declines will undoubtedly impact private enterprises as they are generally smaller in scale and more prone to risks.
Domestic pressures have also been on the rise. Since the beginning of this year, COVID-19 resurgences have been weighing on labor mobility between regions, which present challenges for private enterprises in finding labor and sustaining production. In addition, the services sector, which mainly consists of smaller private enterprises and is dominated largely by offline face-to-face scenarios, has been hit more severely.
Another segment facing pressure in the private sector is real estate. Property has been going through a tough time recently, not only because the sector, cyclically speaking, has been on a downward track after over 20 years of flourishing in China, but the aging population is making a reversal of the downtrend extremely difficult. And with the sector's high proportion of private enterprises, even greater pressure is being seen.
Under such a scenario, in the first eight months, market share of the top 50 private property enterprises fell by 13 percent year-on-year, with sales totaling 2.07 trillion yuan, a year-on-year decline of 58 percent. Although their financing costs in the first half were reduced, financing volume has continued to see negative growth, lagging behind that of centrally administered State-owned enterprises. Measures to further guarantee reasonable financing needs of private enterprises have been unveiled, though it will take some time for the implementation of these policies to take effect, and financing issues of private enterprises will still exist over the short term.
A way out
Tax cuts and fee reductions should be furthered. Favorable policies to this end had been focusing on micro, small and medium-sized enterprises before the COVID-19 pandemic broke out. Since 2020, apart from previous measures, more policies tending to focus on smaller firms have been put forward, such as allowing social security deferrals for smaller firms seriously affected by the pandemic and encouraging reduction or exemption of their operating rents. The supportive attitude of government departments toward private enterprises has been encouraging, especially when the nation is facing weakening expectations for the private sector, and effective policies are very much needed. However, some policies like those improving the business environment feature long-term institutionalized implementation and will take a certain amount of time to achieve results.
Looking ahead, the government should continue to reduce the tax burden and optimize the tax burden structure. The tax rebate policy has proved effective when looking at economic performance, but there is still room for continuous efforts. Local governments can provide more targeted tax support for their respective core industries in accordance with regional industrial advantages. Implementation of tax rebates, tax reductions, tax breaks and other policies should be monitored at every level, kept transparent and fully carried out to effectively help enterprises achieve profit growth, which ultimately will drive the development of the overall economy.
In terms of financing, multichannel financing should be further enhanced to support the development of private enterprises. Some such cases have produced positive results. In terms of equity financing, the establishment and opening of the Beijing Stock Exchange last year was a major move to facilitate a financial support system for private enterprises. As of Nov 14, the BSE had 123 listed companies, of which private enterprises accounted for 86 percent. In terms of bond financing, the China Securities Regulatory Commission and the National Development and Reform Commission have issued measures to promote the bond market to better support the reform and development of private enterprises. According to the National Association of Financial Market Institutional Investors, in the first three quarters, private enterprises issued bonds worth about 428 billion yuan, an increase of 14 percent year-on-year, and the net financing amount was about 29 billion yuan, an increase of about 37 billion yuan year-on-year.
In terms of other financing support, it is recommended that the People's Bank of China — the central bank — and policy banks put forth more policy-based preferential loans to provide interest-free loans to smaller firms, which are in need of bailouts to help them tide over difficult times.
Apart from the above efforts, favorable measures for private enterprises such as widening investment access as well as improving market regulation and supervision will work to help shore up the sector amid economic headwinds. But all in all, the task of overcoming difficulties still relies heavily on the efforts for individual enterprises. Deepening innovation in pursuit of higher quality should be the core solution at any time.
According to a survey by the federation, even among the top 500 private enterprises, it can be seen that research and development expenses are still mainly self-financed, and the proportion of external funding support is low. Policy support to this end can be put forward to encourage R&D help for private enterprises and attract or cultivate more high-tech talent at home and abroad to directly promote R&D progress and business operations.
