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After its sluggish economic performance in 2022, China is said to be poised to resume growth this year and beyond. But that expansion depends not only on a recovery of household consumption but also on much more robust private investment and a concurrent decline in state investment. In a little noticed trend, however, private investment collapsed last year and is unlikely to strengthen significantly without concrete policy adjustments that curtail the role of the Party in economic affairs—an unlikely occurrence if President Xi Jinping continues to dominate policymaking.
China’s strong record of growth began in 1978, driven in large part by economic liberalization that allowed private businesses to emerge and expand. As a result, the share of investment by private firms soared, and the state share fell from 82 percent in 1980 to only 34 percent by 2012.[1] But shortly after President Xi came to power in late 2012 this trend moderated, and by 2016 the private share of investment began to fall continuously.
In 2022 the trend accelerated as state investment rose by 10 percent while private investment inched ahead by only 0.9 percent. This development dampens China’s growth potential because the productivity of state firms, at least in the industrial sector where better data are available, is regularly about a third that of private firms.
The underlying problem is that under President Xi, government policies have persistently favored state control or direction of the economy, to the detriment of private firms, undermining the confidence of private investors and entrepreneurs. The bias against private firms began in Xi’s first term, when he called in an important speech to the 19th Party Congress in the fall of 2017 for supporting and strengthening state enterprises. State banks responded by boosting the share of loans flowing to state companies, at the expense of private firms.
In the same speech in 2017, Xi called for a further expansion of the role of the Communist Party in the economy, including the installation of Communist Party committees even in private enterprises. Indeed, the central committee in 2018 went further, calling on “the Party to exercise leadership over all areas of endeavor in every part of the country.”
More recently, China’s most successful private companies, like Alibaba, Tencent, Didi, and other so-called platform companies, have been subject to regulatory tightening that has led to a collapse of their market values. And, in some cases, the government has purchased a small slice of private companies (a so-called golden share) and insisted that this allows the Party to assume a seat on the firm’s board of directors and to chair critical board committees.
Periodic official rhetoric supporting private firms, including some recent comments by Xi and other officials, appears to have been little more than lip service, doing nothing to improve the operating environment for private firms or restore the confidence of entrepreneurs. Xi himself has made empty comments, publicly emphasizing in 2018 the importance of private firms to the success of China’s economy. Early in February, in remarks to the Politburo he stressed the need to stimulate private investment. Li Keqiang, China’s Premier, also has called for an improvement in the fundraising environment for the private economy. Similarly, Liu He, Xi’s top economic advisor, has periodically, most recently in Davos in early 2023, pledged more support for the private sector and policies to promote fair competition and entrepreneurship.
But, so far, the investment data show that their remarks have not had any impact on private sector growth or investment. Entrepreneurs are increasingly reluctant to invest in an uncertain policy environment.
Note
1. Markets over Mao: The Rise of Private Business in China, pp. 115–116.
Data Disclosure
This publication does not include a replication package.
