After the 20th Party Congress, private business is running scared

How did business respond to Xí Jìnpíng 习近平 gaining an unprecedented third term as party general secretary and the unveiling of the rest of the Politburo Standing Committee, six elderly men, largely distinguished by their loyalty to China’s strongman chief?

A day after the new leadership team marched out into an ornate room in the Great Hall of the People in Beijing before the world’s cameras on October 23, the markets swooned. Stocks in Hong Kong fell their most since the 2008 financial crisis. Chinese equities listed in the U.S. saw their biggest drop ever. And the yuan careened to a 14-year low.

“The market is concerned that with so many Xi supporters elected, Xi’s unfettered ability to enact policies that are not market friendly is now cemented,” Justin Tang, head of Asian research at United First Partners, told Bloomberg.

As a result of the stock market carnage, China’s richest tycoons, including bottled water company Nongfu’s Zhōng Shǎnshǎn 钟睒睒, Tencent’s Pony Ma (马化腾 Mǎ Huàténg), Pinduoduo’s Colin Huang (黄峥 Huáng Zhēng), and Alibaba’s Jack Ma (马云 Mǎ Yún) saw their combined wealth fall by $35 billion. And Chinese billionaires have been the biggest losers this week among the world’s 500 richest people, according to the Bloomberg Billionaires Index. There are reports that more of China’s wealthy are moving their assets abroad an  preparing to emigrate, following the closing of the 20th Party Congress.

While some believed Xi might back off from some of his most market-damaging policies, including COVID zero and the rolling crackdowns on big private companies of the last couple of years, that hope has been dashed. That was already clear when he gave his much-parsed opening address on October 16, with the pointed message that from now on security would trump the economy, made obvious by the far greater emphasis put on the former in his speech: references to “market” and “reform” were at their lowest in a congress address since the 1980s.

What appears to have really spooked the business community are signs that China may finally set up a comprehensive tax system, as part of Xi’s “Common Prosperity” goal of making a more equitable economy. An inheritance tax, a strong capital gains tax, and the much discussed and delayed property tax, all of which China lacks and arguably needs — in part to help boost the revenues of struggling local governments — could hit the pocketbooks of China’s wealthier class. (Income tax in China contributes relatively little to government revenues compared to developed countries, and overall, the tax system is “fundamentally regressive;” tweets former UBS chief economist George Magnus.) China aims to “improve the personal income tax system” and better regulate “wealth accumulation,” Xi said in his speech.

Regardless of whether China finally gets serious about instituting new taxes (and the track record of implementing earlier plans isn’t good), it’s hardly been a good year for private business, buffeted by COVID lockdowns and hurt by the property sector slowdown, not to mention suffering under pressure from Beijing to invest in Party-sanctioned programs like poverty alleviation.

After growing for almost a decade, the proportion of China’s largest companies that are privately owned has been falling since last year, research by the Peterson Institute for International Economics shows. And even though private firms’ production today still accounts for some two-thirds of GDP, and they employ about 80% of urban workers, their profit growth has stalled, falling 7% in the first seven months of this year. By contrast, state-owned firms saw their profits go up by 8%. “China’s private firms have been underperforming relative to the state-run sector,” write Peterson research fellows Tianlei Huang and Nicholas R. Lardy.

Concerns run deeper than new taxes and pandemic policies. Existential angst about what role the private sector will be allowed to play in China has increasingly returned to haunt its entrepreneurs. While the Party has long viewed private business with deep suspicion, and during the Máo Zédōng 毛泽东 years outright persecuted capitalists, that shifted dramatically towards a more positive perspective with Dèng Xiǎopíng’s 邓小平 Reform and Opening in 1978 and later when former top leader Jiāng Zémín 江泽民 welcomed entrepreneurs into the party in 2002.

As I wrote more than two decades ago, “simply put, President Jiang Zemin, Premier Zhū Róngjī 朱镕基, and others recognize that the private sector offers the best hope as an engine of growth. As state firms shed workers and shut plants, new businesses are urgently needed to generate millions of new jobs.”

But under Xi things have taken a marked step backwards, with a much more skeptical eye cast on the private sector as China’s economy has grown far stronger, becoming the world’s second-largest. Even before he had finished his first five years as China’s top leader, Xi told entrepreneurs in 2016 they must “Love the Communist Party,” warning that some people had “unwittingly become trumpeters of Western capitalistic ideology,” which could lead to “disastrous consequences.”

So where did Xi decide to make his first visit after the 20th Party Congress? With the entire Politburo Standing Committee in tow, Xi traveled to the revolutionary cradle of Yan’an, visiting the former residence of Mao and the site of an earlier historic party congress. (Ten years ago he went to Shenzhen, China’s first special economic zone and a symbol of market opening.) In a speech, Xi called on all party members to “strengthen the fighting capacity… and harness the indomitable fighting spirit to open up new horizons for the cause of the Party and the country.” Doesn’t sound much like a pragmatic leader ready to set aside politics and give entrepreneurs space to make money and grow, does it?

No wonder business is running scared.