Xi’s Big Private-Sector Push Runs Into Wall of Skepticism

China’s latest pledges to rebuild a shattered private sector fell flat with investors, underscoring the damage two years of crackdowns and pandemic controls have had on confidence in the world’s second-largest economy.

(Bloomberg) — China’s latest pledges to rebuild a shattered private sector fell flat with investors, underscoring the damage two years of crackdowns and pandemic controls have had on confidence in the world’s second-largest economy.  

The Communist Party and the government issued a rare joint statement late Wednesday, with 31 measures to improve conditions for businesses, including pledges to treat private companies the same as state-owned enterprises and to consult more with entrepreneurs before drafting policies. 

While the move by President Xi Jinping’s government won backing from Tencent Holdings Ltd.’s billionaire co-founder Pony Ma and other Chinese businesses, it was greeted with skepticism by Chinese markets looking for more concrete measures to revive sentiment. With Beijing’s official growth target of around 5% now at risk, urgent stimulus measures are high on investors’ wish lists.

“It’s more of a principal framework, investors are hoping for more specific stimulus measures such as loosening in property policies and more fiscal spending,” said Alan Li, chief investment officer at Atta Capital Ltd. Any lift to financial markets from Beijing’s signals will likely be short-lived, he said. 

Hong Kong’s Hang Seng Tech Index — which includes heavyweights like Alibaba Group Holding Ltd. and Tencent — closed 1.2% lower, marking its fourth day of declines. A gauge of Chinese stocks traded in Hong Kong also wiped out its initial advance to end the day lower by 0.3%.

An official from China’s top economic planning agency said Thursday authorities will issue specific measures “very soon” to boost the private economy and promote private investment. 

Businesses have been bruised by years of tight coronavirus restrictions, which ended suddenly in December, as well as unpredictable regulations in sectors like technology and education. While Beijing appears ready to lift at least some of the plethora of private-sector restrictions, it will be hard to repair investor confidence and recoup corporate losses.

The private sector produces more than 60% of gross domestic product and accounts for more than 80% of urban jobs. Investment by private firms contracted 0.2% in the first half of the year, official data showed this week, compared with an 8.1% expansion by state-owned businesses. 

Foreign companies are looking for more than just rhetoric, urging Beijing to follow through with specific policy steps.

“Meaningful change comes through implementation, not pledges,” the European Union Chamber of Commerce in China said in an emailed response to questions. “European businesses operating in China have grown accustomed to sweeping pro-business statements being made with little concrete action being taken.”

Shrinking Tech

Once-dominant private sector champions like Ant and Alibaba have shrunk drastically after years of constant scrutiny and business curbs, with Alibaba itself preparing to break into six separate units. 

The almost two-year crackdown on tech firms appears to now be at a close, with Beijing imposing fines of over $1 billion on Ant Group Co. and Tencent this month. Underscoring the sector’s wish to move on from the crisis, Tencent’s Ma penned a rare opinion article in state media echoing Beijing’s statements on the importance of the private sector. 

Other Chinese business executives, like Li Shufu, the billionaire founder of Zhejiang Geely Holding Group Co., and Zong Qinghou, the chairman of leading beverage company Hanzhou Wahaha Group Co., also backed Beijing’s pledges.

The public pledges of support from billionaires on Thursday belie the extent to which most entrepreneurs have retreated from the day-to-day running of their empires and shied away from pursuing growth, fearful of drawing Beijing’s gaze.

Li Xuetong, a fund manager at Shenzhen Enjoy Equity Investment Fund Management Co., said while Beijing’s signals should ease fears that the government was becoming more tolerant to slower economic growth, the move is unlikely to result in a quick rebound in prospects.

“This is just one step in an accumulation of factors to turn around expectations for the business environment,” said Li. “It isn’t realistic for one document to be a game changer.”

Weakening Growth

China’s weakening economic recovery this year has sent a chill through global markets, with Beijing’s limited steps so far — ranging from lower interest rates, easier access to credit and a series of measures to kickstart the moribund housing market — doing little to bolster growth. 

Businesses are still waiting for signals from Xi’s new economic team that the policy environment will be more transparent and predictable. While Xi has repeatedly insisted that economic development is the Communist Party’s “top priority,” his government has clearly made protecting national security a central focus. 

Beijing’s recent clampdown on business consultancies like Bain & Company caused unease in global markets, around the same time that the government made revisions to a broadly worded anti-espionage law. Since then, though, officials have had a series of meetings with high-profile executives to repair the damage to business sentiment. 

“While removing existing business obstacles would be beneficial to business confidence, taking concrete measures to stimulate consumer confidence and establish a clearer regulatory framework would be even more critical,” said Maximilian Butek, chief representative at the Delegation of German Industry & Commerce in Shanghai. 

Business Challenges

Private firms still face a number of challenges, including higher financing costs and lack of access to bank loans compared with state-owned counterparts. Many are also constrained because of payments owing to them from cash-strapped local governments — a problem Beijing pledged on Wednesday to resolve. 

The EU chamber said European businesses want the same market access in China that Chinese companies have in Europe, a level playing field, and a business environment “free of politics.” This would “restore the predictability, reliability and efficiency of the China market,” it said.

To revive the domestic economy, a number of economists have called on the government to give direct support to consumers, such as handing out consumption vouchers or cash subsidies to residents — something officials have been reluctant to do. Instead, Beijing outlined a vague guideline this week to boost consumption of home appliances and furniture, and extended a tax break for new energy vehicles purchases through 2027.

“The demand side support, especially how to raise household expectation, as well as stabilize a job market outlook, that’s also very key to restore confidence in household sector,” Betty Wang, a senior economist at Australia & New Zealand Banking Group, said in an interview on Bloomberg TV. “The latest data released shows a very clear weakness in the private and household sector.”

The government will boost support for private companies in share listings, bond sales and overseas expansion, according to the official statement Wednesday. It will also continue to cut market entry barriers for private firms and urged public institutions not to refuse or delay paying outstanding bills to businesses arbitrarily, vowing to expose cases of malicious delay.

“It won’t turn sentiment around overnight, but private entrepreneurs do take these signals seriously, so this and similar statements from top leaders make a difference,” said Gabriel Wildau, managing director at advisory firm Teneo Holdings LLC in New York. “A similar statement directly from Xi would have an even greater impact.”

–With assistance from Jeanny Yu, Ye Xie, Tom Hancock, Evelyn Yu, Yihui Xie, Danny Lee, Linda Lew, April Ma, Iris Ouyang, Catherine Ngai, Edwin Chan, Ishika Mookerjee and Fran Wang.

(Updates with additional details.)

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