What Drives Chinese Entrepreneurs’ Confidence?

This is a Conversation with Fu Xiaoyong, Co-Founder of the Humanistic Economics Society. Written by Du Ping. Originally published in Caixin China Reform, Issue 4, 2023 (July 1, 2023). Translated and republished here in abridged form, with editorial annotation.

The May figures recently released by the relevant central government departments show that the foundation of China's economic recovery is still not firm: aggregate demand remains sluggish macroeconomically, while market participants display low confidence at the micro level. Where does the confidence of market players come from, and what lies behind their current lack of it?

Fu Xiaoyong, co-founder of the Humanistic Economics Society, spent years as deputy secretary-general of the Yabuli China Entrepreneurs Forum and general manager of its research center. He has led or taken part in research reports including A Century of Entrepreneurship 1840–2020, the Chinese Entrepreneur Development Confidence Index, and Entrepreneurship and China's Future. Years of firsthand contact and research with entrepreneurs, and a long run of micro-surveys taken from the entrepreneur's point of view, have given him a precise portrait of this group.

In his view, when economic transition stalls, the entrepreneur's perspective deserves particular emphasis: it is the micro-level perception of entrepreneurs that keeps the aggregate view from becoming distorted. Restoring their confidence, he argues, also has to start from the matters they care about most. We recently sat down with him to talk about this.

A Few Things That Would Restore Entrepreneurs' Confidence

Caixin: Lately, as the macro data have turned down, "entrepreneur confidence" and "the business environment" have again become hot topics. You have long led and taken part in surveys such as the Chinese Entrepreneur Development Confidence Index and the China Business Environment Index. What do those surveys show about the overall and trend characteristics of Chinese entrepreneurs' confidence?

Fu Xiaoyong: The Chinese Entrepreneur Development Confidence Index survey began in 2010. Setting aside the pandemic as a special factor, the index shows three features. The first is a cyclical pattern, with a cycle of roughly three years. The troughs came in 2012, 2015, and 2018, which indicates a fairly strong correlation between entrepreneur confidence and the economic cycle. The second is sensitivity to the international political and economic situation. 2017 and 2018 marked a clear turning point in entrepreneur confidence, showing that the China-U.S. trade friction had a significant impact, after which confidence gradually recovered. The third is an underlying trend: the index has risen slightly overall despite its ups and downs, and it has stayed above the 50-point line between expansion and contraction.

One point worth noting is that among the four first-tier indicators, confidence in the economic environment, in the policy environment, in the political and legal environment, and in the social and cultural environment, the scores in the third indicator are consistently low, and within it "confidence in the international political environment" is especially low.

The China Business Environment Index began in 2016. In both the first and second halves of that year the average score fell below the 50-point line between expansion and contraction, but it has since stayed above 60. Its overall upward trend is clearer than that of the confidence index, which suggests that a series of reforms, including reform of the commercial and business-registration systems, have had a real effect on the business environment. Nearly 80 percent of entrepreneurs believe that the Regulations on Optimizing the Business Environment have markedly improved conditions.

The China Business Environment Index has seven first-tier indicators: the investment environment, the reasonableness of the tax burden, the degree of rights protection, the market environment, the ease of starting a business, the dispute-resolution mechanism, and the level of government service. The highest score goes to the ease of starting a business, which has topped 70 points every year, while rights protection, the market environment, and the dispute-resolution mechanism score lower.

Together, these two surveys capture the micro-level view of entrepreneurs across a large sample and over a continuous period. They show how confident Chinese entrepreneurs have been in the macroeconomy and in future development over these years, and they are also important reference data for the decisions those entrepreneurs will make.

Caixin: What policy recommendations do you have for restoring entrepreneurs' confidence?

Fu Xiaoyong: Let me borrow the answers of two entrepreneurs. Li Dongsheng, chairman of TCL, once said he has two "confidence indices" in mind. One is a "micro confidence index," an entrepreneur's understanding and grasp of his own company. The other is a "macro confidence index," an entrepreneur's confidence in the country's direction. For him, confidence is the sum of the two.

Feng Lun, founder of Vantone Real Estate, draws his confidence from three certainties. First, the middle class keeps growing, and China is certain to be the largest market in the world. Second, the gap between younger entrepreneurs and their global peers keeps narrowing, so the odds of younger entrepreneurs catching up with and overtaking those peers keep rising. Third, China is committed to building a market economy that is fairer, more transparent, more open, and more firmly grounded in the rule of law.

Chinese entrepreneurs as a group want reform to continue, so as to create and provide broader room for entrepreneurial talent to be released. They especially want certainty in the ideological sphere as a safeguard for their confidence. They also want opening-up to continue, above all as a matter of mindset, carried out with the wisdom to take in all comers, offering the outside world more calm, understanding, and empathy. Indeed, when viewed from the perspective of market participants, "going global" represents a sustained, step-by-step struggle for Chinese businesses to carve out a place in international markets — building their presence patiently, one shirt and one button at a time.

Based on the surveys over the years, improving the business environment comes down to three things: strengthening protection of entrepreneurs' property and other rights; continuing to raise the rule-of-law standard of government conduct; and improving the dispute-resolution mechanism, in particular, putting that mechanism on a firmer legal footing.

To strengthen entrepreneur confidence, there are three main recommendations. First, further improve fairness in market access and in obtaining factors of production. This means strengthening the institutions related to and supporting market access, giving the fair-competition review system binding force, and barring local governments from discriminating against, obstructing, or excluding private firms on the grounds of ownership type. It also means improving private firms' access to financing and lowering their financing costs, and speeding up the market-based allocation of quotas for land, energy, and emissions so that these factors flow to competitive private firms.

Second, further improve policy stability. Policy should be transparent, stable, and predictable. Before a policy is issued, it would be advisable to consult market players fully, especially business associations of every type, and to allow the necessary lead time, transition periods, or buffer periods. The aim is to reduce uncertainty in the making and enforcement of policy and to reduce administrative intervention.

Third, communicate with and ease relations with external markets, especially those of developed countries. Relations with external markets, and with developed-country markets in particular, have been one of the most important factors affecting entrepreneur confidence over the past five years.

Caixin: Private firms face recurring operational difficulties. How do entrepreneurs themselves weigh these? Your surveys are mostly of private entrepreneurs. How do they view the challenges of state-owned enterprise reform?

Fu Xiaoyong: Over the past decade, the five recurring difficulties for private firms have been the cost of factors of production (labor costs in particular), the difficulty and expense of financing, international-market risk, policy stability, and internal governance structures. Surveys from different years produce fairly similar results; the only difference lies in the shifting priority among these persistent difficulties. 2018 was a relatively hard year for private firms just before the pandemic, and that year's survey results represent how entrepreneurs typically weigh these challenges.

To begin with, respondents (who could choose more than one option) saw the main current difficulties for private firms as: factor costs rising too fast (66.4 percent); policy pressures such as deleveraging and environmental protection (56.2 percent); discrimination in market access and financing (52.5 percent); growing international-market risk (50.5 percent); and inadequate internal governance mechanisms (47.7 percent).

Next, the measures firms should most take were: innovating products (76.1 percent); reducing leverage and cutting investment (54.7 percent); deep cooperation with state-owned enterprises (52.6 percent); calling on the government for support (46.2 percent); and laying off staff (42.3 percent).

Then, to help private firms through hard times, the measures the government should take most were: creating an environment of fair competition (67.1 percent) and sharply reducing burdens such as taxes and social-insurance contributions (61.1 percent).

Finally, on "how to improve oneself to cope with difficulties," the answers were embracing new technology (76.2 percent) and learning to manage external-market risk (63.2 percent).

Hu Baosen, chairman of Central China Real Estate, says a private entrepreneur's confidence is not something you talk into being; it is something you live out. His methodology of a "clear sense of boundaries" and "building a base area" captures the hard-won lessons of private entrepreneurs who have come through repeated difficulties. 

First, define "two boundaries": with its own values as the radius and the market as the compass, a firm draws a circle to find the boundaries of its industry and its market. Second, master four capabilities: profit, sustained profit, growth, and sustained growth, and use these four to build the firm's inner strength. Third, build a "base area": use craftsmanship and the spirit of the craftsman to build the firm's "base," digging the tunnels deep, building the walls high, and winning through the slow, dogged fight. Fourth, cultivate an "innovation gene": embrace new technology, new models, and new thinking. A few years ago the talk was of "Internet Plus"; now it is of VR, AI, and ChatGPT.

In 2020, the Central Commission for Comprehensively Deepening Reform passed the Three-Year Action Plan for SOE Reform (2020–2022). We wanted to understand how private entrepreneurs perceive the difficulties of state-owned enterprise reform.

The survey showed that the most critical issues in SOE reform, in order, were: sorting out the relationship between state capital and social capital (60.6 percent); shedding the dual identity of entrepreneur and official (55.7 percent); removing the administrative rank of state-owned enterprises (51.7 percent); sorting out the relationship between the board of directors and the party committee (51.3 percent); and sorting out the relationship between the State-owned Assets Supervision and Administration Commission and state-owned enterprises (48.8 percent).

These results represent entrepreneurs' accurate perception and judgment of SOE reform. SOE reform affects entrepreneur confidence on two fronts: market opportunity and market fairness.

Caixin: New technology has been one of the defining topics of this decade. Over the past couple of years, has regulation of the "winner-take-all" phenomenon in the digital economy affected entrepreneur confidence?

Fu Xiaoyong: On the "winner-take-all" phenomenon in the digital economy, nearly 70 percent of entrepreneurs believe the government should tighten oversight of the winners. In order of the share of responses, the options were: the government should strengthen regulation of winners (69.1 percent); winners themselves should have an antitrust awareness and take antitrust measures (52.1 percent); a winner's monopoly cannot "take all" indefinitely, so only prudent regulation is needed (41.2 percent); and "taking all" should not in itself be a reason to move against the winners (22.8 percent).

In fact, this wave of regulation of leading internet firms began in Europe and the United States. Its original aim was not based on the market size or market share of the leading firms. Rather, it was to a degree about forcing leading firms to separate the platform business in which they hold a dominant position from their other lines of business, so as to keep large firms from suppressing competition from smaller ones, that is, to avoid an ecosystem where the emergence of a single corporate giant leads to the collapse of surrounding market participants.

The rise of large models such as ChatGPT has made calls for regulating new technology louder and louder, and on that there is consensus. Musk and others have suggested pausing the iteration of large AI models until sound regulatory measures are in place.

Regulation is not the real problem. What truly damages entrepreneur confidence is that they cannot tell whether, behind a series of new measures, tighter regulation among them, lies an ideological bias about firms' ownership type.

Chinese Entrepreneurs Need a New View of the World

Caixin: What are the distinctive traits of Chinese entrepreneurship?

Fu Xiaoyong: Two interesting surveys may say it best. Asked "where has Chinese entrepreneurs' time gone," the highest score went to "social obligations," at more than 60 percent. Asked "if you could, what activity would you most want to spend more time on," the top answer was "being with family" (56.8 percent).

Another special survey looked at "entrepreneurship with Chinese characteristics." First, asked "what is entrepreneurship with Chinese characteristics," respondents said it places more weight on "relationships" (70.8 percent), is more patriotic (66.1 percent), is more collective in spirit (39.6 percent), pays more attention to cost control (36.5 percent), R&D (29.5 percent), pays more attention to public image (24.3 percent), and is more opportunistic (22.6 percent).

Next, asked "what most constrains Chinese entrepreneurship," the answers were government-business relations (68.4 percent), unfair market treatment (59.0 percent), inadequate protection of rights (53.0 percent), an excessive tax burden (49.6 percent), and resentment of the wealthy (16.4 percent).

Then, asked "what the government should most do to unleash entrepreneurship," respondents pointed to protecting lawful rights and interests (66.1 percent), building a fair market environment (62.2 percent), and cultivating close yet clean government-business relations (31.0 percent).

The regions seen as "most entrepreneurial" were Jiangsu-Zhejiang (73.4 percent), Fujian-Guangdong (33.0 percent), and the Beijing-Tianjin-Hebei region (30.1 percent). Jiangsu-Zhejiang led by a wide margin, more than double Fujian-Guangdong, while Beijing-Tianjin-Hebei showed signs of catching up. Nearly 90 percent of entrepreneurs saw "innovation" as the quality that best represents entrepreneurship, followed by responsibility (64.0 percent), contract (61.3 percent), cooperation (55.1 percent), craftsmanship (52.5 percent), persistence (42.1 percent), and risk-taking (41.5 percent); innovation scored 88.7 percent.

The survey speaks for itself. The common view is that Chinese entrepreneurs place more weight on "relationships" and family interests, lean toward collective thinking, and stress the team and cooperation, whereas European and American entrepreneurs place more weight on originality, competition, and individual success, lean toward individual thinking, pursue independence, and rely more on venture capital.

Research also shows that Chinese and American entrepreneurs differ in their capabilities. When a project is original, with no first mover on the market and nothing to copy, American entrepreneurs have the edge. When the task is one of catching up, with similar projects already on the market that need to be made bigger and stronger, Chinese entrepreneurs have the edge. At this stage, the comparative advantage of Chinese entrepreneurs is the advantage of the latecomer.

Caixin: How has Chinese entrepreneurs' perception of the external environment changed in recent years?

Fu Xiaoyong: In 2018, a special survey set out both to gauge entrepreneurs' judgment of the chip industry and to use this most representative industry to measure their attitude toward the external environment.

More than 70 percent of entrepreneurs saw chip restrictions as a long-term phenomenon. They rated chip firms in Taiwan as the most reliable (44.9 percent), followed by Japan (22.9 percent), South Korea (22.5 percent), Europe (16.9 percent), and the United States (14.2 percent).

The "link in the chip supply chain where China is most likely to break through" was functional chips (55.9 percent), followed by integrated-circuit design (30.1 percent), chip-manufacturing equipment (16.2 percent), chip packaging and testing (9.2 percent), and circuit-board processing (8.9 percent). The "biggest bottleneck for China's chip industry" was the external environment (59.1 percent) and technical capability (58.9 percent).

The chip industry may be a rather extreme case. Still, the same survey question, "how should Chinese firms go global," produced different results in 2016 and 2020.

In 2016, the "most desired regions for Chinese firms going global" were Europe (48.6 percent), North America (45.5 percent), Southeast Asia (41.9 percent), Africa (24.9 percent), and South America (22.0 percent). By 2020, they were Southeast Asia (37.6 percent), Africa (28.5 percent), South America (28.2 percent), Europe (27.5 percent), and North America (12.5 percent). Europe and North America had gone from the top two to the bottom two. The pandemic was of course an important factor, but our judgment is that this shift in attitude reflects a broader trend.

In 2016, the "main obstacle to going global" was a lack of international brand appeal (50.9 percent) and a shortage of internationally minded talent (45.6 percent). By 2020, it was the external political and legal environment (62.1 percent).

Only about 20 percent of Chinese entrepreneurs are optimistic about external markets, a share that has fallen by more than 50 percent over the past decade. More than half believe that deglobalization will last a considerable time.

Everyone is talking about new technology, but for entrepreneurs as a group, a new view of the world may matter more. The outside world is trying out a new pricing strategy toward China, and Chinese entrepreneurs, like “the ducks that are first to feel the spring river warm,” have been the first to sense how sharp that strategy is. A new view of the world will help them understand the shifting external market and prompt them to make decisions on fuller information.

Caixin: Why does an economic downturn make the entrepreneur's perspective especially important? What makes this perspective distinctive, and how can it be kept accurate?

Fu Xiaoyong: The economy is a net, and firms are the nodes on it. Whether that net stretches and expands depends on production, sales, investment, and innovation, and it depends on entrepreneurs' expectations. The sum of every entrepreneur's confidence is an economy's business-climate index. It is hard to imagine anything more likely to reveal an economy's prospects than observing what entrepreneurs perceive and expect.

One well-known entrepreneur said that ten minutes walking through the Yiwu Commodities Market is roughly enough to tell you China's GDP growth for the year. The claim may be a bit of an exaggeration, but it is a sound perspective. Correct economic judgment comes from the fields and villages: only by accurately understanding entrepreneurs' micro-level perceptions can we keep the aggregate view from becoming distorted. That is the value of the entrepreneur confidence index survey and the business environment survey.