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China should take action to reassure its private entrepreneurs

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Minxin Pei is Professor of Government at Claremont McKenna College and Non-Resident Principal Investigator of the German Marshall Fund in the United States.

It is a troubling time for dynamic Chinese private entrepreneurs.

The country’s most flamboyant sales representative, Alibaba Group Holding founder Jack Ma, has disappeared from public view after Beijing scuttled the IPO of its multibillion-dollar fintech company Ant Financial in December latest. The second punch landed four months later when the government imposed a record fine of $ 2.75 billion on Alibaba for its alleged monopoly practices.

Ma may have been lucky compared to ridesharing giant Didi, which challenged Beijing and went ahead and listed its shares in New York in late June. China’s cybersecurity authority punished the company by banning future downloads of its app and launching a data security investigation, wiping out more than $ 20 billion from Didi’s market value.

And Ma has been several degrees of luck more than private entrepreneur Sun Dawu, who has long been a thorn in the side of the Chinese Communist Party. After being charged with a litany of crimes, including “causing quarrels and causing unrest and illegal use of farmland,” Sun, 67, was sentenced in late July to 18 years in prison.

Sun Dawu, pictured in August 2013: The Chinese businessman has been sentenced to 18 years in prison. © The Washington Post / Getty Images

But it is Xi Jinping’s call for common prosperity that must really make Chinese entrepreneurs lose sleep.

This press release, released after a meeting of the Central Commission for Financial and Economic Affairs on August 17, seemed to signal a new policy of redistributing wealth. Although much of the language is standard party language, phrases such as “promoting common prosperity in phases, tertiary income distribution, and banning illegal income” stood out.

The cumulative effect of these developments has shaken the confidence of all but the most robust Chinese entrepreneurs, with Beijing’s message now being quite clear: No matter how rich or influential individual private entrepreneurs are, the Party retains ultimate power and can do whatever he wants.

The challenge facing Chinese entrepreneurs now is how to protect their wealth. Unfortunately, they have few options. In the past, entrepreneurs bought insurance by bribing government officials with expensive money and gifts. Then came President Xi Jinping’s anti-corruption campaign which sent thousands of officials to jail.

Diversifying assets abroad was another option until China began to tighten capital controls in 2015. Today, it is much more difficult to extract large sums of money from the country.

Sufficiently desperate entrepreneurs can bet on the Chinese legal system, but they will certainly be disappointed. Chinese courts are not known for their independence or effectiveness in protecting private property rights. On the contrary, Chinese justice mainly serves the interests of the Party.

The only thing private entrepreneurs can count on to moderate Beijing’s wealth redistribution policy is the Party’s self-interest. Since all entrepreneurs can really do in response is offer passive resistance, the implicit threat of mutually assured economic destruction can provide some sort of flexible bargaining power.

Specifically, if Chinese entrepreneurs collectively decide not to work so hard, or to stop producing altogether, the impact on the Chinese economy would be devastating.

As the Party relies on robust economic growth to maintain its performance-based legitimacy, a collapse attributed to the loss of incentives for private entrepreneurs could persuade Chinese leaders to dilute its newfound passion for wealth redistribution.

Although many Westerners see China as a state capitalist system, in reality its economy is heavily dependent on the private sector. According to official reports, China’s private sector, excluding foreign-invested enterprises, contributed more than 60% of gross domestic product and nearly half of China’s foreign trade last year.

In 2019, the share of the private sector in total investment was 44%. More importantly, the private sector is the main driver of job creation in China, accounting for 80% of all new jobs.

With Chinese leaders clearly aware of the risks of an economic slowdown, they should take immediate action to reassure nervous private entrepreneurs in the country.

First, they need to clarify some of the key slogans circulating in the official media. For example, the meaning of “tertiary income distribution” should be clarified to avoid creating fear that the state will force the rich to give up their property in the name of charity.

The government should also stress that the main mechanism for seeking common prosperity is the development of a transparent progressive tax system and a strong social safety net, not the confiscation of legitimate wealth acquired through private business operations. .

In particular, since regional and rural-urban disparities are the root of most inequalities in China, the government’s common prosperity agenda should target the provision of public services in rural areas.

Two policies deserving of immediate implementation are the provision of free secondary education and a significant increase in public health expenditure in rural areas.

No one knows if the Chinese government will take these steps. But if Chinese private sector business leaders conclude that they might be better off launching a “wealth creation strike,” Beijing’s plan to achieve common prosperity could end up doing just the opposite.

Sources

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2/ https://asia.nikkei.com/Opinion/China-should-take-steps-to-reassure-its-private-entrepreneurs

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