AN OLD AFFLICTION is settling on China’s entrepreneurial class. It manifests itself in a cold sweat just at the mention of state-owned enterprises (SOEs), and a gnawing sensation that it is out of favour with the Communist-run government. Xi Jinping, China’s leader, last month gathered private businessmen to soothe nerves and to offer a comradely cure: to take an “anxiety pill”.
The remedy is a staple of the Chinese socialist lexicon, a phrase doled out to reassure, usually when individual interests appear to butt up against the state. But its use in the People’s Daily, the Communist Party’s main mouthpiece, has shot up, as one scholar recently calculated, appearing in 119 headlines since January. (One article with satirical intent, “A Brief History of the Anxiety Pill”, was censored and taken down from WeChat, a messaging app.)
Why so uneasy? The success of the private sector in China is undisputed. Its most innovative and global technology stars are all privately run, including the “BAT” firmament of Baidu, Alibaba and Tencent. The non-state sector contributes close to two-thirds of China’s GDP growth and eight-tenths of all new jobs. The proportion of private ownership in industry continues to rise as that of the state recedes. This is for good reason: SOEs’ return on assets is half that of privately held ones. Many state firms are propped up by the cheap capital they enjoy from state-owned banks (which are averse to lending to riskier private firms).
A different storyline is now unfolding. Between January and October profits at SOEs grew by 17% compared with the same ten months last year; those at private companies fell by 19%. Most of the 11,000-odd businesses that went bankrupt between 2016 and the first half of 2018 were privately owned, according to an estimate by China Merchants Bank, a lender. Many have been disproportionately hurt by cuts to excess capacity in steel and coal, because of higher industrial prices—from which state-owned producers have in turn profited.
Soon after Mr Xi came to power in 2012, the talk was of reinvigorating state-run laggards by allowing private companies to buy stakes in them, a plan known as “mixed-ownership reform”. That scheme is now working in reverse. At least 29 listed firms on the Shanghai and Shenzhen stock exchanges have sold controlling interests to the state this year. Many have been crimped by a government crackdown on the informal channels of financing on which they rely. CICC, an investment bank, calculates that by September over half of all deals in which a controlling stake was sold this year were nationalisations. Just 8% were privatisations.
Such deals do not necessarily mean a firm is put to the service of the state. Many state investors simply want a tidy return. Shaanxi province, for example, has a three-year plan that urges SOEs to invest in private firms “with great potential for growth”. The government of Shenzhen, a freewheeling capitalist enclave, has earmarked 100bn yuan ($15bn) to buy stakes in struggling listed private firms, to help them rather than take them over. Local governments have spread tentacles beyond their own provinces for a share of the riches: an SOE in Fujian province has invested in a private maker of liquid-crystal displays from neighbouring Jiangxi.
Expansion by the state sector is not new: it also happened during a huge financial stimulus in 2008, for example. It periodically fuels fears of what is known as guojin mintui—the state (sector) advances, the private retreats. Yet this latest bout feels different, says Zhang Lin, an economist at the Unirule Institute of Economics, a respected liberal think-tank in Beijing that has been forced by the government to suspend its work. SOEs saw their fortunes rise a decade ago because of a reflex response to a crisis, says Mr Zhang. Now, he contends, guojin mintui is “intentional and active”.
Analysts in the dairy industry say the phenomenon is clearly taking hold. Even if SOEs are also drawn to its fat profit margins, some interventions look strategic. This month Beingmate, an ailing private maker of milk formula, said it was selling a 5% stake to a state investor. Its second-largest shareholder is Fonterra of New Zealand. Beingmate’s founder has said in private that he wants the Kiwis out so the state can lift its stake.
In the flashier tech industry, rumours abound of the state wanting to take small stakes in its big thriving firms, too. Some have been told to expect party “observers” on their boards from next year. The founder of Bytedance, a tech giant founded in 2012, has said publicly that “technology must be led by socialist core values”. When Jack Ma of Alibaba was revealed last month by state media to be a party member, a matter he had long avoided discussing, some took it to mean that no one now works outside the party-state nexus. Since last year most big live-streaming and short-video platforms have set up party committees.
What can be experienced as intrusion is sometimes simply belated regulation. Still, the state is indifferent to paralysing private companies in the process. It has frozen approvals for companies to charge for new video games since March, without explanation. As a result, Tencent’s stock has fallen by almost a third since a record high in January; dozens of small game-developers face bankruptcy.
State media, meanwhile, love to use the example of one firm, Shanghai Jahwa Group, to prove the ills of privatisation. The cosmetics-to-chemicals group was founded in 1898, nationalised in the 1950s and enjoyed boom times in state ownership. It recruited marketing managers from international firms and, to design packaging, partnered with Sephora, a French make-up retailer. In 2011, as part of reforms to lessen the presence of the state in certain sectors, it was bought by Ping An, a private insurer, and has since floundered. Not every firm in which the state has a stake is uncompetitive. Mr Xi says he is an ardent supporter of private firms. But unless he puts a halt to guojin mintui, Chinese entrepreneurs will conclude that the state is turning against them.