[Richard McGregor] Xi ignored private enterprise. Now he needs it

After more than five years in power, Xi Jinping has constructed a singular political persona: of a leader who places the Communist Party and its authority above all, on top of the state, the economy and military.

So it may have come as a surprise to see Xi usher China’s top entrepreneurs into Beijing’s Great Hall of the People earlier this month to offer them reassuring bromides about their importance for the country’s economy. “All private companies and private entrepreneurs should feel totally reassured and devote themselves to seeking development,” Xi told them, adding that “private enterprises and private entrepreneurs belong to our own family.”

If you were judging this moment in purely economic terms, you could argue Xi should have convened such a meeting years ago. Collectively, the private sector in China accounts for nearly three-quarters of output, and 85 percent of jobs, according to Andy Rothman, chief investment strategist at Matthews Asia.

The businessmen sitting attentively across the table from Xi together embodied the enormous wealth generated by entrepreneurs in the last two decades in China, in gaming, high-tech, health care, food and pharmaceuticals. Many of them, like Tencent Holdings’ Pony Ma, are billionaires many times over, which makes one wonder why he and the other business titans like him needed any reassurance from Xi at all.

One clue was in a trip that Xi made just weeks before, to the farms and factories in China’s northeast where he lavished praise on the state sector and offered only perfunctory support for private businesses. “Such statements as ‘there should be no state-owned enterprises’ and ‘we should have smaller-scale state-owned enterprises’ are wrong and slanted,” Xi said, adding that the party’s guidance in such companies should always be followed.

Inspection tours by top leaders can generate immense political momentum in China, tipping the scales decisively on policy. Deng Xiaoping’s “southern tour” of Shenzhen in 1992, for example, famously turned the tide against conservatives in favor of reform, which in turn created the conditions that allowed today’s private businesses to grow and thrive. For many Chinese entrepreneurs and their supporters in the bureaucracy and think-tanks, Xi’s high-profile tour of China’s state-dominated rust-belt was a worrisome signal.

Xi spent decades in top party posts in Fujian and Zhejiang, two coastal provinces near Shanghai that have long been powerhouses of the Chinese private sector. Yet China’s president has left little on the public record that suggests he appreciates the role of entrepreneurs in making those provinces rich.

After taking over as leader of the Communist Party in 2012, Xi oversaw a declaration about how China would henceforth give the market a “decisive” role in the economy. It was a statement much applauded by market reformers, but which in practice has proved to be a smokescreen similar to many put out by the party, misleading outsiders to think China is becoming more like the West.

In power, Xi has gone in the opposite direction, entrenching the state in the economy, subsidizing national champions, deploying his anti-corruption campaign against targeted entrepreneurs and forcing private companies to give the party a say in their businesses.

At least one entrepreneur may have taken Xi’s tough line to heart. Alibaba Group Holding’s Jack Ma, one of the most recognizable faces of China’s private sector both at home and overseas, announced in September he would step down next year as chairman of the company he founded. Ma said he wanted to focus on education and philanthropy. But one of his business partners confided that Ma’s high profile had made him a potential target for the leadership. If there was a presidential election in China tomorrow, Jack Ma would win, the business partner told me -- and that’s a dangerous situation to be in.

The real world, however, has been sending different signals to Xi about how economies work, and it may be that he is finally hearing them. On top of politics, a cascade of factors has been squeezing Chinese private businesses, and by extension, the kind of growth that Xi needs to maintain the party’s firm grip on power. A credit crunch and a property downturn, combined with Donald Trump’s trade war, have started to turn what was meant to be a policy-induced slowing of the economy into something more alarming.

With alacrity, Xi and top leaders have turned to the only functioning economic engine that China has -- its entrepreneurial class. China’s chief bank regulator, Guo Shuqing, went as far as saying in November that most new loans should be going to private companies. Guo was soon slapped down -- Chinese state banks have little experience in dealing with entrepreneurs and measuring risk in the private sector. But the fact that he said it in the first place is evidence of a change in sentiment.

In truth, Xi has taken longer to learn a lesson that all his predecessors came to understand. The Communist Party sinks or swims with the economy, which itself depends on a thriving private sector.


Richard McGregor
Richard McGregor is a senior fellow at the Lowy Institute in Sydney. He has been the bureau chief for the Financial Times in Beijing, Shanghai and Washington. -- Ed.

(Bloomberg)