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Chapter 1

The Rise and Current State of China’s Private Sector

Brief Overview of Private Sector Development after 1949

After the Communist Revolution succeeded in 1949, China’s private entrepreneurs were politically exposed and were soon targeted by the new leaders. Although most of them were identified as belonging to the ‘National Bourgeoisie’¹ and, as such, accepted as allies of the Communist government in the early years of the new regime, the tide had already changed by 1952. In the ‘Five-Anti Campaign’ launched that year, large-scale entrepreneurs were accused of tax evasion and other economic wrongdoing. In 1953, the regime announced a new ‘general line for the transition to socialism’ and the socialization of industry and commerce. In 1956, the private sector in urban China was eradicated and all entrepreneurial assets taken over by the state. At roughly the same time, private enterprises in rural areas were abolished as well. For the rest of the Maoist period (1949–1976), China’s economy was state-controlled, although some petty businesses were able to survive in the countryside (Dickson, 2007: 831; Dickson, 2008).² By the time of the groundbreaking reforms promulgated at the 3rd Plenum of the 11th CP Central Committee in December 1978, no more than 140,000 officially counted ‘household enterprises’ existed in China (Gold, 2017: 464).

After ‘reform and opening-up’ was formally introduced in the years following the 3rd Plenum, China’s private sector soon reemerged and quickly gained steam. Its starting point was the development, in the mid- 1970s, of a private shadow economy and illegal market activities in many of China’s poverty-stricken areas which were tolerated at the time due to the economic crisis in the countryside. In other words, China’s private sector development was initiated by spontaneous local action as peasants returned to household-based agricultural production.³ As a consequence, markets emerged which were officially illegal at the time. Over the course of the economic crisis, which hit the country in the second half of the 1970s, pressure on the rural areas became unbearable. In response, some poorer provinces (Anhui, Sichuan) tolerated the rise of local markets. Taking note of the ensuing rapid recuperation of the rural economy resulting from these local markets, the central leadership gradually legalized and eventually permitted the establishment of small-scale individual businesses. In fact, the reform policies of the late 1970s, including private sector reforms, must be regarded as a belated legalization of collective action on the part of the peasantry and not merely as a political turn initiated by the Communist Party, even though the role of the party leadership was critical (see Figure 1).⁴

Figure 1: The Rise of China’s Private Sector

Source: Compiled by the authors.

The return to family-based commercial agriculture eventually led to some 150–200 million rural workers being made redundant, with no access to the labor market in the urban state-owned sector. The only way to absorb them was through incorporation into the informal sector, i.e. self-employment in petty trade and craft-based activities. As this was initially forbidden for ideological reasons, these individually owned companies (getihu) employed paid ‘family members’ or ‘relatives’. Though hesitantly, the state accepted this practice and, since the beginning of the 1980s, gradually liberalized employment of up to seven workers as wage labor.⁵ Until 1988, when the above-mentioned regulation allowing for the registration of individual companies with more than seven employees came into force, private entrepreneurs operated in a gray area.⁶ Although they had enjoyed constitutional protection since the end of 1982,⁷ the social reputation of private entrepreneurs was low and they remained politically stigmatized. Only when Deng Xiaoping, the Communist Party’s paramount leader at the time, remarked in 1985 that it was good if some people became rich first did the perception of private entrepreneurs in Chinese society begin gradually to change (Yang and Li, 2008; Li, 2013).⁸

Overall, developments on the ground were always one step ahead of ideological adaption and political decision-making, indicating that the party state was neither willing nor able to control the dynamic of the private sector with its undeniable advantages in creating employment, reinvigorating production, and generating new income. Moreover, the political leadership was under significant pressure from the rural population, reinforcing internal differences on the future trajectory of China’s economic transformation and enabling reform-minded party leaders to push ahead with market-oriented reforms.

In an interview with one of the authors, Hu Yaobang, who was the General Secretary of the Chinese Communist Party (CCP) at the time, argued that the private sector was, on the one hand, an ‘absolutely indispensable supplement to the socialist economy’ (bi bu ke shao de buchong); however, on the other hand, he stated that it should not exceed (bu neng chaoguo) the collective and state-owned economy (Hu, 2011: 30).⁹ This assessment shows that, at that time, the Chinese leadership did not imagine that private entrepreneurship would once again become the dominant economic force in China’s economy. After Zhao Ziyang, then the Communist Party’s General Secretary, announced in 1987 that China was in the ‘primary stage of socialism’, implying that more elements had to be taken from capitalism to develop the socialist economy, the ‘green light’ was finally given for private sector development. During the 1st Session of the 7th National People’s Congress in spring 1988, the constitution was amended by declaring the private sector to be a supplement to the socialist public economy, resulting in the formal legalization of individual companies with more than seven employees as private enterprises (siying qiye).¹⁰ In August of that year, the ‘Provisional Ordinance on the Administration of Self-Employed Individuals in Urban and Rural Industry and Commerce’ was promulgated by the State Council, the legal basis for the individual economy until 2011 (Lin, 2017: 32).¹¹ Some 225,000 private enterprises with more than seven employees, which were registered as individual, collective, or cooperative companies at the end of 1987, could now gain the new status of ‘private enterprise’ by registering organizationally in terms of ‘sole proprietorship’, ‘partnership’, or ‘limited liability company’ (Heberer, 2003a: 18). This was an important confirmation of the party state’s reform course and its rising support for the private sector. However, private entrepreneurs were soon targeted by conservative regime forces which accused them of subverting socialism, allegedly proven by their support of the Tiananmen protests of 1989.¹² They were banned from becoming members of the Communist Party and politically stigmatized in the aftermath of the 1989 events, despite the fact that the Chinese economy, and thus the Communist Party, benefited hugely from the stamina and economic prowess of the country’s private entrepreneurs, who were critical for driving forward market reforms in what had become a ‘dual-track’ economy¹³ since the early 1980s.¹⁴

The number of private companies dropped significantly in the aftermath of the 1989 crackdown of the protest movement. Only after Deng Xiaoping had embarked on his famous ‘Southern Tour’ (nanxun) in early 1992 (Baum, 1994) and pushed back the opponents of market reform in the party was China’s private sector politically rehabilitated and could dynamically expand.¹⁵ The CCP’s 14th Congress in 1992 introduced the concept of a ‘socialist market economy’, implicitly making the private sector an integral component of the national economy. A year later, the 3rd Plenum of the 14th Central Committee of the CCP replaced the term ‘commodity economy’ with ‘market economy’ in the official ideological speak, underlining that, henceforth, enterprises with different ownerships would compete on equal terms in the Chinese market (Gold, 2017: 468). From here, the private sector developed dynamically. As a result, in 1995, the Party leadership released a statement explaining that all forms of ownership should develop in parallel and with equal rights. The prospering provinces in the eastern part of the country termed the private sector the ‘motor’ of the ‘socialist market economy’ (Jiang Zemin, 1995).

In 1997, the 15th Party Congress declared that although the public sector was to remain the backbone of the national economy, non-public sectors were ‘important constituents of the socialist market economy’ (Heberer, 2003b: 19). This formula was constitutionally codified in 1999 in Article 16 (Liang Chuanyun, 1990; Qin and Jia, 1993).¹⁶ In his speech at the founding date of the CCP on 1 July 2000, the then CCP general secretary Jiang Zemin stated that, like workers, peasants, intellectuals, cadres, and soldiers, private entrepreneurs were also ‘builders of socialism with Chinese characteristics’.¹⁷ The 5th Plenum of the 15th Central Committee then announced in October 2000 that self-employed and privately owned businesses would be further strengthened. Finally, by including the ‘Three Represents’ (sange daibiao)¹⁸ into the party Charter at the 16th National Congress in 2002, private entrepreneurs were officially allowed to join the Communist Party as members of the ‘advanced productive forces’ (He Yiting, 2001; Dickson, 2007: 833).¹⁹ These ideological adjustments captured what had been happening on the ground over the years. As Dickson (2007: 832) noted, after 1992, the number of private enterprises grew by 35 percent every year and the number of employees rose to almost 17 million by 1999 (see Table 1).

Table 1: The Development of China’s Private Sector (1989–2004)

Note: The ‘individual sector’ (geti jingji) with less than eight workers and staff is not included in these figures.

Source: Dickson (2007: 833).

It needs to be noted that in the early 1990s, more than two-thirds of China’s registered private companies (but also more than a third of registered individual firms) were still located in rural areas. However, by 1997, the urban percentage of all private companies exceeded 60 percent (62.1 percent) for the first time, while the rural percentage dropped under 40 percent (37.9 percent).²⁰ The increase of private economic activity in the urban areas was the result of a process by which an increasing number of rural entrepreneurs moved to urban areas expecting to expand their entrepreneurial activities more smoothly with closer proximity of markets, easier access to raw materials, and less bureaucratic control.²¹ In the 1990s, many collectively and state-owned firms were transformed into shareholding companies or companies with limited liability, or they were sold to private entrepreneurs, many of them former managers of collectively owned enterprises who ‘jumped into the sea’ (xiahai) to survive and prosper during China’s capitalist transformation. This gave a strong push to private sector development, as did China’s WTO entry in December 2001 which provided private entrepreneurs with access to world markets, a legally more advantageous framework and, overall, new opportunities for growth and development.²²

Two years into the new government of Hu Jintao and Wen Jiabao in 2004, Article 11 of the Chinese constitution was revised again, now explicitly stipulating that ‘the state encourages, supports and guides the development of the private sector, and exercises supervision and administration over the sector according to law’. Article 13 explicitly protects the legal rights of private enterprises by the stipulation that ‘the lawful private property of citizens shall not be encroached upon’. In February 2005, the State Council issued ‘Guidelines on Encouraging, Supporting, and Guiding the Development of Self-employed, Private, and Other Non-Public Entities’ in order to facilitate access for private capital — both domestic and foreign — to sectors so far monopolized by state-owned enterprises (SOEs), like power, telecommunications, railway, air transport, oil, public utilities, etc. (Lin, 2017: 35). After another 3 years, a Property Rights Law was finally promulgated in 2007 by the National People’s Congress. By now, the party state had fully embraced private entrepreneurship, recognizing its contribution to ‘Socialism with Chinese Characteristics’ and its future significance for the country’s economic well-being.²³

The rise of the private sector was closely connected to the privatization of China’s rural township-and-village enterprises (TVEs)²⁴ and the vast majority of medium- and small-sized SOEs between the mid-1990s and early 2000s. Many TVEs were private undertakings anyway, as entrepreneurs colluded with local governments for mutual benefit by giving TVEs a ‘red hat’, i.e. registering them as collective enterprises to ensure ideological acceptability (Wang, 2016).²⁵ In the late 1990s, when the TVEs, most of which were producing labor-intensive goods like textiles, machinery parts, tools, or fertilizer, faced increasing market competition because of low entry barriers and, subsequently, falling product prices, large-scale privatization set in. In just a few years, over 90 percent of TVEs became officially registered private enterprises (Oi, 2001; Li and Rozelle, 2003). The privatization of SOEs, which commenced in the mid- 1990s, was a more protracted process as a vast majority were located in urban areas and responsible for the social well-being of millions of workers on the state’s payroll. Politically hedged by a decision adopted by the 15th Party Congress in 1997 to ‘hold on to the large and let go off the small’ (zhuada fangxiao), some 50,000 small- and medium-sized SOEs were privatized between 2001 and 2006 (Dickson, 2007: 836–837).²⁶

Since then, the number of officially registered private enterprises has continuously risen. At the end of 2017, there were up to 65,794 million individual enterprises and 27,263 million private enterprises with a combined labor force of 341 million (see also Table 2).²⁷ Though no detailed data are available, according to official and academic sources, private enterprises today contribute more than 50 percent of China’s tax income, more than 60 percent of its GDP, more than 70 percent to innovation, and more than 80 percent to urban and 90 percent to rural employment. More than 90 percent of all enterprises in contemporary China are private (Wang and Yang, 2018).²⁸ A fair number of them have become huge conglomerates and global players, with top positions in the Forbes Global 2000 and 500 lists.²⁹ Over the years, party leaders have consistently argued for a strengthening of both the private and public sector economy in order to underline the importance of a balanced relationship between the two as the foundation of ‘Chinese socialism’. However, the future of the Chinese economy relies on the healthy development of the country’s private entrepreneurship, no matter how much the party state protects and nurtures the public sector and its most important SOEs, which are now labeled ‘national champions’.³⁰

Table 2: The Development of China’s Private Sector (2005–2017)

Note: *Excluding individual companies (getihu).

Source: National Bureau of Statistics, http://data.stats.gov.cn.

Stages and Models of Private Sector Development

China’s ‘capitalist transformation’ and private sector development have been through several distinct stages since the start of ‘reform and opening up’ (gaige kaifang) in 1978. Wang and Yang describe these stages as follows: (1) the initial stage stretching from 1978 to 1988; (2) a period of decline from 1989 to 1991 following the suppression of the urban protest movement in June 1989; (3) a period of recovery and adjustment between 1992 and 2001; (4) rapid economic development from 2002 to 2012; (5) a period of sectoral differentiation between 2008 and 2012; and finally (6) a turn to upgrading and innovation since 2013. However, this categorization is rather heuristic. From a regional and local perspective, the time sequence of private sector development differed considerably across the country and is perhaps better defined by distinguishing between different trajectories or models of economic transformation in the reform era (see also Schubert and Heberer, 2015; Shen and Tsai, 2016):

(1)The Pearl River Delta model (Zhusanjiao moshi) of Guangdong province is characterized by economic growth based on foreign investment. This model stood closest to what Deng Xiaoping had in mind when he ordered the establishment of the first Special Economic Zones in Guangdong and Fujian in the early 1980s. Local governments cooperated closely with foreign (including Hong Kong and Taiwanese) enterprises by providing a sound business infrastructure with cheap land and labor and efficient transportation, while foreign investors retained full control of their companies. This model has often been identified with local state entrepreneurialism, which of course also materialized in other parts of China and was not related only to foreign investment.

(2)The Southern Jiangsu model (Sunan moshi) saw early private sector development based on the privatization of former collectively owned TVEs during the 1990s and early 2000s, and tight connections between local enterprises and governments. Many private entrepreneurs had previously been managers of TVEs and were hence party members in a position to ‘jump into the sea’ (xiahai) by taking over TVE assets and commercializing their operations. Local governments, for their part, delivered policies most favorable for private sector development and protected native enterprises from external competition, leading to what has been called local state developmentalism or even corporatism (Shen and Tsai, 2016; Oi, 1999).

(3)The Wenzhou model (Wenzhou moshi) refers to Wenzhou municipality, a prefectural-level city in Zhejiang province, where private sector development was originally based on low-tech and labor-intensive export production by native entrepreneurs, informal finance, and tight marketing networks throughout China. In the early years, the Wenzhou government took a laissez-faire approach toward the private sector and did not intervene much in the local economy, other than providing basic public goods financed by a rising tax income. Wenzhou became a model for national emulation in the 1990s, but its private sector ran into serious problems even before 2008/2009, when the global financial crisis set in and Wenzhou’s export economy collapsed. The low quality of many of its products in conjunction with the family-based structure of many of its companies induced the local government to push for industrial restructuring and upgrading — with moderate success thus far.³¹

(4)The Jinjiang model (Jinjiang moshi) in Fujian province stands for the rise of native entrepreneurship without the opportunities stemming from the decline and transformation of TVEs like in Southern Jiangsu. Jinjiang’s early generations of private entrepreneurs were not party members but nevertheless worked closely with local governments, relying on kinship ties and ‘localism’, i.e. the invocation of a joint mission to develop the local economy. The local government of this county-level city took responsibility for fostering private sector responsibility early on, making use of Jinjiang’s close proximity to the coast which helped to build up regional trade networks. In that sense, Jinjiang followed the logic of local state entrepreneurialism and corporatism, and many of its enterprises were small and medium sized. However, their economic outreach did not go far beyond the immediate environment in Fujian and hence differed substantially from its Wenzhou counterpart.

(5)In addition to the four models mentioned thus far, we would also add rural private sector development as a special variant and call it the Enshi model (Enshi moshi), after a county-level city within Enshi Tujia and Miao Autonomous Prefecture in Western Hubei Province where we conducted fieldwork in 2013. In places like Enshi, very few industrial enterprises exist and most of them operate in the processing of agricultural products. Tourism is also an important economic sector. Private entrepreneurs have little capital and depend strongly on the support and guidance of the local government for identifying and accessing markets or building a sound management structure within their companies. The local government tries hard to stimulate internal and external investment and clearly steers the building up of a private sector economy. It offers numerous subsidy schemes for that purpose, though its fiscal maneuvering space is limited. Enshi’s lack of qualified cadres who know how to drive forward economic modernization and its isolated geographic location with difficult transport conditions make it an inevitable latecomer in terms of private sector development in China.

No matter which model best summarizes the specific trajectory of private sector development across China, in most places, local governments have played multiple, critical roles as gatekeepers, enablers, and steering subjects. They have done so by improving the local infrastructure, ensuring access to land, labor, and credit, granting tax rebates and subsidies for product innovation and branding, providing for vocational education and market information, enforcing industrial upgrading and environmental compliance, and empowering business associations to serve as transmission belts for entrepreneurial concerns and demands. It is the objective and obligation of local governments everywhere in China to improve the competitive capacity of private enterprises in their respective jurisdictions in domestic and international markets around the world and to establish a more effective administration system. Private entrepreneurs, for their part, strive to closely cooperate with local governments because of their control of critical resources and information badly needed for market success, and the power of local bureaucracies to protect ‘their’ enterprises from external competition. At the same time, the private sector has become increasingly significant for local development and positive cadre evaluation over the years, entailing a relationship of mutual dependence between local governments and private entrepreneurs that has shaped state–business relations since the beginning of private sector development in the 1980s. As we have argued elsewhere (Schubert and Heberer, 2015), this relationship gradually changed throughout the Hu–Wen era and the early years of the Xi Jinping administration, when the local state was ordered to scale back its developmentalist and entrepreneurialist activities and become more of a regulator — a shift of function from immediate ‘leadership’ (lingdao) to ‘guidance’ (yindao) and mere service provision (fuwu).³²

The Private Sector in the Xi Jinping Era

In his report to the 18th Party Congress in 2012, the outgoing CCP general secretary Hu Jintao explicitly mentioned the private sector only twice by postulating that private financial institutions and private hospitals should be rapidly developed (Hu Jintao, 2012). Also, in 2013, the CCP’s Central Committee decision on further deepening reforms, thus setting out Xi Jinping’s comprehensive policy agenda for China’s future, addressed the private sector only marginally.³³ Rather, it emphasized the party state’s intention to facilitate private investment in SOEs and better access for private entrepreneurs to markets so far controlled by SOEs, but the overall impression from the document text was that the party leaders, most importantly Xi himself, had second thoughts about the government’s former commitment to more leeway for the private sector. Many private entrepreneurs were alarmed. This compelled party leaders, most notably Xi Jinping himself, to reassure private entrepreneurs that their worries were groundless and the regime ready to further support and develop the private sector.³⁴

In fact, between 2012 and 2018, no important policies targeting the private sector were launched, though the Chinese leadership concerned themselves with reassuring private entrepreneurs that this sector would still be supported politically and that it was crucial for China’s further development and innovation drive.³⁵ Hence, private sector policies were addressed in very general terms concerning content. It seems as though, during this period, the party leadership foremost intended to clarify the future role of the private sector for China’s further economic transformation and its relationship with the state-owned sector before any new policies were defined. As such, in the following paragraphs, we focus on a discursive level to pinpoint the party state’s stance on private sector development.

When Xi Jinping came to power in 2012, he called for greater efforts to incorporate private entrepreneurs into the political system. In May 2016, he sought to strengthen party work within the ‘new social classes’ (xin shehui jieceng),³⁶ particularly among young entrepreneurs in the private sector, people returning to China after studying abroad, and professionals working in the new media. He demanded that these new classes should be represented in organizations such as the CCP and other political parties, in People’s Congresses (PCs), People’s Political Consultative Conferences (PPCCs), etc.³⁷ In September 2016, Yu Zhengsheng, while on an inspection tour in Tianjin as a member of the CCP’s Politburo Standing Committee and Chairman of the National PPCC, declared that people of the ‘new social strata’, particularly entrepreneurs in the nonpublic economic sectors, should be fully respected, and party state authorities should help them to ‘unite around the CCP and the government’ (Yu Zhengsheng, 2016). The United Front Departments (tongzhanbu) of the CCP were called upon to take care of this new social segment and offer training courses to bring private entrepreneurs closer to the party and strengthen their entrepreneurial and ‘patriotic’ spirit,³⁸ a task which had already been written into the Charter of the CCP United Front Department in 2015.³⁹ A national conference of leading ‘United Front’ cadres held in early 2018 again supported the decision to reinforce party work within these ‘new social classes’.⁴⁰

In the context of the anti-corruption campaign initiated in 2014 China’s political leadership also targeted private entrepreneurs. Many of them were involved in major corruption cases. Interestingly, in autumn 2016 Renmin Ribao published an article on the private sector calling for a ‘new relationship’ between private entrepreneurs and leading cadres in order to combat corruption. Such a statement had originally been made by Xi Jinping during a meeting of entrepreneurial delegates to the National PPCC in March of that year. Xi emphasized that the government–business relations (zhengshang guanxi) should be ‘intimate’ (qin) and ‘clean’ (qing), meaning just and honest. He called on both government officials and entrepreneurs to create a new atmosphere of cooperative relations in which corrupt practices, exchange of power and money, as well as predatory behavior on the part of cadres and entrepreneurs had no place. Although governments at all levels and entrepreneurs should keep a distance from each other, the former should treat private enterprises like relatives, frequently communicate with them, take care of them, and support them in solving problems. Entrepreneurs in turn should contribute to local development and refrain from corrupt and illegitimate practices (Zou, 2016). In his report to the 19th National Congress of the CCP, Xi Jinping reiterated that constructing new qin and qing relations between politics and business would be the right way to create a ‘healthy’ private economy and sound entrepreneurship (Xi Jinping, 2017). Interestingly, a provincial party publication emphasized that the core responsibility to accomplish this objective was on the side of the government, not on the side of private entrepreneurs (Xia, 2018).

For his part, Premier Li Keqiang underscored in his work report presented at the annual session of the National PC in 2016 the Chinese government’s intention to resolutely promote private sector development.⁴¹ Li had emphasized several times before that ‘mass entrepreneurship’ and ‘entrepreneurial innovation’ (dazhong chuangye, wanzhong chuangxin) would be fostered in order to achieve China’s ambitious development goals.⁴² In fact, judging by numerous official statements made by the Premier in recent years, China’s private entrepreneurs are conceived of as a crucial force for initiating and maintaining a process of continuous technological innovation, an important precondition of China becoming a globally competitive economy (Li Keqiang, 2017).⁴³

In September 2017, shortly before the 19th Party Congress of the CCP, a joint statement issued by the CCP’s Central Committee and the State Council reemphasized the state’s willingness to put new policies on track to assist private entrepreneurs and protect their legal rights. The new policies sought to ensure that their innovative capacity, patriotism, and ‘entrepreneurial spirit’ (qiyejia jingshen)⁴⁴ be further developed, and that they consistently act in the interest of the nation, their businesses, and their employees.⁴⁵ Private entrepreneurs were expected to advance patriotism and professionalism, as well as innovation and social responsibility (Zhonggong Zhongyang Guowuyuan, 2017). Official documents like this one have repeatedly reiterated the party state’s invocation of private entrepreneurs as both loyal regime supporters and an innovating force bearing a major responsibility for China’s modernizing program until 2050.

Interestingly, Xi Jinping’s report to the 19th National Party Congress of the CCP in October 2017, however, addressed the private sector only marginally. He emphasized that its development should be supported (zhichi fazhan) and guided (yindao) and that the ‘entrepreneurial spirit’ should be further promoted and protected (Xi, 2017). The same holds true for the Working Report of the Government at the 2018 session of the National People’s Congress, delivered by Prime Minister Li Keqiang, which only mentioned the government’s intention to ‘solve the crucial problems of private enterprises’ (Li Keqiang, 2018). Nevertheless, even these limited references to the private sector induced the All-China Federation of Industry and Commerce (ACFIC/Gongshanglian) and its local branches to proclaim the implementation of new private sector policies.⁴⁶ To what extent these initiatives will translate into the implementation of concrete policies over the coming years remains to be seen, but party and government leaders have made it very clear that China’s future depends on the success of its private entrepreneurs in an increasingly competitive global economy.

For instance, the vice-president of the Federation of Industry and Commerce of Anhui Province and a member of the People’s Political Consultative Conference called for assisting the private sector to overcome the ‘three difficulties’ facing this sector: lack of capital, shortage of manpower, and insufficient support of local governments to initiate and finance innovations.⁴⁷ In his speech at the World Economic Forum in Davos in 2014, Prime Minister Li Keqiang announced the above-mentioned promotion of ‘mass entrepreneurship and mass innovation’ to boost the Chinese economy and entrepreneurial innovation,⁴⁸ which was followed in 2015 by the promulgation of the ‘Opinion of the State Council on Some Issues and Measures for Boosting Mass Entrepreneurship’ (Guowuyuan, 2015). In mid-2017, the Chinese State Council adopted detailed guidelines for promoting ‘mass entrepreneurship’ in order to open up new avenues of employment, optimize China’s economic structure, and foster sustained growth. According to these guidelines the state shall facilitate business registration procedures, set up new credit channels and financial services for start-ups and promising enterprises, nurture collaboration between enterprises and research institutes in order to assist private enterprises in identifying and employing skilled workers and professionals, open new industries for private investment, and enact measures to strengthen the protection of property rights, intellectual property, and the legal status of private businesses (Guowuyuan, 2017). Prime Minister Li Keqiang reiterated the same points in September 2018, emphasizing the need to ‘intensify mass entrepreneurship’ and further facilitate businesses start-ups.⁴⁹ This would suggest that private investment and the role of private enterprises in generating economic growth and new job opportunities had become increasingly urgent. The fact that Li had to repeat the official line announced in 2017 revealed how difficult it was to implement new private sector policies.

To support private enterprise development, in early 2018, the ‘Central Political and Legal Work Conference’, organized by the powerful ‘Central Political and Legal Work Commission’ (Zhongyang zhengfawei) under the Central Committee of the CCP, called for taking further measures to protect individual property rights to make private entrepreneurs feel safer in their business operations and to trigger entrepreneurial innovation. Concurrently, Guo Shengkun, head of the commission and member of the Political Bureau of the CCP, emphasized the need to handle the legal cases of entrepreneurs properly in accordance with the law. In fact, several court verdicts based on false accusations and flawed trials in recent years had been abrogated and the respective victims rehabilitated.⁵⁰ This has made observers speculate on the beginning of a new era in state–business relations.⁵¹

Indeed, there is evidence that the Chinese leadership is facilitating private sector investment and development, for instance, in the defense industry, which is so far closely monopolized by public sector investment. This should foster more competition, trigger innovation, and reduce costs since the private sector may offer lower prices for defense and more dual-use products than SOEs are usually able to provide (Nouwens and Béraud-Sudreau, 2018). In fact, the Chinese leadership has shown a lot of trust in the private sector’s ability to spur innovation, which is badly needed in order to accomplish the party state’s modernization objectives.

Arguably, the party state believes that the high-tech sector is paramount to materializing China’s ‘China 2025’ development blueprint, according to which China intends to become the world’s leading nation in ten high-tech industries by the year 2025. A study at the MERICS Institute in Berlin has highlighted that without the private sector, particularly small and medium high-tech enterprises, it will be hard to achieve this goal. Likewise, the Chinese leadership has identified SMEs as critical for its 2025 objectives. Generally, private enterprises should help to improve the performance of state-owned firms, if necessary by ‘mega-mergers’ between them. In addition, party organizations in private enterprises shall assist entrepreneurs to pursue technological upgrading and innovation (Zenglein and Holzmann, 2019).

Challenges of Private Sector Development

Despite all assurances by the central leadership, the private sector is still not treated on an equal footing with the public sector. For instance, as was reported in 2018 in the context of China’s debt-cutting efforts, private companies are perishing due to bond defaults, whereas state-owned firms, in spite of heavy debts amounting to more than 70 percent of China’s total corporate debt, are surviving due to massive state subsidies. This shows that, even now, the party state has not yet come to a conclusion on what kind of mechanisms must be implemented to solve the tremendous cash flow problems of Chinese enterprises. The recent crackdown on shadow banking and ‘illegal borrowing’ has only aggravated this problem (Tang, 2018).

In June 2018, the Central Committee of the CCP and the State Council ordered that polluting enterprises should be technically upgraded, transferred to other areas in interior China, or simply be closed (Zhonggong Zhongyang Guowuyuan, 2018). All administrative levels were ordered to take immediate steps to implement this directive, and implementation would become an indicator of cadre performance evaluation. In August 2018, entrepreneurs and business associations complained that a large number of small and medium enterprises (the overwhelming majority of them private) were ordered to stop production or had even been closed. They pointed to the economic importance of the private sector and argued that they were interested in solving the environmental problems of their enterprises themselves. However, nobody would give technical advice or come up with transparent criteria or standards for those technologies considered environmentally friendly or not. The out-come of this would be that local authorities arbitrarily closed down companies, a large number of workers became unemployed, and social stability was negatively impacted.⁵²

The rigid implementation of environmental policies restricts the private sector significantly. Obviously, the party state targets polluting industries, i.e. the more traditional sectors of the Chinese economy, to cease production. At the same time, it fosters high-tech enterprises to push for a modern, innovation-oriented private sector. The discussion on the future development of the private sector was also fueled by an investigative report published in 2016 which predicted that more than 95 percent of China’s private enterprises were going to vanish within the next 5 years, particularly those founded during the 1970s and 1980s. These entrepreneurs, it was argued, wanted to make money but were unwilling to learn how to be innovative. According to the report, the number of private enterprises running losses had increased tremendously, from 41,000 in 2011 to 59,000 in 2015 alone (Shui, 2016).⁵³

In fact, the slowdown of China’s economic growth hit the private sector particularly hard, primarily small- and medium-sized enterprises. In order to support this important pillar of the Chinese economy, which also suffered due to a systemic credit crunch and high tax rates, a State Council executive meeting in August 2018 chaired by Premier Li Keqiang decided that smaller enterprises should enjoy better access to affordable loans. It was argued that financial institutions should be incentivized to be more supportive of smaller businesses, and regulatory oversight should be improved to ensure that credit services are made available for small- and medium-sized private companies. At the same time, it was suggested that taxes for these enterprises should be reduced. Li explained that small businesses play a critical role in creating jobs and that the well-known problems of credit access have to be solved as soon as possible (Guowuyuan, 2018). A few days later the ‘State Leading Group for Promoting the Development of Small and Medium Enterprises’ (Guowuyuan cujin zhong xiao qiye fazhan gongzuo lingdao xiaozu) admitted that small- and medium-sized enterprises in particular are still discriminated against in favor of SOEs and that the ‘Law on Promoting Medium and Small-sized Enterprises’ (Zhong xiao qiye cujin fa) promulgated in 2017 had so far not been properly implemented. A package of measures to solve the most urgent problems of private companies concerning access to bank loans and excessive taxes was then brought on track (Caxin Zhoukan, 2018).⁵⁴ To underscore the government’s determination to improve the credit situation for small and medium enterprises Li Keqiang visited the Nantong branch of the Bank of Jiangsu in November 2018, praising it as a model for providing such enterprises with low-interest loans.⁵⁵ A meeting of the Standing Committee of the State Council in December 2018 reiterated this determination.⁵⁶

In his report on the work of the government during the second session of the 13th National People’s Congress in March 2019, Prime Minister Li Keqiang emphasized that improvement of the business environment of small and medium enterprises is a must, that the bank loan problem must be solved under any conditions, and that private banks should be permitted and fostered.⁵⁷ Shortly thereafter, the political leadership reiterated measures to be taken in order to raise the confidence of private entrepreneurs, most notably an improvement of market access for private enterprises, facilitation of access to bank loans, simplification of administrative procedures, and the strengthening of market supervision and regulation. The prime minister also emphasized the significance of competition and of equal treatment of private and SOEs which must be guaranteed by the state.⁵⁸ China’s supreme judge Zhou Qiang promised that the rights of private entrepreneurs would be better protected,⁵⁹ the first time the private sector was ever mentioned in a work report of the Supreme Court. In mid- July 2019, the National Development and Reform Commission decided upon measures to better protect private enterprises’ intellectual property rights, to guarantee their equal market access and fair treatment regarding public bids and government procurement, and to punish infringements upon private enterprises.⁶⁰

As a matter of fact, the Chinese government has for years tried to solve these issues, but with limited success. Against the backdrop of the recent economic slowdown and the US–China trade war, small and medium enterprises are facing increasing risks, all the more since private enterprises in 2017 accounted for more than 90 percent of Chinese exports. The number of Chinese entrepreneurs on the Hurun lists’s 2 billion RMB threshold fell by 237 in 2018 from 1,893 in 2017 (Hancock, 2019).

With regard to taxation by private entrepreneurs, Changdong Zhang (2017) argues that due to high tax rates (value added tax 17 percent, corporate tax 33 percent) almost all private entrepreneurs try to avoid or evade taxes by looking for patrons within the party state to protect them, which leads to hiding business income from the tax authorities and outright bribery of officials. The party state, according to Zhang, is not interested in remedying these practices since it allows maintenance of effective political control over private entrepreneurship: In the case of (political) ‘misbehavior’, entrepreneurs could at any time be arrested by being accused of ‘tax evasion’. At the same time, as Zhang further argues, the party state has a ‘strong incentive to keep a large SOE sector for both ideological and instrumental reasons’ (Zhang, 2017: 49). In fact, there is some evidence on this. In September 2018, Li Yang, Chairman of the National Institute for Finance & Development, a think tank of the Chinese government, argued that investment in and the takeover of private enterprises by SOEs had increased substantially. This observation, which has been shared by a number of our respondents in the later stages of our fieldwork, points to a more recent trend in China’s ongoing economic transformation formula which may be called ‘oligopolization under SOE leadership’. State-owned companies at all administrative levels are ‘encouraged’ by local governments to invest in private enterprises to control a majority of shares or buy them out, if possible. From their perspective, this makes sense: SOEs become, arguably, more modern and competitive, which facilitates access to bank loans and helps local economic development. Li warned that this might discourage and negatively impact private sector development (Han, 2018). However, the current ‘oligopolization trend’ is hard to stop given the vulnerability of China’s small- and medium-sized private enterprises, the powerful resources most SOEs have at their disposal, and the cadre evaluation system which still regards economic development as the major indicator of performance and, thus, personal promotion.

A Core Problem: Getting Access to Capital

A major obstacle to private sector development is a severe shortage of investment capital. Particularly in times of economic crisis, banks are rather reluctant to lend credits to enterprises; and if they do, they would rather serve state-owned companies which can rely on official collateral or big private conglomerates who usually meet their loan performance targets more quickly than small- and medium-scale enterprises. Even if the government demands that banks lower their lending standards to support private enterprises, change is unlikely as long as the state does not back up credits for the private sector in some way — for instance, by loosening capital requirements for banks or providing guarantees on private sector loans to reduce the lending risk (Orange Wang, 2018). Moreover, the granting of loans is selective. As Quan and Leng (2018) have shown, in many places local governments decide which company is qualified to receive a loan and which is not, giving priority to high-tech businesses and obstructing loans to small- and medium-sized firms of the manufacturing sector which have been the principle driving force of economic development in recent decades (Chan and He, 2019). On top of this, if an enterprise is unable to win contracts from public offers it might be unable to get any credit at all.

A large number of private enterprises, acting as guarantors for other firms, are also facing insolvency. Since private entrepreneurs as a rule need proper collateral or guarantors in order to acquire a bank loan, private enterprises frequently act as mutual guarantors for other businesses. This ‘cross-guaranteeing of debt’ is dangerous for financial systems and new lending (Shu, 2019). In addition, delayed payments of government authorities and SOEs to private enterprises (for completed tasks) are a further issue which negatively impacts cash flow of enterprises (Hu, 2019).

Due to the above-mentioned significance of small- and medium-sized firms, the central government seems determined to undertake efforts to find a solution for all these problems. Accordingly, in February 2019, the CCP’s Central Committee and the State Council ordered that all Chinese banks increase lending to private enterprises in order to support the private sector and to avoid a further slowdown of the economy. Also in 2019, large commercial banks are expected to increase the number of loans offered to small- and medium-sized enterprises by more than 30 percent (Jinrong fuwu 18tiao, 2019). Since banks have still been reluctant to provide loans to small- and medium-private enterprises due to higher credit risks, China’s Banking and Insurance Regulatory Commission (CBIRC) in February 2019 again urged state-owned commercial banks to facilitate and increase lending to these enterprises and reduce lending rates in order to avert an economic slowdown.⁶¹

Although the central government repeatedly promised to provide more loans to private enterprises, in reality no major change was observed until the end of 2018 (Yao, 2018). However, due to the importance of the private sector, the central government has, historically, at least endeavored to find further solutions for these recurring problems. For example, in 2008, soon after the central government had launched the ‘4 trillion economic package’ in response to the outbreak of the world financial crisis, the People’s Bank of China (PBOC) released credits through China’s banking system. It also encouraged the sub-branches of commercial banks to increase their lending by administrative incentives such as promotions or demotions. This induced the banks to draw up so-called ‘implicit contracts’ with local enterprises, i.e. establishing a system of mutual guarantees between local enterprises to extend their ability to apply for loans and then force the banks into lending, so that official targets for overall credit expansion could be met. However, when inflation and unsustainable investments reached unbearable levels, the government soon turned to fiscal contraction, leading to a severe credit crunch in the private sector beginning in the late 2000s without an end in sight so far (Chen Ye and Guan, 2018; see also Wang and Tong, 2018). To this day, a relaxation of lending policies on the part of China’s banks is hampered by high levels of public and private debt, making it politically risky for the People’s Bank of China — or the central government, for that matter — to force the banking system to expand its credit lines for private enterprises.⁶²

In reality, there is contradictory information on solving the credit issue. In April 2019, it was reported that state-owned commercial banks such as the Bank of Communication had increased the credit volume for private enterprises and concurrently reduced interest rates.⁶³ Moreover, in June 2019, China’s State Council decided to further reduce real interest rates on loans for small and medium enterprises, cap lending surcharges, support corporate finance, facilitate intellectual property pledge financing, and improve financial services in general for the private sector.⁶⁴ A report of the Standing Committee of the National People’s Congress, however, revealed that the effects of these policies have been far from being satisfactory. Banks are still risk-averse, set high thresholds for loans, are hesitant to grant them to small and medium enterprises, and demand high interests.⁶⁵ Obviously, it is difficult for the central government to implement private sector policies on a national scale since local banks are reluctant to support them. One major reason is related to conflicting bank policies. On the one hand, the central bank has several times cut banks’ reserve requirement ratios in order to facilitate liquidity and loan provision for private enterprises. On the other hand, the central government has requested that banks reduce lending risks, thus strengthening the banks’ perception of small private firms as the riskiest group of borrowers.

In order to counterbalance this dilemma, Chinese banks introduced a worldwide accepted measure of lending: discounting of bankers’ acceptances. When a company buys something from a supplier, it can pay using a so-called bankers’ acceptance, which is issued by a bank on behalf of the buyer. When the acceptance matures, the supplier exchanges it for cash from the bank for the amount of the sale. The bank then seeks payment from the company on whose behalf it issued the acceptance. If the company needs money before the acceptance is due, it can go to any bank and exchange the acceptance for cash, albeit at a discount to the value of the acceptance which is cashed in by the bank. That’s the reason why many private businessmen are reluctant to turn to this method as it reduces further the already small profit margins of private businesses.⁶⁶

Discourses on Private Entrepreneurship

As mentioned earlier, self-employed individuals reemerged with the onset of economic reforms at the end of the 1970s, which were followed by the gradual legalization of private entrepreneurship in the 1980s. Since then, the term ‘entrepreneur’, which has always been ideologically problematic in a socialist system, has been hotly debated in China. Figure 2 summarizes the change in the official assessment and terminology of entrepreneurship until its reinterpretation as ‘traditional Chinese’ or ‘socialist’ in the 1990s. In the early 1990s, the term ‘peasant entrepreneurs’ (nongmin qiyejia) was employed to describe successful managers of rural enterprises who were seen as ‘representatives of the advanced productive forces in the countryside’ (e.g. Wang and Chen, 1985). Since the mid-1990s, Chinese academics have discussed the Schumpeterian idea of the entrepreneur. Not only them, even Chinese officials later admitted that an entrepreneurial stratum had once again come to the fore in China (Xu, 1997; Zhang and Li, 1998).

Figure 2 illustrates the change in the assessment and official conceptualization of ‘entrepreneurs’ up until the 1990s. In the 1950s, the characterization as ‘capitalists’ or ‘bourgeois’ attributed an anti-socialist character to entrepreneurship and thus placed them outside society. As of the mid-1950s, entrepreneurs effectively ceased to exist. The leading personnel of (state-owned) enterprises were officially nominated SOE directors, often acting as party secretaries at the same time. With the beginning of the reform policies in the late 1970s ‘individual businesses’ and, eventually, ‘private entrepreneurs’ (in rural areas initially called ‘peasant entrepreneurs’) finally came into existence once more. Only in the 1990s was the term ‘entrepreneur’ in its ‘correct’ usage discussed among both scholars and policy advisors, but with different attributes such as ‘socialist’, ‘Chinese’, or simply speaking of ‘entrepreneurs’.

Figure 2: The Chinese Entrepreneur as a Discursive Category

Source: The authors.

Throughout the 1990s, the entrepreneurial stratum was labeled the ‘most valuable’ resource of the economy, which thus had to be supported and further developed by granting private entrepreneurs equal economic, political, and legal status within Chinese society. It was argued that intellectuals should be encouraged to become entrepreneurs, and the state sector should no longer be favored one-sidedly (Wei and Sun, 1994). It also became apparent that innovative or ‘scientific entrepreneurs’ would be needed (Zhao, 1998). Being an entrepreneur was qualified as an ‘honor’ (rongyaode), and operating a company was portrayed as a kind of ‘heroism’ (yingxiong zhuyi) (Yu Shaowen, 1994). As the ‘most valuable’ resource (Zhao, 1998), entrepreneurs were created in the course of China’s social transformation as a product of the market economy, which they then subsequently nurtured (Mi and Gao, 1997: 42–44). By the end of the 1990s, entrepreneurship was finally classified as a ‘profession’ and no longer had political overtones (Zhang and Liu, 1996; Li, 1999).

At the same time, the Chinese entrepreneur was treated as a culturally specific type. It was argued that this type was different from its Western counterpart through its ‘distinct Chinese qualities’ (Zhongguo tese) as a ‘reformer’ (gaigejia) and a ‘hero’ (yingxiong), working in the interests of society and for the benefit of its overall prosperity (Liu, 1997). This discussion was continued in the more recent discourse on the ‘Confucian entrepreneur’ (rushang, see Chapter 3). Other authors have declared, in an apologetic fashion, Chinese entrepreneurs to be ‘socialist’ as they contribute to the building up of a ‘material’ and ‘intellectual culture of Socialism’. In contrast to their Western counterparts, ‘socialist entrepreneurs’ fulfilled two central requirements: they were innovators (chuangxinzhe) and at the same time possessed ‘political qualities’, i.e. they supported the CCP and the socialist system (Yuan, 1997). They belonged after all to the ‘avantgarde of the economic revolution’ (Zhang and Liu, 1996) and were called to be patriots, to behave in a ‘morally superior’ way, display a ‘good ideology’ and a good working style, and to constantly improve themselves (Zhongguo qiyejia diaocha xitong, 1998).

Overall, the role and function of private entrepreneurs in China’s economic transformation had been seen as widely positive within domestic discourse, and at the end of the Hu–Wen era, their ‘profession’ was socially and politically accepted. Under Xi Jinping, the private sector was called important for further economic reform at various occasions, and domestic discourse focused on their potential as ‘innovators’ and drivers of high-tech development (see, e.g. Liu, 2017). Particularly larger private enterprises were praised as a ‘leading force’ in promoting corporate social responsibility and public charity (see, e.g. Cao, 2018). Nevertheless, in recent years, private entrepreneurs have had to face much criticism, too. The 2018 vaccine scandal which exposed the criminal behavior of a large private drug producer, Changchun Changsheng Biological Technology Co Ltd,⁶⁷ various incidents on construction sites for which private firms were held responsible, and numerous corruption cases involving private entrepreneurs have together triggered a discussion on the future of the private sector in China.⁶⁸ Being aware of the political danger caused by such negative reporting for the private sector, Pan Shiyi, a celebrity blogger and chairman of SOHO China company, one of the most prominent real estate developers in China, wrote on his Weibo blog that private entrepreneurs should not only strive for profit but must also be role models in Chinese society and be committed to the social well-being of their employees (Pan, 2018). In September 2018, Wu Xiaoping, a veteran financial entrepreneur, published a short essay on social media in which he made the following surprising claim:

in the progress of China’s great history of reform and opening up, the private economy has tentatively completed its important historical task to assist the public economy in making a developmental leap forward. In the next step, the private economy should not be expanded blindly, but in a completely new fashion become a more centralized, solidaric and extensive public–private mixed system, so that in the course of the new development of a society based on a socialist market economy a new gravity will steadily come to the fore.⁶⁹

Put differently, China’s private sector economy should be phased out to the benefit of a mixed system in which the public sector would be leading. Although this statement was criticized by most netizens, it coincided with a mood among some leftist intellectuals and a popular undercurrent within certain sections of the population critical of private entrepreneurs’ wide association with corruption and unclean behavior. For years, scholars such as Zhou Xincheng (see, e.g. Zhou, 2018), the former head of the School of Marxism at Renmin University, or Chen Zhonghua, the Dean of the International Academy of Politics and Law, demanded the elimination of the private sector, which they saw as contrary to Marxist theory. On the other side, at the ‘Forum of 50 People’ (50 ren luntan), a meeting of influential economists and senior officials held in September 2018, a majority of participants strongly criticized the slogan ‘Let the state sector come in and the private sector withdraw’ (guojin mintui) and all demands of abolishing the private sector (An, 2018). Moreover, few of the respondents with whom we spoke after Wu’s essay had been published seemed particularly worried. Still, the debate caused uneasiness among many entrepreneurs that private sector policies might change during the coming years of the Xi Jinping era. Prominent figures such as Hu Deping (2018), the influential son of the late party general secretary Hu Yaobang, warned of tendencies to cut down private sector development. The government has since tried to reassure the country’s private entrepreneurs that this was not going to happen. A Renmin Ribao editorial reiterated that the private sector was indispensable to China’s development and modernizing process and that government policies would help to improve, not limit, it (Li Zheng, 2018). Premier Li Keqiang reassured attendees at the ‘Tianjin World Economic Forum’, also held in September 2018, that the private economy would be further promoted and that all obstacles to development should and would be removed from this crucial and promising sector of the Chinese economy (Li Yanli, 2018). Finally, Xi Jinping declared at the ‘Conference on Private Enterprises’ (Minying qiye zuotanhui) held in November 2018 that private entrepreneurs ‘can feel reassured’. Policies toward the private sector would not change, and the private economy would be further promoted and supported. Entrepreneurs are, as Xi argues, ‘our own people’ (women zijide ren) (Xi Jinping, 2018a, 2018b). In the weeks that followed, the problems of the private sector and possible solutions were widely discussed, and many party state organizations at the central and provincial level assiduously expressed their support and assistance to that sector.⁷⁰

However, in his speech, Xi Jinping also emphasized that SOEs still are the main force (zhuti) in the Chinese economy (Xi Jinping, 2018a). The renowned economist Cheng Enfu from the Chinese Academy of Social Sciences explicitly underlined this position in the Party’s daily Renmin Ribao (Cheng, 2018). Economist Sheng Hong thus interpreted the expression of political support of the private sector by Chinese leaders and the media as a ‘tranquilizer’ (dingxinwan) and ‘speech therapy’ (hualiao) and noted that Xi’s formula of entrepreneurs being ‘our own people’ would make the latter feel rather uneasy as they would not understand the meaning of this wording (Sheng, 2018).

Despite all reassurances by the Chinese leadership that private sector policies would not change, it was recently reported that listed private companies are forced to sell significant stakes to SOEs (Hancock, 2019). In fact, there is huge pressure on private enterprises to become part of investment companies (touzi gongsi), in which representatives of state authorities, SOEs, and private enterprises have shares. Membership in these companies facilitates access to public procurement contracts and access to bank loans (Li Gengnan, 2018). The same is true if SOEs invest in private enterprises (Lu, 2018). An entrepreneur told us that this trend was very serious. In many cases, local governments would only trust private enterprises that closely collaborated with state-owned firms or if these state-owned firms held a significant share in them. Many entrepreneurs had no other alternative but to follow this path. Government officials would play a leading role in investment firms, e.g. leading figures of the ‘State-owned Assets Supervision and Administration Commission’ (Guoziwei). The same interviewee emphasized, however, that these policies were not only a control instrument of the party state but also a measure to help major private enterprises improve their efficiency and their national and international competitiveness.⁷¹ In 2019, it was reported that private solar power and energy firms which faced a debt crisis in recent years were increasingly taken over by publicly subsidized state-owned companies (Chen and Kirton, 2019), for many entrepreneurs a further sign of the retreat of the private sector.⁷²

In addition, promises by the leadership and reality frequently differ. Take, for instance, the case of entrepreneur Zhao Faqi who fought against the arbitrary cancellation of a government contract for coal exploration rights and therefore campaigned online and also turned to the courts for suing this government. Winning his case, celebrated as a hero among private entrepreneurs, and supported by many liberal economists and lawyers, he suddenly disappeared, probably after being arrested. Many entrepreneurs took this story as a litmus test for the legal system and the official claim that the Chinese leadership would support the private sector against predatory officials. The New York Times quoted Zhao a few weeks before his disappearance, saying that he faced a lot of risks and pressure because of this lawsuit, and that Chinese entrepreneurs would yearn for the rule of law to replace arbitrary power: ‘You can’t say someone is protected one day, and take away protection the next day.’⁷³

A larger number of corporate scandals related to private enterprises in recent years have strongly affected trust in the party state’s private sector policies. Not a few entrepreneurs were held in criminal custody, some of them later released and rehabilitated due to wrongful verdicts. Such verdicts, an entrepreneur told us, might be motivated by increasing prejudices vis-á-vis private entrepreneurs, social discontent with the widening gap between rich and poor, and a sentiment in society that the wealth of most entrepreneurs originates from criminal behavior.⁷⁴ Zhang Wenzhong, founder of the Wumart chain stores who had been held in prison for seven years due to a flawed prosecution and was released and rehabilitated in 2013 told the annual Yabuli China Entrepreneurs Forum in February 2018 that what had happened to him could happen to every entrepreneur in China at any time and that without the intervention of political leaders this unjust and mistaken judgement would have never been revoked. He urged that the legal rights of private entrepreneurs should be better protected.⁷⁵ Cases such as Zhang’s have strongly undermined confidence in China’s private sector policies among private entrepreneurs. Many entrepreneurs do not buy recent official statements of the Chinese leadership in support of the private sector anymore, which have been made in relation to the China–US trade conflict or the overall importance of the private sector to stabilize and modernize the economy.⁷⁶

Recently, Chen Tianyong, a (private) Chinese real estate developer in Shanghai, who left China in early 2019 and settled down in Malta, published an article on the social media explaining the reasons for his emigration. He argued that many entrepreneurs have lost confidence in China’s future, that the Chinese leadership has mismanaged the economy, and that the level of economic and political liberalization has decreased. He called upon his fellow entrepreneurs to leave China as soon as possible (Chen, 2019; Li Yuan, 2019). A recent survey by Hurun, a research institute located in Shanghai, seems to confirm Chen’s pessimism. According to this survey, only one-third of China’s rich people are very confident with regard to China’s economic prospects.⁷⁷ If private entrepreneurs are indeed losing confidence in government policies, this will have negative effects on both private sector development and the strategic acting of private entrepreneurs.

The recent debate on private entrepreneurship in conjunction with the mixed signals sent by China’s leaders, who emphasize the importance of both the public and private sector while abstaining from clarifying their relationship in terms of consistent policy-making, has unsettled private entrepreneurs and may, over time, mean that the younger generation is far less willing to ‘jump into the sea’.⁷⁸ The call of the party state for public–private mergers and for SOEs at all administrative levels to invest in private enterprises, combined with increasing debt ratios on the part of private companies facing discrimination within the current credit system (Wu and Fran, 2018), serves to reinforce the skepticism of many private entrepreneurs concerning their future in an evolving Chinese economy. Official encouragement of state enterprises to attract private investment is read by many as a state-sponsored takeover operation and not as a promise of new opportunities for gaining access to markets so far dominated by the state sector (Sun and Lin, 2018). The announcement of Alibaba’s charismatic Chairman Ma Yun in 2018 of withdrawing from his company and focusing on his charity foundation, and an increasing reideologization of state and society pushed by the current leadership have further fueled the concerns of private entrepreneurs that the political climate might gradually turn against them. Strategic action to defend their economic interests, the major topic of this book, might become more difficult in the coming years.

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¹The ‘National Bourgeoisie’ consisted of indigenous entrepreneurs not allied with foreign investors, multinational corporations, foreign banks, or the military.

²For the situation of private entrepreneurship in the Maoist era, see Solinger (1984) and Heberer (1989). For more recent historical accounts of the rise of the private economy in post-Mao China, see, e.g. Zheng and Yang (2011), Coase and Wang (2013), Chen (2015), Wu and Ma (2016), and Lin (2017). See also Chen and Naughton (2017), who have proposed a sequence of three generations of a ‘China model’ of economic development.

³Since undisguised resistance would have been laden with risk, the peasants developed a strategy of permanent though limited fence-breaking by, for instance, ignoring legal restrictions of private economic activities, something James C. Scott has classified as ‘everyday forms of peasant resistance’ (Scott, 1985, 1989, see Chapter 3).

⁴The process of de-collectivization in agriculture was typical for later developments in the industrial and service sectors as well: Limited transgressions of laws or regulations which were tolerated by the regime induced copycat effects leading to an extensive practice of ‘fence-breaking’, first at the grassroots and soon across all administrative tiers (Fforde and de Vylder, 1996: 1). The success of the private shadow economy in solving supply-side shortages and creating jobs discouraged suppression by party leaders, once again inducing new transgressions of the law, to the extent that reforms in areas other than the economy were soon brought about as well.

⁵This was a somewhat arbitrary limit taken from a comment of Karl Marx made in Chapter 9 of the third volume of Capital according to which a capitalist enterprise with eight and more employees would appropriate the workers’ surplus value, hence committing capitalist exploitation.

⁶In 1988, the Chinese State Council enacted the ‘Provisional Regulations for Private Enterprises of the PR of China’ (Zhonghua Renmin Gongheguo siying qiye zanxing tiaoli), see Heberer (1989: 400–412) and, for the full text in Chinese, Renmin Ribao, 29 June 1988.

⁷The state constitution, which was amended in December 1982, stated in Article 11 that the individual economy was a supplement to the socialist public economy and was protected by the state.

⁸‘Let some become rich first’ (Rang yi bufen ren xian fuqilai), statement made by Deng Xiaoping on 23 October 1985, when meeting a delegation of U.S. entrepreneurs. http://cpc.people.com.cn/GB/34136/2569304.html (accessed 30 March 2018).

⁹The full text of the interview conducted by Thomas Heberer (in German) in Die Welt, 17 November 1986. Hu Deping’s book contains its Chinese part on private sector development.

¹⁰Article 11 of the 1982 constitution was revised as follows: ‘The State permits the private sector of the economy to exist and develop within the limits prescribed by law. The private sector of the economy is a supplement to the socialist public economy. The State protects the lawful rights and interests of the private sector of the economy, and exercises guidance, supervision, and control over the private sector of the economy.’

¹¹It was then replaced by the ‘Ordinance of Urban and Rural Industrial and Commercial Self-Employment’ (Lin, 2017: 32).

¹²The extent to which the 1989 protest movement was supported by private entrepreneurs is estimated as low by most scholars. There was financial and material support by a number of them, but in general private entrepreneurs abstained from becoming entangled in the protests and displayed much ambivalence in taking a stance on them (Wank, 1995).

¹³‘Dual-track’ means the pursuance of market reforms under the auspices of a command economy protected by the state.

¹⁴One of the most comprehensive and telling studies on the rise of the private sector in post-Mao China is Nee and Opper’s Capitalism from Below (2012), which meticulously traces the interplay of state institutions and informal agency on the part of entrepreneurial actors which resulted in institutional adaptation and change by shifts in market competition, entrepreneurial action bringing about institutional innovation, mutual monitoring and enforcement in cross-cutting networks and mimicking, i.e. copying effects caused by successful private entrepreneurs which led to increasing collective action for further changes in the overall institutional setup of the Chinese economy.

¹⁵However, Deng’s ideological ‘victory’ remained contested in the party throughout the 1990s and it was only thanks to his personal authority that the ‘reform and opening up’ was not attacked with more serious consequences as market reforms went into rough water periodically during that decade.

¹⁶During roughly the same time frame, there was a complete restructuring of the public sector economy (see below).

¹⁷Jiang Zemin, ‘Qi yi jianghua da tupo’ (Big breakthrough by Jiang Zemin’s July 1st talk). http://talk.163.com/06/0323/16/2CTNGB5600301IJI.html (accessed 22 June 2018).

¹⁸The ‘Three Represents’ were officially mentioned for the first time by General Secretary Jiang Zemin in 2001 in a keynote speech at the occasion of the 80th anniversary of the founding of the Communist Party. According to this formula, the Party represents China’s ‘advanced social productive forces’ (i.e. economic development), the ‘progressive course of China’s advanced culture’ (i.e. cultural development), and ‘the fundamental interests of the majority of the Chinese people’.

¹⁹This was no less than a revolutionary change in the party constitution: Private entrepreneurship, the epitome of mankind’s exploitation, was now defined as a major pillar of socialist development instead of, as in the early years of the People’s Republic, being considered only a transitory means in the struggle to bring about socialist transformation.

²⁰Zhongguo Gongshang Bao (accessed 20 March 1998).

²¹Chinese firm development confirms the theory of Hayami and Kawagoe (1993), among others, according to which a productive upswing in agriculture entails entrepreneurship specializing in industrially processing agricultural produce. In this way, the agricultural sector is connected with modern industry and urban markets. Traditional village and clan communities facilitate this process as they help to keep costs at a minimum. Rural industrialization generates increases in income for both urban and rural areas. Consequently, rural–urban migration is calibrated and limited at a tenable level.

²²For an interesting example of structural, institutional, and social change induced by ethnic entrepreneurs in an ethnic minority area in China as well as their competition with Han entrepreneurs — an issue which, however, cannot be addressed in this volume — see Heberer (2007).

²³As a Chinese entrepreneur noted, the private sector was developed by giving it freedom (fang) and not by means of a bureaucratic steering (guan) (Sun, 2018: 55).

²⁴The history of China’s TVEs, which developed out of the old communes and production brigades after the household contract responsibility system had been installed in rural China, is well accounted for by Oi (1999), Naughton (2007), and Huang (2008).

²⁵Huang Yasheng (2012) has argued that China’s capitalist takeoff was predominantly due to the success of its TVEs. On the development of TVEs and other rural ownership forms, see Fan et al. (2015: 65–160). In 1985, according to data published by the Chinese Ministry of Agriculture, there were 12 million TVEs of which 10.5 million were registered as private and only 1.57 million as collective (!). In the same year, the official data started to divide TVEs into three categories, namely (1) collective, (2) privately run, and (3) household businesses. The growth of TVEs in the following years until 1993 occurred entirely in the second category. This means that the government was not only well aware of the private character of most TVEs, which had meanwhile registered as collective enterprises, but also accounted for them as such statistically. Huang also points at another interesting aspect of private sector development in China’s countryside during the 1980s: the liberalization of informal finance (via rural credit cooperatives and so-called rural cooperative foundations) as a substitute for formal finance to help private enterprises solidify their operations. However, starting in the early 1990s, the central government reverted its former policies and attempted to wipe out informal finance schemes in order to regain full control over the credit sector and the private sector economy. Since then, private companies have suffered from a structural ‘credit crunch’.

²⁶Dickson cites a survey conducted by the All-China Federation of Industry and Commerce (gongshanglian) and the Chinese Academy of Social Sciences in 2002 which also showed that 25 percent of all officially registered private enterprises at the time had originally been part of the state sector.

²⁷Wo guo shi you geti gongshanghu he siying qiye zhan quanbu shichang zhuti 94 percent (Individual and private enterprises constitute 94 percent of all market players), Xinhua News Net, 22 January. http://www.xinhuanet.com/fortune/2018-01/22/c_1122297394.htm (accessed 9 August 2018).

²⁸Some reports, however, argue that these data do refer to small and medium enterprises only. See, e.g. ‘Wei xiaowei qiye shutuan, xu shichang ‘zhichi’ genshang’ (A bailout for small enterprises requires ‘support’ for their survival in the market), Xin Jing Bao (New Capital Newspaper), 31 August 2018; Zhongda lihao (Major advantages), Zheng, shang xuejie jiti xingdong, minqi xinde de chuntian yao laile (Collective action of politics, business and scientists, the new spring for private enterprises is arriving). https://465557.kuaizhan.com/11/45/p5516239418a8bf (accessed 1 September 2018).

²⁹Well-known ‘national champions’, which have ranked among the top 10 on the Forbes’ Global 500 list of 2017, are State Grid (2), Sinopec (3), and China National Petroleum (4).

³⁰‘National champions’ are companies which a government has identified as major driving forces of its overall economic development strategy. They have easier access to credit, are given preferential treatment in government contract bidding, and sometimes gain monopoly or oligopoly status in certain sectors of a country’s economy. China’s biggest companies, most of them state-owned, are called ‘national champions’, among which are the world’s three largest companies: Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), and Agricultural Bank of China (ABC). Huawei, the world’s largest producer of smartphones, is probably the most prominent example for a private ‘national champion’, though a vast majority of them are SOEs. The establishment of the State-Owned Assets Supervision and Administration Commission (SASAC) in 2003 marks the starting point of China’s ‘national champion’ policy, as SASAC was assigned the task of enacting industrial policies to transform China’s top 40 companies into such giants (Graceffo, 2017). Today, in accordance with the state’s call to promote so-called ‘Strategic Emerging Industries’, which was written into the 12th Five-Year Plan (2011–2015) and further refined in the 13th Five-Year Plan (2016–2020), China’s ‘national champions’ play a major role in developing an ‘innovation economy’ in sectors like information technology, biotechnology, robotics and intelligence systems, high-efficiency energy storage, new-energy vehicles, etc. For a long time, the promotion of ‘national champions’ has been criticized by both foreign and Chinese experts as they threaten to ‘crowd out’ the domestic private sector and shut out international competitors from the Chinese market. For an early study on China’s ‘national champion’ policy, arguing that this policy can be traced back to the 1970s, see Nolan (2001).

³¹Our fieldwork in Wenzhou in 2013 and 2017 brought to the fore the manifold problems of the private sector in this prefecture-level city. Private entrepreneurs complained strongly that the local government does too little to help them survive the rough-and-tumble of economic adjustment due to necessary structural change. In a particularly telling interview with local entrepreneurs and business associations on September 23–24, 2017, the local government was asked, among other things, to shield the local economy from external investors, reduce taxes, facilitate access to credit, provide for skilled labor from outside Wenzhou, engage in more communication between private enterprises and government cadres, and reduce the pressures put on the private sector to adjust to environmental guidelines. Whereas many Wenzhou entrepreneurs did not care for the government in the early years of ‘reform and opening up’, they now call for the state’s help and guidance. This was confirmed by an interview with a former policy advisor to the Wenzhou government, 12 April 2018.

³²We have defined this shift as the rise of ‘local state corporatism 2.0’. In traditional local state corporatism (‘local state corporatism 1.0’), local governments and private enterprises were conceptualized as components of a larger entity (a corporate firm) with the goal of maximizing the profits of the local corporate state. In this concept, the state figured as an entrepreneur itself, establishing and operating collective-owned enterprises (TVEs) in order to develop a locality. Under the conditions of ‘local state corporatism 2.0’, however, the local state no longer figures as a ‘corporate head’ but increasingly acts as an ‘interested facilitator’ and regulator of private sector development.

³³Zhonggong zhongyang guanyu quanmian shenhua gaige ruogan wenti de jueding (Decision of the Chinese Communist Party and the Central Government on Some Issues Concerning Comprehensively Deepening Reforms). Chinese version: http://cpc.people.com.cn/n/2013/1115/c64094-23559163.html (accessed 3 January 2019).

³⁴See, e.g. ‘Xi Jinping tan minying qiyejia: dajia dou you tou you lian yao weihu hao xingxiang’ (Xi Jinping on private entrepreneurs: All are respected people who should safeguard their image). http://finance.sina.com.cn/roll/2016-03-09/doc-ifxqafrm7345622.shtml (accessed 10 March 2016).

³⁵An extensive Chinese study on the innovation potential of China’s private entrepreneurs is provided by Liu Dan (2017).

³⁶‘New social classes’ refers to four groups of people: private entrepreneurs and leading managing and technical personnel of private enterprises and foreign joint ventures; leading figures of intermediate and social organizations; self-employed persons; and leading figures in the new social media (see also Luqiu and Liu, 2018). An overview of the ‘New social classes’ is provided by Zhang Linjiang (2018).

³⁷A specific bureau was established to consult representatives from these new social classes. See ‘Zhongyang tongzhanbu shige 11 nian zai she xinju zhuanmen fuze xinde shehui jieceng renshi tongzhan gongzuo’ (After 11 years the United Front Department of the CCP has established a new bureau targeting the new social classes). http://epaper.jinghua.cn/html/2016-07/05/content_316162.htm (accessed 1 October 2016).

³⁸See ‘Shaanxi xin shengdai qiyejia he xinde shehui jieceng renshi lingting 19da jingshen xuanchuan’ (The new generation of entrepreneurs and new social classes in Shanxi listen to the propagation of the spirit of the 19th Party Congress). http://news.sina.com.cn/o/2017-12-08/doc-ifypnyqi2272507.shtml (accessed 1 May 2018).

³⁹See Zai jie ‘xindeshehui jieceng renshi’ (Newly understanding the ‘new social classes’). http://www.zytzb.gov.cn/tzb2010/zcjd/201703/f2cd5f2c04b64e8a95e5ab7e6f378a81. shtml (accessed 2 May 2018).

⁴⁰‘Quanguo tongzhanbuzhang huiyi: Jinnian yao jiaqiang xinde shehui jieceng renshi tongzhan gongzuo’ (National conference of the heads of United Front Departments: From this year onwards the United Front work with new the social classes shall be reinforced). http://money.163.com/18/0118/15/D8EOOPUB002580S6.html (accessed 4 May 2018). On private entrepreneurs as a new social class, see also Huang Dongya (2014).

⁴¹See http://house.china.com.cn/apple/fullview_823253.htm (accessed 28 March 2016).

⁴²See, e.g. Mass entrepreneurship and innovation as new growth engine. http://english.gov.cn/premier/news/2016/03/03/content_281475300571752.htm (accessed 24 April 2018). See also http://guoqing.china.com.cn/word-en/2016-05/10/content_38430378.htm (accessed 24 April 2018).

⁴³See, e.g. ‘Rang minying qiye chengwei chuangxin zhuti’ (Let private enterprises become the main force of innovation) (2017). Qinghai Ribao (Qinghai Daily), 24 November. http://news.ifeng.com/a/20171124/53544625_0.shtml (accessed 2 May 2018). A 2018 report published by the European Chamber of Commerce in Beijing revealed that in 2017 the expenses of private enterprises for research and development were 13 percent higher than in 2016. The report noted that these figures are comparable to those in industrialized countries. See Frankfurter Allgemeine Zeitung, 21 June 2018.

⁴⁴In 2018, a forum organized by private entrepreneurs defined ‘entrepreneurial spirit’ as the determination to contribute to the nation no matter how big the difficulties are (Wang Meng, 2018: 77). For the party, ‘entrepreneurial spirit’ means to be creative and innovative so that they can pave the way for China’s turn from being a production base for traditional industries to a high-tech and knowledge-based economy (Wang Meng, 2018).

⁴⁵For an early academic conceptualization of ‘entrepreneurial spirit’ with the help of indicators to measure entrepreneurship as well as innovation and leadership capacity, see Wu et al. (2014) and Hu (2018). Xi Jinping, for his part, added patriotism and social responsibility to the concept of ‘entrepreneurial spirit’.

⁴⁶In April 2018, for instance, the National Federation of Industry and Commerce organized a meeting in Beijing attended by government representatives and private entrepreneurs to discuss new policies to strengthen private enterprises such as downscaling administrative procedures and costs, as well as introducing new tax reduction incentives. See 9 bumen wei minqi zhuanchang jiedu youhua yingshang huanjing (Special meeting with 9 government bureaus to interpret the optimization of the business environment), http://www.xinhuanet.com/politics/2018-04/03/c_1122628747.htm (accessed 3 April 2018).

⁴⁷Liu Mingping weiyuan huyu zhuoli pojie minying qiye ‘san nan’ (PCC member Liu Mingping urges to solve the ‘three difficulties’ of private entrepreneurs). Jiangzhun Shibao (Jiangzhun Times), 8 March 2018.

⁴⁸For his speech, see http://www.qnr.cn/waiyu/yiwen/eng/201501/1039326.html (accessed 4 May 2018).

⁴⁹Nation to boost entrepreneurship innovation, China Daily, 7 September 2018.

⁵⁰‘2018 nian zhongda lifa, anli quanmian shuli’ (Significant legislation in 2018, comprehensively sort out specific cases). http://www.chinalawinfo.com/Feature/FeatureDisplay1.aspx?featureId=602&year=2018&data=2018/2/5 (accessed 4 May 2018).

⁵¹A prominent example of those private entrepreneurs recently acquitted is Zhang Wenzhong, founder of the Wumart chain stores, who was declared innocent of charges of fraud, embezzlement, and corporate bribery in May 2018, after spending nine of his 12-year sentence in jail. In fact, close connections to high-ranking officials may prove to be either a blessing or an existential danger for China’s private entrepreneurs, as their fortune becomes intrinsically linked to the destiny of their political patrons, a destiny which has become unpredictable in Xi Jinping’s China. See Wang (2018a).

⁵²‘Gongchang tingle! Dapi gongren shiye! Huanbao Zhongya xia, hai tan shenme fazhan’ (Factories stop production! Many workers are jobless! How to talk about development under strong pressure of environmental protection). https://www.xuehua.us/2018/08/10//zh-tw/ (accessed 15 February 2020) A respondent told us that in his hometown alone (a prefectural city) hundreds of enterprises had been officially closed, though many of them continued to operate clandestinely and with the silent approval of the local government. Interview, Chinese entrepreneur, Duisburg, 8 August 2018.

⁵³An article in Renmin Ribao noted in 2013 that the average lifespan of 50 percent of all private enterprises in China is less than five years (Cheng, 2013).

⁵⁴See also ‘Zhongda li hao. Zheng, shang xuejie jiti xingdong, min qi xinde de chuntian yao laile’ (Major advantages. Collective action of politics, business and scientists, the new spring for private enterprises is arriving). https://465557.kuaizhan.com/11/45/p5516239418a8bf (accessed 1 September 2018).

⁵⁵Li Keqiang kaocha Jiangsu — xia feiji weihe zhiben zheli? (Why did Li Keqiang go straight there after getting the aircraft during his inspection tour of Jiangsu?). http://www.gov.cn/xinwen/2018-11/29/content_5344449.htm