How Chinese private firms can be made more confident of the government's support

Since late 2020, China has taken strict measures to regulate and clean up the platform economy, education and training, and information security sectors, which has worried the capital market, especially about the fate of private enterprises.

At the end of August 2021, the Chinese Communist Party (CCP) Committee on Deepening Reforms affirmed the importance of both adhering to regulation and stimulating growth, and to drive economic recovery by reinvigorating the private sector.

Indeed, state media such as People's Daily and CCTV carried and widely propagated the message of unwavering encouragement and support for the growth of the private sector. Last December, the Central Economic Work Conference (CEWC) said that "legal and institutional arrangements will be made to ensure that the equal treatment of private enterprises and SOEs [state-owned enterprises] actually gets implemented".

The CEWC also stated that "law will be established to protect interests and rights including property rights of private enterprises". Meanwhile, the government shall respect the laws of the market, exercise less control and streamline administrative procedures, balance control with decentralisation, and treat enterprises of all ownership types equally.

After Deng Xiaoping's famous Southern Tour in 1992, the 14th National Congress of the CCP held in that same year established the socialist market economy and affirmed the fundamental role of the market in resource allocation. As an economic management system, socialist market economy is an attempt to balance pure capitalism with social aims.

Indeed, China is not against capitalism, and its support for private enterprises remains unchanged. But China does not allow the disorderly expansion of capital, as that would damage the socialist ideology of fairness and common prosperity.

For over 30 years, we have seen the government and market going back and forth between tussling and compromising. This shows that China has long tried to make capitalism a means for economic growth and to integrate it with China's socialist ideology. It aims to seek a balance that fits the country's situation and create a socialist market economy with Chinese characteristics.

At times, major policy changes towards the market have led to inconsistency and uncertainty, which in turn cause the weak growth expectation for market entities, especially private enterprises, and their lack of confidence in government policies.

The conclusions of the CEWC in December show that China's leadership are well aware that propaganda and official statements alone are not enough, and measures must be fully implemented at the institutional, legal and policy levels to support private enterprises.

I would like to raise a few points based on my own practical experience.

One, strengthening the rule of law.

Laws should be clearly enacted in areas where the rights of private enterprises must be protected, to prevent the private enterprises from being affected due to the different interpretations of policies by local officials.

When private enterprises are unfairly treated, there should be appropriate channels for legal appeal. For example, Singapore's administrative law exerts control over the power of government's administrative agencies. Administrative law requires administrators or public officials to be fair, reasonable and to act according to the law.

Occasionally, we hear of irresponsible or incompetent local officials who do little or wishfully do nothing to avoid being responsible for mistakes, and as a result the ones who suffer are private enterprises. To resolve this problem, there must be a system of accountability for local officials in policy implementation. Besides a top-down approach of political appointments and removals, we can consider including market feedback and public support as important factors to consider in officials' performance evaluation system.

Two, the government should "guide" the private sector development at the macro level, but should not "dominate" or "interfere" with market operations of private enterprises at the micro level.

With the exception of industries involving national strategic interests, as part of the country's overall economic policy, government officials should set out the position and development direction of the industry but refrain from directly participating or intervening in the operations of market players and enterprises in the industry.

This is because government intervention often affects an enterprise's market development and innovation and even harms market efficiency and value creation, hindering the opportunity to grow the economic pie. The foundation of China's common prosperity drive will only be stronger if the economic pie grows bigger.

Hence, authorities must exercise extra caution when implementing the guidelines for strengthening united front work involving the private sector (《有关加强党组织对民营经济统战工作的领导的重要指示》) and the rectification measures to rein in the disorderly expansion of certain enterprises introduced back in 2020, which includes measures such as having SOEs taking ownership in private enterprises and putting government officials in private enterprises to enhance compliance.

Doing so will ensure that the government is truly respecting the laws of the market, simplifying administrative procedures and delegating more central government powers to local government and market players, and setting out clearly the boundaries between the government functions and the market responsibility.

Three, the government should recruit, train and entrust more professional talents.

The CEWC also stressed that the new leadership team must do new things, strengthen their industrial knowledge learning, and become experts and leaders in their areas of work involving the industries. This aligns with my personal experience and should be greatly encouraged.

Major policy adjustments or even U-turns often throw the market off guard, and enterprises lose their confidence or willingness to formulate their long-term business development plans.

Hence, it is better to ensure the consistency and continuity of policies and rules. To do this, government officials should possess relevant industry expertise and capabilities; be familiar with business operations and market "tricks"; keep watch on unhealthy and irregular business practices; and keep their finger on the market's pulse.

They should also identify and address emerging issues - such as unfair and unregulated market operations - with market-based approaches in a timely manner, or make refined and incremental adjustments to policies, so that monopolistic behaviours in the market will not take shape and gradually expand and solidify with time. Otherwise, resorting to heavy-handed or draconian one-size-fits-all executive orders or policy U-turns will only make it tougher to eradicate problems and deal a harsher blow to the society, affecting the credibility of government policies and adding to the policy risk faced by the private enterprises.

Four, establishing mechanisms and creating the environment for market discipline to play its rightful role.

Apart from solving problems with appropriate policies and regulations, such as implementing anti-monopoly laws, maintaining a level playing field and establishing an exit mechanism based on market principles, some problems can be addressed by relying on "market discipline".

Hence, the government could focus on cultivating a comprehensive industry ecosystem, enhancing corporate governance and industry self-regulation, and creating a fair, orderly and healthy competitive environment that abides by the rule of law.

Through healthy market competition that ensures the survival of the fittest, consumers will be provided with the best products and services, and enterprises' monopolistic behaviours or disorderly expansions will be reduced.

This article was first published in Lianhe Zaobao as "如何提振中国民企对政府的信心".

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