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Jia Tianhao and his friends thought they would be running a fast-growing tech start up by now. But like many entrepreneurs and private sector companies in China, they are finding growth harder to come by as the world’s second-biggest economy stumbles.
Their four-year-old software company, based in Alibaba’s hometown of Hangzhou is “slowing down”. We’re taking a step back and using this time to improve ourselves,” says Jia, 26.
For China, such sentiment is a problem. Headlines in recent weeks have focused on thorny debt problems which have battered the property sector and strained local government coffers. But another problem is standing in the way of the country’s economy returning to a path of sustained growth: a lack of confidence among businesspeople.
Metrics of this may be imperfect but there is evidence that confidence among consumers and entrepreneurs in China has not recovered from a plethora of policy measures under Xi Jinping’s administration, including the leader’s sweeping “common prosperity” campaign in 2021 which tackled inequality and excess while also reasserting the Chinese Communist party’s control over the country’s entrepreneurial class.
Business confidence in August fell to its lowest point in a year, according to the Caixin services survey. “The biggest problem right now is a loss of confidence on the part of Chinese entrepreneurs,” says Andy Rothman, an investment strategist at the Matthews Asia fund. “That’s the part of the economy that drives most of the job creation, most of the wealth creation, most of the innovation and most GDP growth,” he says.
A new tracker from the Peterson Institute for International Economics shows that in the first half of this year, the share of China’s state sector among the country’s largest listed companies rose to 61 per cent, from 57 per cent. The share of the private sector dropped below 40 per cent for the first time since the end of 2019, declining further from a peak of 55.4 per cent in mid-2021.
PIIE researchers Tianlei Huang and Nicolas Véron point out that their tracker “echoes . . . other dismal recent private-sector numbers”. Among them, China’s private-sector fixed asset investment shrank in the first half of the year compared with the same period in 2022.
In July, political leaders in Beijing acknowledged they had a problem. The party’s Central Committee, one of China’s top decision-making bodies, and the State Council, the country’s cabinet, issued a rare joint statement in support of developing the private sector in China. Since then there have been signs of green shoots: some restrictions over the real estate sector have been eased and more moves have been made to boost domestic consumption. Even Jack Ma, one of the key targets of the 2021 campaign, has resumed some public appearances.
Liqian Ren, who manages China investments at WisdomTree Asset Management, argues the real estate bubble bursting is the “overarching factor” weighing on private sector investment. “Naturally, whether it’s in China or outside China, where you have these kinds of macro conditions, people are cautious,” she says.
Rothman says entrepreneurial sentiment is eventually going “to turn around”. But the timing, he concedes, is uncertain. “Over the last several decades, the Chinese economy has gone through a lot of challenging periods . . . in the end, the government has, after it’s made a lot of mistakes, been pragmatic, and in the end, Chinese entrepreneurs and households have been resilient.”
To that end, Wang Ziyi, co-owner of a Hangzhou company that develops digital luxury goods supply chains, is among those who see an opportunity in the downturn. She says that with cheap rent it is a good time to expand and open new stores.
Still, most analysts believe far more needs to be done to convince businesspeople that unpredictable regulations and sudden crackdowns are a thing of the past. They point to the inherent tension between Xi’s priorities of party control and national security, and unleashing the animal spirits of China’s entrepreneurs and consumers.
Yu Jie, a China expert at the UK think-tank Chatham House, said that the “common prosperity” campaign created a sense of uncertainty, spooking private investors and private companies. “It is very easy to undermine confidence, it will take a much longer time to restore the sense of confidence that would be required to get the economy back on track,” she said.
Additional reporting by Nian Liu