As trade tensions between Beijing and Washington worsen, a debate is intensifying in China over the role private and state-owned enterprises play in the economy. The debate has even stoked fears that the communist-led government is preparing to nationalize private industries, analysts say.

Under Xi Jinping’s leadership and especially over the past year, after he scrapped rules on term limits for the president, allowing him to potentially carry on as China’s ruler for life, the communist party has begun re-asserting its dominance over all segments of society, including business.

Party on top

 

In June, the party announced it was mandating all listed companies set up party organizations for their employees. Over the past two weeks, as tensions with Washington have ratcheted up, there have been articles posted online suggesting it was time private enterprises step aside and that China should move toward a large scale centralized private-public mixed economy.

 

“The private economy has accomplished its mission to help the public economy develop and it should gradually step aside,” said Wu Xiaoping, a veteran financier, in one article.

Despite a backlash, even from state media, the fact that the article was not immediately taken down was a sign the government was testing the waters to see the public’s response, said said Frank Xie, an associate professor at the University of South Carolina Aiken.

“In China when there is something that the government doesn’t want people to hear, it won’t survive, as soon as it surfaces on the internet, on Wechat, it will be deleted and removed, right away” Xie said. “And yet this thing, the call by this guy stayed there for so long.”

A more recent comment from the Qiu Xiaoping, deputy secretary of the Ministry of Personnel and Social Affairs, was also met with a backlash. In recent remarks, Qiu said private enterprises need to be more democratic, allow for more participation in management and help strengthen the leadership of the party.

Private assurances

Chinese officials have given assurances that private companies would be looked after. During a visit to the northeastern province of Liaoning late last week, President Xi urged private companies to be confident.

He also pledged that the party would unswervingly develop, support, guide and protect the private sector. Whether Xi’s remarks meant getting more involved in private companies’ affairs was unclear.

Clearly, the private sector is deeply concerned.

 

“Against the backdrop of the U.S.-China trade war there are concerns that the Chinese economy will contract and that Chinese leaders may sacrifice private enterprises to prop up state-owned enterprises,” said Lu Suiqi, an associate professor of economics at Peking University.

Lu said that despite assurances, the commanding role that state-owned enterprises enjoy is unlikely to change.

 

State-owned enterprises have long enjoyed a monopoly over key lucrative industries in China. They’ve also long been a hotbed for corruption. And yet, despite their access to 70 percent of the country’s financial resources, they account for around 30 percent of the economy.

 

Private enterprises receive less access to capital and yet account for 80 percent of employment as well as contributing to 60 percent of the economic growth.

 

But while many in and outside of China see SOEs dragging China’s economy down and as an obstacle to free trade — state owned enterprises are a key part of Washington’s trade complaints — the party is likely to continue its effort to expand the size of state-controlled enterprises.

 

“Whether it is nationalizing private enterprises or making state owned enterprises bigger, it is all about expanding control,” said Darson Chiu, a research fellow at the Taiwan Institute of Economic Research. From China’s point of view, “expanding the size of SOEs, will make it easier to promote a planned economy and manage risks.”

 

That is the opposite of what President Donald Trump is asking China to do and if Beijing does press forward, the two will be on a collision course, said Frank Xie.

 

“It’s only going to encourage Trump to move to the next step, with another $267 billion in tariffs,” Xie said.

 

Survive

 

But serious risks are what China is facing, and it is not just the trade war. China’s stock market is at its lowest point in nearly four years and industrial growth has slowed for four consecutive months.

The Chinese economy is facing a range of problems, including massive government and corporate debt combined with tightening liquidity.

 

Just last week, the head of China’s biggest real estate firm Vanke created a stir online when he announced at a regular meeting that the company’s main goal is to “survive.”

Speaking at an internal meeting, where red banners with the same words “survive” were hung, Vanke Chairman Yu Liang said China is currently at a turning point and no industry will be spared the from negative economic impacts.

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