China should take measures to appease private entrepreneurs

Pei Minxin is a professor of government at Claremont McKenna College and a non-resident senior researcher at the German Marshall Fund in the United States.

For China’s aggressive private entrepreneurs, this is a disturbing time.

China’s most dazzling business representative, Alibaba Group founder Jack Ma disappeared from public view after Beijing cancelled the IPO of its multi-billion fintech company Ant Financial in December last year. Four months later, the government imposed a record fine of US$2.75 billion on Alibaba for alleged monopolistic behavior.

Compared with ride-sharing giant Didi, Jack Ma may be lucky. Didi ignored Beijing and went public in New York at the end of June. China’s cybersecurity agency punishes the company by banning future downloads of its apps and investigating its data security, evaporating Didi’s market value by more than $20 billion.

And Jack Ma is several times luckier than Sun Dawu, a private entrepreneur who has long been a thorn in the eyes of the Chinese Communist Party. After being charged with a series of crimes such as “picking quarrels and provoking trouble, illegally occupying farmland”, 67-year-old Sun was sentenced to 18 years in prison at the end of July.

Sun Dawu, in August 2013, a Chinese businessman was sentenced to 18 years in prison. © Washington Post/Getty Images

But what really makes Chinese entrepreneurs sleepless is Xi Jinping’s call for common prosperity.

The communiqué was issued after the meeting of the Central Finance and Economics Committee on August 17, and seemed to mark a new policy for wealth redistribution. Although most of the language is standard party language, sentences such as “promoting common prosperity in stages, three-time distribution of income, and prohibiting illegal income” are prominent.

The cumulative effect of these developments has shaken the confidence of everyone except the most tenacious Chinese entrepreneurs. Beijing’s message now is very clear: no matter how rich or influential individual private entrepreneurs are, the party has the ultimate power and can Do whatever you want.

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

Before China began to tighten capital controls in 2015, diversification of overseas assets used to be another option. Nowadays, it has become more difficult to transfer large sums of money abroad.

Desperate entrepreneurs may bet on China’s legal system, but they will certainly be disappointed. Chinese courts are not well-known for their independence and effectiveness in protecting private property rights. If there is any difference, China’s judicial system mainly serves the interests of the party.

The only thing private entrepreneurs can count on to ease Beijing’s wealth redistribution policy is the party’s self-interest. Since the true response of all entrepreneurs is to provide passive resistance, the implicit threat of mutual assurance of economic destruction may provide a kind of soft bargaining power.

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

Since the Communist Party relies on strong economic growth to maintain its performance-based legitimacy, the recession caused by the loss of incentives for private entrepreneurs may persuade Chinese leaders to downplay their new enthusiasm for wealth redistribution.

Although many Westerners view China as a national capitalist system, in reality, its economy relies heavily on the private sector. According to official reports, last year, in addition to foreign-invested enterprises, China’s private sector contributed more than 60% of GDP and accounted for nearly half of China’s foreign trade.

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

Since Chinese leaders are well aware of the risks involved in causing an economic slowdown, they should take immediate steps to appease nervous private entrepreneurs.

First, they need to clarify some key slogans circulating in the official media. For example, the meaning of “the three-level distribution of income” should be clarified, so as not to cause the state to force the rich to give up their assets in the name of charity.

The government should also emphasize that the main mechanism for seeking common prosperity is the development of a transparent progressive tax system and a sound social safety net, rather than confiscation of legal wealth obtained through private enterprise operations.

In particular, since regional and urban-rural gaps are the main cause of inequality in China, the government’s common prosperity plan must target the provision of public services in rural areas.

Two policies worthy of immediate implementation are the provision of tuition-free high school education and a substantial increase in public health spending in rural areas.

No one knows whether the Chinese government will take these measures. However, if China’s private-sector business leaders conclude that they are better off conducting a “wealth creation strike,” then Beijing’s plan to achieve common prosperity may eventually produce the exact opposite result.