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A Fragile Private Sector Recovery

Private sector competitiveness is critical to China’s long-term economic health. According to the National Development and Reform Commission (NDRC), private firms drove 60% of fixed asset investment, 75% of technological innovation, and 90% of new employment since 2012. But last year the private sector shrank, and state-owned enterprises (SOEs) grew as a proportion of China’s economy for the first time in two decades. This was seen by private investors – within and outside of China – as an indication of the government’s preference for state firms and as a harrowing sign for the country’s economic trajectory.

Since late 2018 senior Chinese leaders promised new support for the private sector, including more lending and tax cuts, along with pledges of “competitive neutrality,” or equal treatment between private and state firms. Are these efforts working? Recent data suggest that while private sector financial performance is improving marginally in recent months, this is primarily because of easier credit conditions, rather than fundamental improvements in the competitive environment that would drive stronger private sector profitability.

Posted April 10, 2019
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