Private Exploration of Socialism—The Unique Role of Private Enterprises in the Chinese Economy

Across the 70 years of economic development since the founding of the People’s Republic of China in 1949, the private economy has played an irreplaceable role in spurring economic growth, creating jobs, producing tax revenues and fostering new products and innovation. It has proven an indispensable part of socialism with Chinese characteristics. A look at the history of development of China’s private economy may help provide a deeper understanding of the country’s unique socialist system.

Development of the Private Economy

The status of China’s private economy has much to do with the theory of socialist economics with Chinese characteristics. In the beginning, the country’s understanding of socialism was primarily drawn from the writings of Marx, which lacked real-world experience for reference. Its understanding of the socialist system has deepened profoundly through exploration and trials. China adheres to a combination of theory and practice and addresses problems plaguing the country’s economic development directly. China upholds people-centered developmental concepts and strives to first meet the needs of the people. China continues enriching and improving socialist economic theory as it breaks through ideological restraints. Alongside the formation and development of socialist economics with Chinese characteristics, China’s private enterprises have undergone a process of encouragement, limitations, diminution, rebirth and development before reaching prosperity.

Since the reform and opening-up policy was implemented in the late 1970s, China’s private economy has sprouted from nothing. The laws of economic development have determined its development cycle, which has encountered periods of prosperity, overcapacity, adjustment, upgrading and further development.

Two different periods featured contrasting circles. The first emerged in the early 1980s and continued until the mid-1990s, during which time the private economy grew from nothing and developed fast. Private enterprises eventually found themselves with a surplus of primary products and began to adjust. Many started to adopt new strategies. They upgraded through improving management, placing more focus on developing new products and technologies and exploring overseas markets. The second period stretches from the mid-1990s until now. Through transformation and upgrading, private enterprises have constantly adjusted according to changes in the market and leveraged opportunities brought by China’s accession to the World Trade Organization (WTO) to quickly expand. Around 2008, large-scale overcapacity began to emerge again, causing private enterprises to launch another round of transformation and upgrading, which, guided by technological innovation, has taken more time.

A glance at history shows that the status of private enterprises in China’s economy has been increasingly strengthened. In government documents, the private economy has transitioned from “a necessary supplement to the socialist economy” to “a key piece of China’s socialist market economy,” and policies have been adopted to “encourage, support and guide development of the non-public economy” and “ensure that sectors of all kinds of ownerships use production factors equally,
participate in market competition fairly, and are equally protected by law.” Furthermore, the government has vowed to “unswervingly consolidate and develop the public sector of the economy, and unswervingly encourage, support and guide development of the non-public sector,” as was written into the basic strategy for upholding and developing socialism with Chinese characteristics in the new era.

Trends and Challenges

China’s private economy is now in a period of adjustment. Differentiation is an obvious trend for the future of the private economy, and enterprises that fail to adapt to changes in time will be eliminated by the market. Some will continue to chase low-cost products and survive by moving production to central and western regions or migrating abroad. Another choice for some would be to promote upgrading of production equipment, modification of process flow and accelerated adjustment of product structure. With support from the government’s overall strategy of accelerating innovation-driven development, high-tech private enterprises will develop rapidly.

The private economy is also facing new opportunities. Thanks to growing per capita income and expansion of middle- and high-income groups, China’s huge consumption potential will provide unprecedented opportunities for development of the private sector. The development of new technologies has also spawned new industries and products, creating more new business models with greater vitality.

But we should also be aware that China’s economy has entered an era of high-quality development in which low-cost production has gone forever. Perpetually rising costs of labor, materials and workspace will represent the new normal for the private economy in the foreseeable future. At the same time, the tough choice between cutting costs to streamline production and catering to consumers’ demand for improved variety, quality and brand image is causing the upgrading of enterprises to take a long time. Rising in the value chain requires massive R&D investment and more time, and has higher risk. The choice of whether to increase investment in R&D has already become a headache for private enterprises. 

The author is an associate professor with the Institute of China’s Economic Reform and Development and a researcher at the Research Center of China’s Private Enterprises, Renmin University of China.