China writes first legal rulebook to strengthen its vital private sector

(By Caixin journalists Zhang Yichuan and Han Wei)

China is fast-tracking a landmark law to bolster its vital private sector, as top leaders acknowledge the urgent need to restore business confidence amid mounting economic headwinds.

The Private Economy Promotion Law, China’s first authoritative law on the private economy, is to receive a crucial third legislative review this month — potentially paving the way for its passage. This caps a remarkably swift journey since drafting began just over a year ago.

The legislative push reflects Beijing’s effort to revitalise a sector responsible for more than 60% of GDP and 80% of urban jobs, but long plagued by challenges such as unequal access to resources, arbitrary penalties and inconsistent policy enforcement. The law seeks to codify guarantees of fair competition and strengthen legal protections for private businesses, aiming to provide a more stable operating environment than offered by government directives alone.

The accelerated timeline underlines its urgency: drafting began in September 2023, a public consultation draft was released in October 2024 and the National People’s Congress Standing Committee held the first and second readings in December 2024 and February 2025 respectively. A third reading — typically the final step before enactment — is scheduled for late April, according to the official Xinhua News Agency.

Calls for stronger legal safeguards for the private sector have grown louder in recent years. Mounting global economic uncertainties and rising trade barriers have made China’s domestic market increasingly vital to its economic stability.

The immediate impetus followed the Central Economic Work Conference in December 2022, which called for embedding equal treatment for private and state-owned enterprises into law. That call led to a legislative proposal from the All-China Federation of Industry and Commerce and the establishment of a dedicated Private Economy Development Bureau under the National Development and Reform Commission in late 2023 to lead the drafting.

“The development of the private economy is crucial for stabilising employment, boosting consumption, and building a unified national market,” said Wang Xiaoye, an antitrust scholar at the Chinese Academy of Social Sciences (CASS), calling the law’s timing “very appropriate” in the light of global economic shifts.

Zhang Shouwen, president of the Economic Law Research Association of the China Law Society, said the law aims to promote the healthy development of the private economy by ensuring equal legal rights, market opportunities and development rights to private enterprises and their state-owned counterparts.

The draft law comprises 78 articles across nine chapters, covering fair competition, financing support, innovation incentives, operational norms and rights protection. It defines private economic organisations broadly to include various company structures controlled by Chinese citizens.

Experts say the law consolidates and elevates existing protections scattered across other regulations, such as the Company Law and the Small and Medium-sized Enterprises Promotion Law as well as State Council directives issued in 2005 and 2010.

“Elevating these protections to the legal level will make them more stable,” said Li Shuguang, dean of the Institute of Law and Economics at China University of Political Science and Law. “Law can build social consensus ... creating an awareness that one cannot act arbitrarily when there is a law.”

Echoing this, Liu Junhai, a professor at the Renmin University of China in Beijing who was involved in early drafting discussions, said that while central authorities have issued a number of policies to support the private sector, a dedicated law is needed to establish a long-term mechanism for stimulating private sector vitality.

A central pillar of the draft law is levelling the playing field for businesses, putting fair competition principles at its heart.

Addressing longstanding complaints from entrepreneurs, the draft features a dedicated chapter on “Fair Competition” immediately following its general principles. It requires all government policies affecting businesses to undergo fair competition reviews and calls for the consistent cleanup of rules that fragment the national market — explicitly ensuring private firms can participate fairly.

Market access is a central focus. The draft law reinforces the existing “negative list” system, which grants all companies equal access to sectors not explicitly restricted. Since a nationwide rollout in December 2018, the list has been reduced from 151 to 117 prohibited items. The draft law enshrines this principle of equal entry.

Liu Guizhe, a senior researcher at independent research firm Beijing Dacheng Enterprise Research Institute, said deeper reforms are needed to ensure ownership type is no longer a factor in market entry decisions.

Beyond entry barriers, the draft tackles unequal treatment in day-to-day operations — a major pain point for many private businesses. Wang Yu, chairman of Shanghai-based budget carrier Spring Airlines, told Caixin that despite many supportive policies, execution often falls short, particularly in resource allocation where private firms are not on an equal footing.

To address this, the draft law stipulates equal access for private firms to key production factors such as capital, land, data and technology, as well as parity in government funding, land supply, permits, standards-setting and project applications. Public resource trading must also be transparent and equitable.

The law also empowers market regulators to investigate violations related to fair competition.

“The entire law focuses on the relationship between the government and the private economy,” said CASS’s Wang Xiaoye. It clarifies government obligations while informing businesses of their rights and available remedies, she added.

Wang Yu, of Spring Airlines, said: “Private enterprises hope for equal treatment across the board.” He sees the law’s value in making discriminatory practices illegal. “Protection for businesses should not be differentiated based on ownership form,” he added.

The new law aims to tackle head-on one of the biggest drags on business confidence: arbitrary law enforcement and the shaky protection of property rights — issues entrepreneurs now view as more pressing than funding or market access.

Despite repeated pledges to safeguard property rights, official reports acknowledge persistent problems. A June 2024 State Council study admitted that protections for private firms and entrepreneurs remain inadequate. A central concern is “profit-driven enforcement” where authorities — sometimes crossing provincial lines — target businesses, especially private ones, for the financial gain of local governments.

A Guangdong-backed study found that nearly 10,000 local enterprises in the southern province had faced cross-jurisdictional enforcement actions since 2023, often involving excessive freezing of funds.

In the eastern province of Zhejiang, the cradle of China’s private economy, a year-long campaign identified more than 17,000 cases of improper business seizures. The campaign helped 123 companies unfreeze assets worth more than 70 million RMB (US$9.6 million).

According to the Zhejiang Provincial Procuratorate, such practices damage the rule of law and erode business confidence.

Surveys by the Dacheng Institute show businesses now regard correcting abusive enforcement and rectifying wrongful convictions as more important than traditional concerns such as fair competition and financing difficulties.

The draft law directly confronts these issues. It mandates a strict separation between civil disputes and criminal offences, bans criminal charges for non-criminal acts and requires dismissal of cases lacking clear evidence. Critically, it prohibits authorities from using administrative or criminal tactics to interfere in business disputes.

It also imposes tight controls on enforcement actions, including freezing assets and personal restrictions, which must comply with legal protocols regarding authority, scope, and duration. The law requires clear distinction between legal and illegal assets, corporate and personal funds, and involved versus unrelated parties. Investigations, it adds, should minimise disruption to normal business operations.

Experts see this as a targeted response. Li from the China University of Political Science and Law called it a check on vague charges when evidence is thin. Renmin University’s Liu emphasised the integration into the legal process of ways to correct wrongful convictions affecting businesses.

Zhao Shuwen, a law professor at Hebei University, stressed the need for transparent asset seizure and personal accountability for officials who break the rules.

“Strict accountability measures must be in place,” Zhao said. “Without real consequences, violations come at no cost.” He added that personal liability is essential for the law to carry real weight.

Beyond protection, the draft law outlines measures to promote private sector growth by easing financing bottlenecks, promoting innovation and improving government services.

It encourages banks to develop tailored products and directs regulators to apply “differentiated regulation”, potentially softening loan requirements for small and micro enterprises.

Li called this a “relatively big breakthrough” for firms often shut out by collateral demands designed for state giants. The draft explicitly broadens acceptable collateral to include assets such as accounts receivable and intellectual property, though Li acknowledged final lending decisions remain “market decisions”.

On the innovation front, the law seeks to draw private companies deeper into China’s high-tech ambitions. It encourages their inclusion in national R&D projects and grants access to national research facilities. Enhanced collaboration between industry, academia and private firms is also promoted. Zhao, however, stressed the need for detailed rules and incentives — such as favourable land or tax policies — to make this participation meaningful.

The draft law further requires government agencies to establish effective communication channels to listen to and resolve business concerns. Specific mechanisms are outlined for handling complaints about administrative enforcement, alongside increased oversight.

A notable addition is the creation of a “credit repair” system, allowing businesses and entrepreneurs to restore their creditworthiness, potentially lowering barriers to re-entry and supporting a culture that distinguishes failure from wrongdoing.

The ultimate effectiveness of these promotional measures, however, may depend on execution. Li emphasised the need for concrete metrics — specific performance indicators for government agencies regarding financial support, subsidies, or procurement benefiting private firms — to ensure these ambitions translate into real-world results.

“It must be implemented through specific matters, specific indicator by specific indicator,” he said.

This article was first published by Caixin Global as “Cover Story: China Writes First Legal Rulebook to Strengthen Its Vital Private Sector”. Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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