The Ascendancy and Economic Contribution of China's Private Sector

Key Insight

China's private sector has been the most significant contributor to the nation's sustained high economic growth over the last three decades, with virtually all productivity and employment gains since 1978 stemming from the reallocation of resources towards private firms. It now represents the majority of China's economic activity, accounting for approximately 60% of GDP, and also dominates employment, fixed investment, industrial production, new bank loans, and the trade surplus. This substantial growth has fostered considerable wealth, evidenced by 2,400 private-sector millionaires and 324 billionaires in China by 2014, highlighting the private sector as the core of China's economic success and future growth potential.

The private sector's evolution in China can be divided into three distinct phases. The initial period, from the late 1970s to the mid-1990s, saw rapid expansion despite an insecure legal framework. The dominant form was the 'getihu' (individual business enterprise), legally restricted to seven employees. Larger private firms often circumvented registration difficulties by 'wearing the red hat,' registering as 'collective' enterprises with local government shareholdings for patronage and protection. This era laid the groundwork for future growth under challenging legal and institutional conditions.

The second phase, from 1995 until the 2008 global financial crisis, marked a significant boom for the private sector. During this time, private property rights were strengthened, more flexible corporate organizational forms became available, and the state reduced its role in many sectors, opening new lucrative markets for private firms, some of which acquired distressed SOEs. A symbolic policy shift in 2001 allowed private entrepreneurs to join the Communist Party. The private sector's share of industrial value-added more than doubled from 15% in 1998 to 33% in 2003, with broader estimates suggesting an increase from 56% to 63% between 2003 and 2007. This dramatic growth meant private firms went from near zero to controlling roughly two-thirds of China's industrial production, while SOEs' share dwindled from three-quarters to one-quarter. Post-2008, despite the 'guojin mintui' (state advances, private sector retreats) narrative, private sector shares in output, exports, employment, GDP, and bank credit continued to rise, although the pace of displacement of state firms slowed. Current challenges for private firms include discriminatory regulation and barriers to entry in lucrative service sectors, rather than access to bank loans, which saw 39% of outstanding loans go to private firms in 2013.