China Economy

China's Xi tries to reassure the country's worried private companies

Key Points
  • President Xi Jinping is attempting to reassure China's private sector that it has nothing to fear from the state.
  • Xi met entrepreneurs on Nov. 1, telling them they "should feel totally reassured" and offered tax breaks and financing help, state media reported.
  • Analysts say Xi's outreach, which comes amid the trade war with the United States and a slowing Chinese economy, is important to restore confidence in the job-creating private sector.
Chinese President Xi Jinping.
Thomas Peter | Reuters

Chinese President Xi Jinping is making peace with his country's private companies.

That reassurance comes amid an environment in which privately owned enterprises have taken a hit from banks constricting lending in a national effort to rein in debt. On top of that, confidence has been shaken on concerns private firms were falling out of political favor in relation to their powerful state-owned brethren.

Now, facing trade war with the United States and a slowing economy, Xi is offering the sector an olive branch, which analysts and investors say is necessary to boost confidence in the critical job-providing sector.

China's big state-owned enterprises have long enjoyed exalted status, with preferential access to funding and other benefits. And despite years of reform talk, their political influence has actually been seen to grow in recent years.

But at a symposium last Thursday with private entrepreneurs and reported by the official Xinhua news agency, Xi sought to make amends, promising measures including lower taxes and improved financing, while also offering soothing words of inclusion.

"All private companies and private entrepreneurs should feel totally reassured and devote themselves to seeking development," Xi said at the event, according to Xinhua. "Private enterprises and private entrepreneurs belong to our own family."

Andy Xie, an independent economist formerly with Morgan Stanley, said Xi's words may have a positive psychological impact but action will be more critical.

Xie told CNBC on Thursday that state-owned enterprises have become "emboldened" by an environment that "stresses politics above everything else" in the last five years.

"They've been basically really taking on private companies in a very negative way," he added, citing anecdotal examples of the latter either being forced out of business by state rivals or seeking investment from them to stay in business.

'Loses its dynamism'

In an apparent nod to concerns of political favor for the state-run sector, Xi, according to Xinhua, called for a level playing field for private business and said the Communist Party of China should pay more attention to its needs.

China's private sector is diverse, consisting of behemoths such as internet companies Alibaba and Tencent as well as smaller companies that form the backbone of the country's manufacturing.

The debt campaign, which China has had to tone down amid the trade war, along with other policies, dealt an outsized "negative" blow to China's private companies, Japanese financial firm Nomura said.

"So we view these latest moves by Mr. Xi as an apparent effort to boost market confidence at a time when China's economic growth faces a worse-than-expected slowdown, its stock markets have tumbled and the private sector is being financially squeezed," it said in an analysis the day after he met the entrepreneurs.

Xi's internal outreach came just days before a speech Monday in Shanghai directed at foreign governments and investors in which he pledged to increase imports, further open the economy and strengthen intellectual property protections — all key demands of the United States.

Both the meeting with domestic companies and the Shanghai speech appeared to be part of a two-pronged strategy, according to Citi.

"After re-assuring Chinese private entrepreneurs, the government is looking to convince foreign investors and multinational corporations that their participation in China's economic development is welcome," the U.S. bank said in a Monday note.

"While these messages will allay the worst fears about the direction of China's economy, we believe confidence will take time to return," it added.

Mark Jolley, equity strategist at CCB International Securities in Hong Kong, called Xi's approach to the private sector a "positive" because it is small companies that drive job growth.

"It's something which is quite important because, obviously, if small business is suffering for too long, China loses its dynamism as an economy," Jolley said.

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