China resorts to unusual measures to restore confidence among entrepreneurs. But it's not working

Hong Kong CNN

Private entrepreneurs in China have lost their enthusiasm after years of regulatory clampdowns and Covid curbs. China's government has taken surprising measures to restore confidence in the private sector, but this campaign has elicited more anxiety than optimism.

Last month, the province of Hainan - an island Beijing hopes to transform into the largest free trade port in the world - launched a package of initiatives to help the private sector. Most eyebrow-raising of all was the promise from the provincial government to not target private businesspeople without reason.

In a press release, it stated that '[authorities] shouldn't arrest those entrepreneurs who are involved in criminal cases if they're not needed, shouldn't prosecute them if necessary, and should not sentence them to jail if necessary'. If it is not necessary to continue detaining them, then [authorities] must release them as soon as possible or change the enforcement measures against them.

The package includes more than two dozen actions to support the private sector, which is responsible for over 60% of China's GNP and more than 80% of its employment.

Hainan's government stated that the measures are aimed at protecting private entrepreneurs' legitimate rights and interests and creating an 'fair and equitable' legal environment.

The announcement caused a lot of controversy both online and off. Social media users criticized the announcement as 'absurd,' as it implied that the government was arresting people as they pleased and that entrepreneurs would now be able to enjoy extrajudicial rights.

Analysts believe that the statement, in which the most controversial pledges were later removed, could have the opposite impact. Analysts say it could cause businesspeople to be even more anxious about punishment.

Willy Lam is a senior fellow with the Jamestown Foundation in Washington. The statement made by Hainan authorities highlights the arbitrariness of Chinese laws, even when it comes to multi-million yuan bosses.

He noted that there have been numerous reports of private businessmen being arrested on 'dubious' charges.

Bao Fan is a prominent investment banker who has been missing from February.

China Renaissance, his company, said that Bao was 'cooperating with an investigation' by the authorities. It has not provided any other information. Analysts think he could have been involved in Beijing's anti-corruption crackdown against the country's finance industry.

Private investment has stalled

Hainan’s measures are critical at a time when the second largest economy in the world is struggling to recover after three years under strict Covid-19 control and years of repression against private industry.

The growth rate has dropped to its lowest level in many decades. The business climate is shaky, and companies are hesitant to invest or hire. Unemployment is high, particularly among young people.

China's leaders, including Xi Jinping have tried to reassure entrepreneurs and investors that they can invest again in the country.

Nicholas Lardy is a senior fellow at Peterson Institute for International Economics. He said that'statements will not restore confidence in the private sector'. Actions such as reducing [the Chinese Communist] Party's role in the economy will speak louder.

He said that while private investment in China stagnated last year, state investment soared. He said that the latter is more efficient because it generates more economic growth per unit of investment.

The private sector has retreated even further this year.

According to official statistics, the gap between private and state-led investment in fixed assets widened even more compared to last year. State-led investments grew by 10.5% while private investment grew only 0.8%. In 2022 state investment increased by 10.1% while private investment only increased by 0.9%.

'This shows that confidence among private entrepreneurs still lacks despite China reopening Covid and the vocal reassurances from officials in recent months,' said Tianlei Hua, a researcher and coordinator of the China Program at the PIIE.

Are you scared?

The Chinese government has promised to revitalize the economy of the country, which is currently showing a sluggish rate of growth. They have also opened the doors for foreign companies. In March, the new premier Li Qiang promised that China would adhere to global trade rules and treat foreign investments equally. He also pledged to remove government controls and promote trade and investment.

Some Western companies took the bait. Tesla (TSLA), announced in this month it would be building a new factory for batteries in Shanghai.

Airbus Europe (EADSF), a European company, announced plans to build a new assembly line in Tianjin, a northern Chinese city. This will double the production capacity.

Analysts said that despite President Xi's preference for ideological control over economic goals, most foreign and domestic investors could still be discouraged by his desire to prioritise this.

Lam, of the Jamestown Foundation, said that'most private businesspeople prefer to stay low than make big investments in an environment where party control is more important than entrepreneurial spirit'.

Last month, Xi urged the private sector (and other sectors) to help boost growth. He also promised that the government would support them if they encountered difficulties.

Xi stated that he always regarded private businesses and entrepreneurs as being on his side.

He also said that private companies should be aligned with the priorities of the ruling party, including being 'patriotic and' participating actively in "charity undertakings" -- in line his 'common prosper' campaign.

Steve Tsang is the director of the China Institute of SOAS University of London.

He said that they consider themselves pro-business because businesses do the Communist Party's bidding.

Lam pointed out, too, that recent statements made by Xi's team placed a greater emphasis on loyalty to the party than the emergence of the market.

Lam stated that while they needed more input from foreign and private businesspeople, their emphasis on political correctness could deter non-state sector investors from both China and abroad.