President Xi doesn’t love the private sector, but he needs friends with benefits

Beijing has issued a new policy to encourage entrepreneurship, but it will comes with some pretty major strings attached.

Over the past few months there have been repeated cries in China, ostensibly from some parts of the academia and media, to relegate the private sector further to a second-class role in the economy, to play only a supporting part to the state-owned enterprises (SOEs), despite the former contributing 60% of China’s GDP and creating 80% of the jobs.

But at the beginning of this month Chinese President Xi Jinping hosted a high-profile meeting with 50 leading private companies to reassure the private sector that “you belong to our family”. Promises were made to help alleviate the private sector’s tax burdens, make their access to the financial and capital markets easier, do away with more restriction on competing with SOEs, as well as protect their private property rights.

Since then we understand the state and local media have interviewed numerous cabinet as well as local officials who all vowed to carry out the presidential decree in earnest. Private sector sources in China have also told us that they have received many visits from local officials to hear their grievances and to promise support.

None of these is unheard of. Mr Xi, who has assumed supreme power and has steered the country more and more towards a Mao-style governance, has not been the biggest fan of market economy and has not shied from saying so. But the time has changed. Private sector confidence in the economy has hit a historic low, and many businesses have opted to sell and pull out of the country. One of the highest profile cases in recent years was the withdrawal of Li Ka-shing, the Hong Kong tycoon, who owned Hutchison (and ultimate owned Three UK). This is not helped by the slowdown of the economy in general and the trade war with the US. The country desperately needs the private sector to shore up the economy and keep people employed.

As a follow-up action, Beijing’s municipal government issued its new policy to improve business environment. Many concrete measures are put into place, including shortening the approval process of new business set-up to three days by the end of 2018, and to two days by the end of 2019, and the process to register fixed assets to one to four days. The new regulation also raised the threshold of business revenue that can enjoy favourable tax rate as well as the tax-deductible amount companies can spend on R&D equipment.

The measures may be favourable to private businesses but may not always be beneficial to individuals. For example, business owners are given more flexibility on how much social security payment they can choose to pay for their employees, especially the housing benefit. More importantly, buried in Article 15 of a total of 22 articles, are the specifications on implementing “social credit system” in Beijing.

As was already reported, Beijing vowed to implement the social credit system by 2020 as a model of “city of integrity and honesty” for the whole country. Specifically, the authorities (15 municipal government departments and all the 16 district councils) will complete three lists: data list, behaviour list, and measure (reward and punishment) list, which are to be used to give every resident (22 million of them) a “social security point”.

The names of individuals and businesses that lose credit will be publicly shamed. As the regulation stated in unambiguous terms, those with good points will have “green channels” opened to them in areas like market access, public service, travel, employment, setting up own business, etc. On the other hand, anyone who loses a credit point somewhere will be restricted everywhere.

This most likely will be the biggest artificial intelligence and smart city project (and not in the IoT sense) in the world. But, with the presidential backing, it may succeed.