Xi Jinping really is unshakeably committed to the private sector

China’s paramount leader, Xi Jinping, contains multitudes. His economic philosophy touts both self-reliance and openness. His vision of policymaking embraces top-down design, but also bottom-up experimentation. During the covid-19 pandemic, he urged local officials to eliminate infections (which often required lockdowns) and promote growth (which required mobility). His recent call to cultivate “new productive forces” entails championing cutting-edge technologies, but without neglecting traditional industries. Communists are taught to believe in the power of contradictory forces, as Trivium, a consultancy, once put it. So Mr Xi “will expect his comrades to cope”.

For others, Mr Xi’s priorities can be baffling. Take the “two unshakeables”, one of his favourite slogans, which has been heard a lot in the past year or so. This refers to the Communist Party’s unshakeable commitment to both the state-owned economy and private enterprise. The pledge, sometimes translated as the “two unswervings” or the “two unwaverings”, first appeared under Mr Xi’s predecessors. It was reaffirmed in 2013 when his party promised to “unwaveringly encourage, support and guide the development of the non-public sector”. And it will no doubt feature at the forthcoming “third plenum”, a twice-a-decade meeting devoted to long-term reforms, which will take place from July 15th-18th.

But what does the formula mean? At first blush, each unshakeable seems to be in contradiction with the other. Almost 867,000 firms in China have some degree of state ownership, according to Franklin Allen of Imperial College London and co-authors. Real resources, unlike party slogans, are scarce. Any land, labour or capital used by China’s state-owned enterprises (SOEs) ceases to be available to scrappier private firms. A commitment to one form of ownership must surely come at the expense of the other.

Certainly, the fortunes of China’s private firms have wavered. Their share of investment reached 59% in 2014, according to official figures. But that percentage has since dropped. At the end of last year, it was just 50%.

Instead of support, China’s private entrepreneurs have suffered fines, detentions and crackdowns. Three years ago, private firms accounted for 55% of the market value of China’s top-100 listed firms, according to the Peterson Institute for International Economics, a think-tank. By the end of last year, that figure was 37%.

But the two unshakeables are more compatible than they appear. Although private firms are more likely to thrive in the absence of SOEs, the reverse is not always true. Private competitors often make state-owned rivals better: more efficient and responsive to market demands. Since China’s leaders cannot forswear state ownership, they want to make the most of what remains of it. They value private enterprise in part because the force of its example and the threat of private competition can help whip SOEs into shape. The private economy “has not weakened the state-owned economy, but has improved the efficiency of state-owned enterprises and stimulated their vitality”, argued Teng Tai, director of Wanbo New Economic Research Institute, a think-tank, at the launch of his new book on the private sector in Beijing.

Private firms fear that SOEs will crowd them out: “the state advances, the private sector retreats,” as the Chinese sometimes put it. But since the global financial crisis of 2007-09, the private sector has often retreated of its own accord, in response to market downturns, not state advances. In these cases, investment by state-owned vehicles, including local-government infrastructure firms, has filled the gap in demand left by a cowed private sector. Last month Yang Jing of the Institute of Marxism within the Chinese Academy of Social Sciences argued that SOEs provide “ballast” and play the role of “stabiliser”. The labour, land and capital absorbed by such enterprises is not being denied to private firms if they were never going to use it.

Private firms can benefit from SOE investment. Links between industries are “like a giant spiders’ web”, points out Xiaohuan Lan of Fudan University. He cites BOE Technology Group, which evolved out of a state-owned maker of vacuum tubes. Its emergence as China’s leading maker of digital displays helped break a foreign stranglehold to the benefit of downstream private enterprises making televisions and phones.

I’m from the Chinese government, and I’m here to help

The party’s unshakeable commitment to private ownership is also of a peculiar kind. Elsewhere governments show support for private enterprise by getting out of the way. In China, by contrast, the party’s commitment to the private sector includes a pledge to “guide” it. This can range from subsidies to regulatory restrictions. It can also work through party organisations within private firms that have grown in number and influence. In 2020 the party urged such organisations to direct members of private firms. “Arm their minds and guide their practice with Xi Jinping Thought”, it said, and increase “their political, ideological, and emotional identification with the Communist Party of China”.

Party officials have repeatedly said that private entrepreneurs are “our own people”. That may be reassuring to businessfolk who fear being vilified as greedy, unpatriotic or corrupt. But the gesture of solidarity is double-edged. It implies that entrepreneurs must mouth party platitudes and “actively practise the core socialist values”. Entrepreneurs cannot be their own people.

In the early 2000s prominent businesspeople joined the party hoping it would be a vehicle for their commercial ambitions. But it has become increasingly clear that the party sees private firms as a vehicle for its own objectives. Officials are not indifferent to private enterprise. The party’s unshakeable commitment to the sector is sincere—even if many entrepreneurs may wish it were less so.

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