While the rest of the world experienced a resurgence of the private sector in the post-pandemic era, majorly due to the base effect, leading to expansion in hiring and capital expenditure by the private sector, China has been sailing in the opposite stream ever since. The private sector in China is not all right.
China has been squeezing out its private enterprise, which impacts a large section of the population as 80 percent of the workers are employed in the private sector. The private sector has lost confidence, and as a result, we see the private sector is reluctant to expand, and as a result, private capital expenditure is dropping. Interestingly, the gap in profits earned between the private sector and SOEs (state-owned enterprises) has fallen since 2015.
There are multiple reasons for the current state, mostly political in nature. Over the last three years, private companies have been exposed to government crackdowns and excessive controls and regulations. Private enterprises have always been subjected to biased treatment from the state in terms of taxation, funding, and excessive supervision, along with Beijing’s preference for SOEs against private enterprises. Moreover, a mounting load of pending payments from the government and government-owned enterprises to the private sector has almost handicapped the private sector, weakening their trust in the system, discouraging their operations, and resulting in shrinking their investment capacity.
In the past, Chinese economic planners have expressed their concerns over the debts that local governments and state-owned enterprises (SOEs) owe to small and medium-sized enterprises (SMEs). The private companies find themselves looming into layers of debt because of delayed and ultra-delayed payments for their services. In order to continue their operations, the companies end up taking loans from other companies or banks while waiting for the government and its entities to pay back their amounts. This has been called “triangular debt,” a chain of multiple debts and delayed settlements between the government, companies, and banks, increasing the financial risk.
This issue ties up to the larger problem of cash-strapped local governments in Chinese provinces. Local governments have not been able to revive their fiscal revenues since the real estate crisis. The paucity of financial resources also limited the capacity of local governments to pay their employees on time, and they had to borrow money from banks for the same due to their fiscal deficits[1].
So, we observe significant negative externalities on the fiscal front. The cash crunch was earlier making the functioning of local government difficult, but now it has spilled over to the private sector, impacting it adversely. The hardships of private enterprises are subsequently leading to poorer labour market outcomes for the employees. Many businesses are shutting their factories and laying off hundreds of workers. Many companies are also taking away workers’ benefits like paid leave[2].
Such situations, combined with rising deflationary pressure in China, have adversely impacted the wage offers in China. Wages are decreasing in all the major cities, like Beijing and Guangzhou, as well as in major sectors like technology, finance, and government departments. The staggering private sector stands to exacerbate the already high unemployment rate among youth[3] as well. Moreover, entry-level wages and salaries are also falling in various sectors in China[4]. Everything works in a closed loop-feedback manner. The persistent situation of long delays in payments to the private sector is further adding to the deflationary pressures, falling wages, and rising unemployment.
This system operating on debt, with borrowed money feeding into the payment for the other stakeholders, has led to the creation of a rather risky and unsustainable economy. Though a 31-point action plan was released by Beijing to promote the growth and development of China’s private economy, as per many business entrepreneurs, it has provided neither any effective relief nor reformation. It has, rather, just come across as a ploy to make sure that the private sector does not lose confidence[5][6]. Beijing’s supportive measures are not reaping any benefit to the enterprises. The competition from SOEs is sabotaging the growth of the private sector, as much of the investment is getting distracted by SOEs. Experts suggest that discrimination between public and private enterprises should be abolished, and Beijing should put the impetus on entrepreneurial talent and spirit to enhance the vitality, competitiveness, and innovative caliber of the enterprises. However, as much of the promises of the Central government remain mere lip service, private enterprises, employees, and youth suffer silently under the reign of the CPC.
[1] https://www.aljazeera.com/economy/2023/5/11/chinas-cash-strapped-local-governments-cant-pay-workers-on-time#:~:text=here%20to%20search-,China’s%20cash%2Dstrapped%20local%20governments%20can’t%20pay%20workers%20on,Shanghai
[2] https://www.wionews.com/business-economy/chinas-economic-woes-deepen-as-private-sector-struggles-with-challenges-surrounding-unemployment-670754
[3] https://www.nytimes.com/2024/01/17/business/china-youth-unemployment.html
[4] https://www.business-standard.com/world-news/chinese-workers-witness-biggest-decline-in-hiring-salaries-on-record-124010400175_1.html
[5] https://www.nytimes.com/2023/07/22/business/china-private-enterprise.htmlx
[6] http://www.news.cn/politics/2023-07/19/c_1129758014.htm