BREAKINGVIEWS-China is reshaping, not choking, private business

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to fix dateline.

By Hudson Lockett

HONG KONG, Oct 30 (Reuters Breakingviews) - Is China choking off its private companies? After more than a decade of increasingly centralised rule under President Xi Jinping, the answer seems clear. The private sector is on the wane due to stringent regulation and policies favouring government-run enterprises over profit-focused entrepreneurs.

Tech giants like Alibaba have had their wings trimmed, while a crackdown on the property sector tipped developers like China Evergrande into bankruptcy. Anbang Insurance, which once scooped up overseas trophy assets like New York’s Waldorf Astoria hotel, has been wound down and its former chairman imprisoned.

The shift is evident in the stock market. Private companies only accounted for 33% of the combined market value of the 100 largest Chinese stocks in June, according to the Peterson Institute for International Economics, down from a peak of 55% just three years prior. State-run groups such as telecom operator China Mobile and liquor producer Kweichow Moutai have climbed the rankings.

The apparent shift from entrepreneur-led firms to state-controlled companies has coincided with the roughest patch for the world’s second-largest economy in decades. One recommended remedy is "to unleash the private sector much more to really capture productivity growth,” as Asian Development Bank Chief Economist Albert Park told Bloomberg. Putting beleaguered private businesses back on a level playing field with state-run competition is the key to jolting China out of its post-pandemic slump.

It’s true many companies in China are in dire straits, in part due to their inability to procure support as easily as state-run peers. But the Chinese Communist Party is not intentionally throttling private business. Rather, as underscored by a draft law on private sector promotion made public this month, the party wants to reshape business to simultaneously serve its policy goals of growth and national security. Privately owned companies that meet these criteria, like $120 billion electric-vehicle and battery giant BYD, and $21 billion solar panel maker Longi Green Energy Technology, have thrived.

CRACKS OPEN UP

There is no denying Beijing cracked down on numerous sectors dominated by private businesses. Regulators started in November 2020 by halting the imminent $37 billion initial public offering from Ant, the fintech firm controlled by Jack Ma. That expanded into an anti-monopoly drive targeting e-commerce groups like Alibaba and Tencent and other measures that ultimately wiped $2 trillion off the value of stocks included in the MSCI China Index.

This was painful for China’s biggest listed companies and their international shareholders. But the real roots of private sector pain lie in the forcible deleveraging of the real estate sector, which also kicked off in late 2020. Xi's dedication to shrinking the unsustainable debt loads of mostly private developers torpedoed growth in a sector responsible for roughly a quarter of annual economic activity. Falling property values, plus stringent enforcement of Xi’s disruptive zero-Covid-19 policy until early 2022, sent consumer confidence tumbling to record lows, where it remains.

NEW CHAMPIONS

Yet at the same time other private enterprises, even those without large government shareholders, have thrived in industries like solar panels, electric vehicles and - to a lesser extent - semiconductors.

According to the International Energy Agency, China poured more than $50 billion into new solar panel capacity between 2011 and 2022, helping turn producers like Longi to global leaders. The Center for Strategic and International Studies estimates government support for EV makers has risen to about $45 billion annually in recent years, enabling private carmakers like BYD to take on Western rivals. In May, China set up its third investment fund to bolster its semiconductor industry, with the total of $48 billion raised roughly double the total of previous funds in 2014 and 2019.

The dangers from this new approach to state capitalism lie in its tendency towards chronic oversupply. Offloading surplus output in the global market has provoked a backlash, including the European Union’s recent decision to slap tariffs on Chinese-made EVs. That leaves China’s new national champions looking vulnerable.

DEFINE ‘PRIVATE’

These examples also show the flaws of looking at the private and state sectors in China through a binary lens. Xi has sought to thread state influence throughout business: Communist Party cells embedded in large companies must be looped in on major moves and corporate governance. So-called guidance funds set up by central and local governments have assumed a greater role in providing capital to start-ups. And the party retains a tight grip on the supply of capital as almost all major financial institutions remain under some form of state ownership.

Meanwhile, regulators have taken more control over companies listing abroad, following ride-hailing firm Didi's disastrous Wall Street listing in 2020. These restrictions largely halted the flow of Chinese IPOs to both New York and Hong Kong. Finally, greater use of official and informal controls over onshore listings mean the state now exerts more sway over which businesses can tap domestic capital markets.

THE UPSHOT

The state’s growing presence and impact is becoming harder to ignore. These changes appear to rule out the creation of new disruptive upstarts that were central to China’s growth during the 2010s.

That doesn’t make technological innovation impossible, though, as the successes of Longi and BYD demonstrate. And the growth of $17 billion Instagram-alike Xiaohongshu suggests entrepreneurial drive can still help fuel a transition to consumption-led growth.

Yet China’s private sector remains vulnerable not only to surges in regulatory ire, but also officials’ wilful blindness to the utility of markets. Top leaders spent most of the past year ignoring what was dragging stocks down while trying to force them back up through various forms of intervention. In August, mainland bourses even halted daily readouts on foreign inflows as international investors flirted with turning net sellers of Chinese equities for the year to date.

This suggests policymakers view sagging markets not as a signal of when and where to adjust course, but an embarrassment to be swept under the rug. Yet the solution to a red warning light is not to unscrew the bulb. China’s current growth model is clearly rife with problems, but in this it is hardly unique. Its approach to private enterprise could yet prove up to the task of turning the country into the technological superpower Xi desires - provided disdain for market forces does not blind Beijing to the hard decisions along the way.

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(Editing by Peter Thal Larsen and Streisand Neto)

((For previous columns by the author, Reuters customers can click on LOCKETT/ hudson.lockett@thomsonreuters.com))