China’s renewed embrace of the private sector

When Chinese officials speak at Davos, they cater to their audience of global capitalist elites. Back in 2017, Xi Jinping, leader of the Chinese Communist party, quoted Charles Dickens and the Swiss founder of the Red Cross Henry Dunant to launch a defence of economic globalisation. “Pursuing protectionism is like locking oneself in a dark room,” he said then.

This year, it was the turn of Liu He, a vice premier who is regarded as China’s “economic tsar”. His message at Davos last week was that after three years wrestling with the pandemic, “China is coming back”. He also pledged strong support for China’s beleaguered private sector and promised that the door to foreign investment will “only open up further”. Was Liu merely trying to win his audience?

Probably not. Beijing’s renewed embrace of the private sector and foreign investors is consistent with recent high-level policy statements made in Beijing. Han Wenxiu, a senior official in the Central Financial and Economic Affairs Commission — a body headed by Xi himself — articulated similar undertakings for private capital and foreign businesses in a speech in late December.

The outside world therefore should take China’s signals of a reset in economic policy seriously — even though doing so requires a leap of faith. A heavy-handed regulatory crackdown on 13 leading privately owned internet companies has wiped trillions of US dollars off the value of their shares over the past two years.

Foreign multinationals have also had a torrid time. A survey of the 1,800 members of the EU Chamber of Commerce in China last year found that 23 per cent were considering shifting current or planned investments out of China — the highest ever recorded. A full 77 per cent also reported that China’s attractiveness as a future investment destination has decreased.

Thus it is not charity that is inducing China to change its tune. An anaemic GDP growth rate of 3 per cent last year, an urban youth unemployment rate that stood at 17 per cent in December, a slumping property market, widespread debt stress at the local government level, a faltering export performance and several other frailties have convinced Beijing that it needs to court all potential sources of economic growth.

Indeed, its chaotic pivot from “zero-Covid”, which started in December, was probably precipitated as much by frustration within China’s political and business hierarchies as it was by street demonstrations in more than 20 cities in November.

However, it should be recognised that China’s plan to reopen and embrace the private sector does not signify a diminution in Xi’s obsession with control. State control over private companies has been stepped up. Alibaba and Tencent, for instance, have had to cede “golden shares” to state entities, which allow officials to take board seats and veto certain company decisions.

In other evidence of bolstered state control, China is instituting a “traffic light” system to regulate share offerings. Private companies in sectors that align with Beijing’s strategic priorities — such as semiconductors — may get green lights to launch IPOs while others in less favoured sectors such as education and alcohol may be prevented from doing so, according to Gavekal Dragonomics, a consultancy.

China should recognise that giving better treatment to the private sector and multinationals cannot be a matter of expediency. Such policies must be long-term and sustainable if Beijing wishes to build trust. If officials travel to Davos to express fealty to a creed of open markets only to reverse course once back home, it will inflict lasting damage to China’s reputation.