Private sector promotion law: A turning point for Chinese enterprises

Editor's note: Matteo Giovannini, a special commentator on current affairs for CGTN, is a finance professional at the Industrial and Commercial Bank of China, a non-resident associate fellow at the Center for China and Globalization, and a member of the Global Young Leaders Dialogue. The article reflects the author's views and not necessarily those of CGTN.

China introduced a milestone in its economic governance with the private sector promotion law on Wednesday, set to come into force on May 20. This is the country's first dedicated law to comprehensively promote and protect private enterprises. It arrives at a critical juncture as China works to revitalize economic growth, address lingering investor concerns and strengthen the private sector's role in driving development.

For seasoned observers of China's policy evolution, this law represents more than a symbolic gesture; it is a significant institutional commitment to provide legal certainty and structural support to the private sector. Yet, the true test will be in how effectively it is implemented across China's diverse regions and industries.

Private enterprises have long been essential to China's economy, contributing over 60 percent of GDP, 70 percent of technological innovations, and 80 percent of urban employment. However, despite their indispensable role, they have often had to navigate an environment fraught with policy ambiguity, inconsistent enforcement and unequal treatment compared to state-owned enterprises (SOEs).

The new law is designed to address these challenges by reinforcing property rights protection, ensuring equal market access and improving financial support mechanisms.

Specifically, it mandates the protection of private enterprises' lawful assets, prohibiting unauthorized government intervention, expropriation, or arbitrary penalties. This commitment is crucial to restore trust among private business owners who have, in recent years, faced concerns over regulatory unpredictability.

In terms of market access, the law says private firms must be treated on par with SOEs in areas such as market entry, licensing and public procurement. This principle of "competitive neutrality" aims to remove the longstanding barriers that have limited private enterprise participation in key sectors like energy, telecommunications and finance.

Regarding financing, one of the private sector's most persistent challenges, the law calls for financial institutions to enhance services for private enterprises. It promotes diversified financing channels, from bank loans and credit guarantees to capital market instruments, with particular attention to the needs of small and medium-sized enterprises (SMEs).

The success of this law will hinge on its implementation at the local level, where much of the friction between private enterprises and regulators occurs.

Administrative simplification needs to be prioritized. Streamlining licensing, registration and compliance procedures, particularly for SMEs, will reduce the bureaucratic burden and foster a more business-friendly environment.

Moreover, strengthening legal enforcement mechanisms is critical. This means ensuring that private firms have access to fair and transparent judicial processes, whether in resolving commercial disputes, or protecting intellectual property.

In addition, to realize the law's promise of fair competition, the anti-monopoly and anti-unfair competition regulations must be vigorously enforced. Local protectionism and hidden subsidies to SOEs remain obstacles that distort market dynamics. Establishing independent oversight bodies and conducting regular audits of market fairness can help to build genuine confidence in the system.

Importantly, the performance evaluation of local officials should include clear metrics related to private sector vitality, such as improvements in market access, the number of new private enterprises established, and SME growth, alongside traditional indicators like GDP.

At present, the private sector's top concerns are predictability and access to financing. Regulatory shifts in sectors such as technology and education over the past few years have created unease, underscoring the need for greater policy consistency.

In terms of financing, innovative solutions are essential. Fintech-driven credit assessments that leverage data from tax records, e-commerce transactions and supply chains to provide more accurate credit evaluations should be promoted. This can help bridge the financing gap for SMEs, which often struggle with traditional collateral-based lending.

Expanding government-backed loan guarantee programs is also vital, especially in regions where private capital is scarce. Establishing regional credit enhancement platforms can mitigate banks' lending risks and stimulate investment in emerging industries.

Furthermore, enforcing timely payment obligations for private sector suppliers, particularly by SOEs and public sector entities, can significantly improve cash flow for SMEs, a longstanding pain point that hampers business sustainability.

To meet the evolving needs of private enterprises, there should be more institutionalized dialogue between government and business. Setting up formal consultation mechanisms, such as industry councils or periodic policy roundtables, can ensure that the voices of private entrepreneurs are heard and factored into policymaking.

Experiments can be conducted in pilot zones for regulatory innovation, allowing local governments to test flexible policies around taxation, digital administration and labor management. Successful pilots can be scaled nationally, creating a dynamic ecosystem for business reform.

Beyond policy, it's also important to cultivate a culture of entrepreneurship. Recognizing the contributions of private enterprises through public honors, media campaigns and education initiatives can strengthen societal support for entrepreneurial risk-taking and innovation.

The private sector promotion law is a landmark in China's journey toward a more balanced and dynamic economy. By embedding protections for private enterprises into the legal framework, it offers reassurance to business owners and investors that the private sector is not only recognized but actively supported as a core driver of China's modernization.

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