There is nothing “Private” about Private Enterprises in China

If you are surprised by the Chinese authorities’ recent crackdowns with seemingly abrupt and draconian measures on Jack Ma’s Ant Financial Group in April, Didi Chuxing in July and now the after-school tutoring (AST ) sector in August 2021, perhaps a brief revisit to the development history of China’s “Socialist Market Economy with Chinese Characteristics” will help you better appreciate these recent regulatory crackdowns in China.

What Socialist Market Economy means in China
In spring 1992, after the famous tour to the South of China (九二南巡), Deng Xiaoping, the Chief Architect of China’s reform and opening up, expounded his views: –
“ A planned economy is not equivalent to socialism, because there is planning under capitalism too. A market economy is not capitalism, because there are markets under socialism too. Planning and market forces are both “means” of controlling economic activities”

In Sep 1992, the 14th National Congress of the Communist Party of China set the goal of economic system reform of China – by establishing socialist market economy system (社会主义市场经济), allowing market to play a basic role in allocation of resources. Simply put, a socialist market economy is a system of government and economic management that attempts to strike a balance between pure capitalism and social objectives.

It is interesting to note that the word “Socialist” comes before “Market Economy”.  “Socialist” points to the ideology and values that guide the “Market Economy” which is the tool or means, and central party control is one important “Chinese characteristic”.
There are three important features in the Chinese system of market economy which are different  from the market economy in other countries:-Firstly, dominant position of the public ownership via state-owned enterprises in the economy.
Secondly, Communist Party of China (CPC) is the political foundation for the operation of socialist market economy to ensure a steady, fair, safe and orderly social and economic development.

Thirdly, the goal of socialist market economy system is to realize the social equity and justice, and achieve common prosperity for all of its people in order to maintain the unity of the people and harmony of the society.
The CPC’s treatment of private capitalists has also evolved over generations. Mao Zedong vowed to abolish China’s capitalists.
Deng Xiaoping said they could get rich…first and then help the rest to finally achieve common prosperity.  
Xi Jinping now tells the private sector capitalists – “We’re here to help you, but you must also help and heed us”

On 16 Sep 2020, in an Order to party officials published by People’s Daily, President Xi instructed to increase CPC influence over private enterprises even as the government promises to give private businesses more support and opportunities.

Some important messages in the Order go like this: –
“…unify members of the private sector around the party, do better in promoting the healthy development of the private economy, and strive to uphold and develop the cause of socialism with Chinese characteristics for the new era …”    
“… party committee must strengthen its leadership of the private economy, ensuring that China’s rising capitalists are recruited into the party’s “united front” of allies, ready to support the government’s economic and political priorities….”  

In essence, there is nothing “private” about private enterprises in China because CPC is the ultimate boss! Central party control in Beijing will not hesitate to crack down on antitrust and monopoly practices, preventing disorderly expansion of capitalism, uplifting people’s livelihood and promoting social fairness (in order to achieve “common prosperity”), and protecting data privacy and prioritizing national security.

Why Abrupt and Draconian Measures?
China has shown it is capable of dishing out seemingly abrupt and draconian measures to rein in market forces, for examples, during 2015 Chinese stock market turbulence, 2015 RMB exchange rate reform  and now the “rectification” (整改) of undesirable and mis-aligned market conducts of Ant Financial, Didi Chuxing, and the AST sector.

There are possibly many reasons contributing to these seemingly abrupt and draconian measures. Some of them are as follows: –
Firstly, as China started opening up its capital markets only in recent years, its decision makers are still learning and feeling their way to deal with international capitalist finance, such as managing foreign capital flows. It takes time to hone their skills and accumulate experience in how to play by market rules when there is a need to tame the market excesses or irrational exuberance and not always resort to administrative orders in all situations.

Secondly, financial regulation and supervision in China generally lags behind market development and the regulatory agencies find it very challenging to strike a good balance between regulating and promoting the market development. If the market is not supervised closely and incremental gentler remedies are not implemented in time, chances of an abrupt and harsh administrative intervention becomes more likely at later stage. 

Thirdly, a powerful and some described as authoritarian central government that can issue policies and regulations expeditiously without much restrain. The lure of speed and ease of implementing and the vested interest that grow with it making government policies and regulations an easy option for the government officials to deal with market irregularities.
But, make no mistake about China’s continued intention to develop capital markets, to promote innovation and entrepreneurship, and to open up to more foreign investments, as these are well stated as long-term strategies in its 15th Five Year Plan (2021-2025) announced early this year by the Chinese government. Also, it has to be said that the recent crackdowns are for greater social good and serving the interest of its people. Be it preventing unfair competitive advantage in data resources, seeking to ensure healthy market competition, eradicating predatory lending and harmful individual spending habit, lessening the financial burden on cost of education for lower income families and protecting data privacy, among others.

Role of Private Capitalists

Foreign investors need to differentiate corrective actions and policy reversal. China is not anti-capitalist and its support for private businesses remains intact. However, it will not allow disorderly expansion of capitalism that undermines its socialist ideology of social equity, justice and common prosperity, among others. It therefore won’t let the private capitalists stand in its way of doing what the party believes is best for the most people of the country.

The private capitalists have to understand their subordinate place in the Chinese system or they will suffer the consequences of their mistakes. They ought to be reminded that having built up their mighty and powerful business empires does not give them the power or privilege to do all things as they wish and challenge the political and regulatory baselines. There were ample examples of Chinese government cracking down and decimating “misbehaved” large private business groups and turning them to state capitalists.

So, when doing business or investing in China, foreign investors must remember that evaluating and managing “Policy and Regulation Risk” is a very important part of due diligence. If you are doing business in a province or a city in China, while good working relationship at local level is essential, be aware that priorities from central party control are even more important!

Dr Pei Sai Fan is an adjunct university professor, angel investor and adviser to fintech startups, and director of Libai Academy. He was formerly a director of the MAS Academy.

Aug 2021
(This article by Dr Pei was first published in The Business Times on 13 Aug 21.)