China’s government is investing heavily in promoting entrepreneurship as a way to create jobs and upgrade the economy.
The government is pinning its hopes on entrepreneurship to foster a new economic growth model and develop the poorer, rural areas of the country. Recent policies take a two-pronged approach, targeting urban graduates and rural migrants separately.
What next
Top-down planning coupled with massive investment will yield positive results, but at the price of inefficiencies. Most small businesses will still struggle to raise capital and most new businesses will be created in labour-intensive and low-tech sectors.
Subsidiary Impacts
- Policies targeting high-tech innovative start-ups have high potential to boost the quality and quantity of economic growth.
- Entrepreneurship-promotion policies aimed at start-ups and small businesses will mostly benefit already established enterprises.
- The supply of credit available to entrepreneurs will fail to meet their huge and growing demand for financing.
Analysis
‘Mass entrepreneurship and innovation’ has been a central government policy since Premier Li Keqiang first introduced the concept in a keynote speech at the World Economic Forum in Tianjin in 2014.
Efforts to promote entrepreneurship aim to solve two distinct problems.
Graduates
The labour market fails to provide fresh graduates with jobs that make use of their skills, even though this is precisely the educated workforce that China needs to drive innovation and transition to a high- tech economy.
Migrants
China needs to reduce industrial overcapacity and upgrade labour-intensive industries. That means that fewer migrant workers are needed in the southern and eastern coastal areas. The number of new rural migrant workers has decreased steadily since 2010.
Many cannot afford to live in cities, which do not welcome them to stay (see Recent hukou policies will increase inequality among the migrant population). The forced eviction of thousands of migrant workers from Beijing from November 2017 onwards is a recent and dramatic example.
The government wants migrants to return to small cities, towns and villages and start businesses there. This would help ‘soak up’ the redundant migrant workforce and also generate economic growth in China’s rural areas, where poverty remains most severe.
Cutting red tape
In large cities, the government aims to create synergies between universities and enterprises and an environment conducive to technological and financial innovation.
The most notable development here is reform of the business licensing system.
In 2015, registration procedures were simplified so that business licences, tax registration certificates and ‘organisation code’ certificates were all issued by a single administration.
In 2016, a new ‘five-in-one business licence’ combined business licence, tax registration, organisation code, social security registration and statistical registration into a single document.
In October 2017, a paperless system was introduced to allow the whole process to be done online.
Local ‘bases’
In May 2016, 28 ‘demonstration bases for mass entrepreneurship’ were approved, followed by 92 more in June 2017.
These give a foretaste of what may follow nationally – delegation of power to lower-level governments, further simplification of administration, better intellectual property protection, preferential tax policies, and new models of crowdsourcing and crowdfunding.
Universities and research institutes are tasked with running courses on innovation, credit management and entrepreneurship, and adopting a ‘flexible schooling’ system that lets students suspend their studies to start businesses. Research institutes are called on to cooperate more closely with companies and incubate start-ups.
Corporate demonstration ‘bases’ (such as at state-owned aviation giant AVIC) are given financial incentives to increase R&D investment and foster innovation, especially in IT.
Returned migrant policies
Another set of policies targets rural areas and migrants.
Policy documents in 2015 and 2016 streamlined rural business registration and gave rural companies huge tax cuts. Start-ups meeting requirements were exempted from corporate income tax, value-added tax, sales tax and local taxes, and had their social security contributions greatly reduced.
Since 2013, the government has promoted public-private partnerships and allowed private companies to participate in rural infrastructure development and public services previously reserved for the state.
By November 2017, 341 pilot areas for returning migrant entrepreneurship were experimenting with special loans and credit support for migrants. Local governments built thousands of incubators with public funds across the country.
Training is particularly emphasised. Vocational training is not a new idea; the government has promoted it since 2003. However, the focus has shifted to e-commerce and sectors such as ‘leisure agriculture’, the ‘forest economy’ and rural tourism. The government hopes to train a ‘new type of professional farmer’.
Perhaps more important are innovations in credit and land ownership to encourage rural entrepreneurship. In rural areas, lack of collateral is the major constraint on access to credit and therefore business creation.
Major reforms in 2014-15 allow farmers to borrow against the collateral value of land-use rights. The separation of rural land rights into ‘ownership rights’, ‘contract rights’ and ‘management rights’ in 2016 allows farmers to retain the contract right over their land, while renting or mortgaging their management rights.
The impact will be significant in a country where only one-tenth of entrepreneurial capital comes from formal financial institutions.
Successes
Policies promoting entrepreneurship come at a cost: in 2015, for example, China granted more than 300 billion renminbi (46 billion dollars) in tax cuts to boost entrepreneurship and innovation.
However, the policies are achieving results. The number of newly registered companies has grown each year, rising 24.5% year-on-year in 2016 to 5.5 million, up from just 2.5 million in 2013 before the policy programme started. Around 13 million new urban jobs have been created each year since 2013 and the number of domestic patents for inventions rose 44.7% in 2016. Up to September 2016, 4.8 million migrants and students had returned and set up businesses in the countryside – up from 4.5 million the previous year (though still small compared to the total migrant population of 282.0 million).
Continuing difficulties
A 2014 study (in Chinese) found that 67% of fresh graduates expressed willingness to start a business in a rural area, but only 7% put their idea into practice. Most incubators, built in small cities under top-down planning, are still half-empty.
In practice, tax breaks and other incentives mainly benefit already well-established businesses with personal connections to local officials rather than capital-starved entrepreneurs.
The major beneficiaries of policies do not seem to be those most in need of them
Entrepreneurs still suffer from insecure property rights, despite the passage of a Property Law in 2007 and further improvements in the years since to the protection of real and intellectual property – especially the establishment in 2015 of a nationwide real property registration system.
For most migrants, ‘starting a business’ means self-employment and a precarious financial situation. The number of self-employed had levelled off before the 2008 financial crisis, but has more than doubled since.
Despite emphasis on vocational training, most migrant workers are poorly educated and lack management and technical skills. Their businesses are concentrated in labour-intensive industries, farming and tourism, with small and low-tech structures.
These are not businesses with the potential to upgrade China’s economy and restructure it in the way policymakers want. On the contrary, these small entrepreneurs risk being left behind as the economy changes and have no safety net if they fail.
This article was first written for the Oxford Analytica Daily Brief, which is the copyright holder.