China pins growth hopes on struggling small businesses

Beijing’s hopes for an economic recovery after posting slowing growth last year will depend in large part on the animal spirit of small and medium-sized businesses, which account for the majority of production, urban employment and tax revenue but have been hit hard by the pandemic.

While the best-known private-sector companies in China are tech giants like Alibaba and Tencent, small and medium-sized enterprises — formally defined as companies with 1,000 employees or fewer — account for about 80 percent of total employment and 70 percent of corporate revenue, making It makes it a critical driver for any economic recovery.

China’s National Bureau of Statistics announced on Tuesday that the economy grew just 3 percent last year, well below the government’s target of 5.5 percent and the second-slowest growth rate since 1976.

“The challenge for the government now is to rebuild private sector confidence, which will be needed to boost household consumption and private investment,” said Eswar Prasad, a China finance expert at Cornell University.

However, small and medium-sized business owners say their operations continue to be hampered by government-imposed costs, including recent increases in Social Security payments, which could derail policymakers’ hopes for a quick economic recovery this year.

“The official message is that they support small and medium enterprises,” said Xun Ren, a longtime China market analyst and founder of a research firm in Shanghai. “But as a business owner, I just don’t see enough of that.”

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Prominent figures have made repeated assurances in recent weeks that President Xi Jinping’s administration is determined to shore up the private sector.

“Entrepreneurs will play an important role as an engine driving China’s historic pursuit of shared prosperity,” Liu He, China’s chief economic official, said at the World Economic Forum in Davos on Tuesday, a political priority for Xi. Liu said: “If wealth does not grow, common prosperity will become a river without a source or a tree without roots.”

But since late last year, more than a dozen cities and counties have increased their minimum employer-funded Social Security payments, which for small businesses are often a flat amount rather than a percentage of wages, by 10 percent or more. Regional authorities argue the increases were needed to keep pace with strong wage growth since 2021, when global demand for Chinese exports soared, helping to insulate the world’s second-largest economy from the impact of the COVID-19 pandemic.

Small business owners bemoan that China’s economic environment has worsened dramatically since then, and the outlook remains uncertain as the country grapples with a Covid virus outbreak that has killed at least 60,000 people since giving up control of the pandemic last month.

“I pay so much money for pensions and health insurance for my employees that I can hardly break even, let alone grow my business,” said Li Anquan, owner of a market research firm in eastern Shandong Province.

A sharp decline in global demand for Chinese products has clouded business prospects, with exports falling nearly 10 percent year-on-year in November and December.

A vegetable seller at a street market in Macau
Consumer price hikes have been less severe in China than in much of the world, increasing just 0.9% in 2021 and 2% in 2022 compared to double-digit growth elsewhere. © Eduardo Leal / Bloomberg

The pressure has been particularly acute on small businesses in the service sector, where labor is often a major expense, and where Social Security expenses typically account for up to a third of total operating costs.

On January 6, the Shandong provincial government said it would increase the minimum social security payment by 10 percent this year. Three days later, Jiangsu Province, an industrial and export powerhouse that borders Shanghai, announced plans to increase payments by 6 percent this year after a 12 percent rise in 2022.

David Lee, the owner of a Beijing-based advertising company, said he had to cancel plans to hire account executives after the municipal government raised social security payments by 15 percent.

He told me, “I’m not going to hire another person until the government makes Social Security affordable.”

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And sharp increases in employer contributions do not keep pace with inflation, which has been quieter in China than in Europe or the United States over the past year. China’s consumer prices rose just 0.9 percent in 2021 and 2 percent in 2022, far less than the average double-digit wage increases used to justify higher Social Security payments.

According to the Beijing municipal government, average wages in the capital increased by 13 percent in 2021 while the CPI in the city increased by 1.1 percent. In the same year, Hunan Province, a relatively poor province in southern China, reported an average annual wage growth of 8 percent.

Managers of small and medium-sized companies said that these increases do not reflect their experience in overcoming the pandemic, which has forced many of them to cut salaries and headcount. This discrepancy may be due in part to the fact that official statistics reflect the state sector more than small and medium enterprises in the private sector.

“Small businesses are underrepresented in official wage figures even though convenience stores employ more than half of China’s workforce,” said a Beijing-based government policy advisor, who requested anonymity. Small and medium enterprises also account for more than 50 percent of total production and tax revenues.

Two middle managers at state-owned enterprises in southeastern Fujian province told the Financial Times that they had recently received generous increases in their nominal salaries, but the adjustments simply made up for corresponding decreases in fringe benefits that may not be obtained through official wage surveys.

Social Security tax increases may also reflect official unease about the outlook for the country’s pension funds. China’s population declined for the first time in 60 years in 2022, according to official figures released on Tuesday.

“The government needs to strike a difficult balance between reducing the financial burden on small businesses and keeping the social security system from collapsing,” said the government advisor. “Right now, the top priority is making sure that retirees get paid on time.”

Additional reporting by Tom Mitchell in Singapore and Andy Lin in Taipei

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