China’s Economic Regulations With CCP Characteristics

Commentary

The Chinese Communist Party (CCP) has been forced over the years to incorporate Western economic concepts such as “market-oriented reforms” and “supply-side structural reforms” into its regulatory framework to deliver a “socialist market economy with Chinese characteristics” while maintaining central control in pursuing Party leader Xi Jinping’s oft-stated goals of “promoting high-quality development and innovation.”

The latest in these economic lurches was the adoption of the Private Economy Promotion Law (PEPL) by the National People’s Congress Standing Committee in April 2025. It was China’s first foundational legislation dedicated to supporting and regulating the domestic private sector.

Is the law likely to deliver on its objectives? Let us examine it.

The Private Economy Promotion Law

Made effective from May 20, 2025, the PEPL consists of 78 articles of regulations that define “private economy organizations” as for-profit entities controlled by Chinese citizens, excluding majority foreign-owned companies.

The law was almost certainly motivated by the need to counter private-sector setbacks stemming from policy instability over the years, discriminatory enforcement of regulations against state-owned enterprises, trade tensions associated with tariffs, weak and fluctuating demand, and the continuing real estate collapse, which severely affects local governments.

A particularly pernicious practice called “distant-sea fishing” had been in practice for several years. This is a metaphor illustrating how interprovincial law enforcement agencies seize, freeze, or even abuse criminal methods against businesses elsewhere to gain improper benefits under the guise of law enforcement. The goal is to use criminal law to resolve local debts by stealing from other jurisdictions.

As a result of the above concerns and practices, local governments continued to fail to meet their planning goals (always a challenge in a centrally planned economy!), resulting in arbitrary arrests “for corruption,” asset seizures, and large uncollectible debts, all of which erode confidence in local government planners.

By 2024, many of these problems had come to a head. Private investment contracted, with foreign direct investment falling by 27.1 percent in 2024 alone. Private entrepreneurs faced increasing discrimination in credit and market access compared with state-owned enterprises. Arbitrary distant-fishing arrests surged; almost 10,000 private companies in Guangzhou Province alone faced cross-provincial seizures in 2023.

In an attempt to address decades of economic concerns faced by Chinese citizens, the new law prohibits discriminatory practices such as predatory regulations, local protectionism, monopolies, extrajudicial arrests, asset seizures, and contract breaches by local governments or state-owned enterprises, while mandating prompt payments and unified regulatory standards governing all economic transactions.

The law is intended to boost sustainable, high-quality private-sector development by ensuring equal legal status, fair competition, access to investment and financing, support for innovation, rights protection, and curbs on abuses such as “distant-sea fishing” enforcement.

Its primary purpose is to rebuild entrepreneurial confidence, align private companies with national priorities as mandated by the CCP, and integrate the Chinese private sector into the 15th Five-Year Plan (2026–2030) by ensuring a level playing field and access to production factors.

Integration With the 2025 Negative List for Market Access

Specifically, the PEPL integrates with the 2025 negative list for market access to allow equal entry into non-reserved sectors and requires ideological alignment with CCP guidance.

The 2025 negative list for market access is China’s official nationwide catalog that lists sectors, industries, and activities where market entry (such as investment and operations) is prohibited or restricted and requires government (CCP) approval, licenses, or specific conditions to participate. The list contains 106 restricted items across 21 industries, of which six are fully prohibited (for example, deemed sensitive or state-monopoly areas).

The PEPL provides that all qualified entities—private Chinese companies, state-owned enterprises, and foreign investors—have equal, non-discriminatory access to enter, invest in, and operate in any sector not listed on the negative list, without special barriers or approvals beyond standard business registration.

However, the actual implementation varies because of the vagaries of regulatory discretion and graft, approvals in practice, or long-standing state-owned enterprise advantages in procurement/contracts, even in so-called open sectors. The kicker is that the PEPL requires ideological alignment with CCP guidance, which opens the door to bureaucratic graft and corruption.

Structural and Enforcement Challenges

Since its implementation, the PEPL has faced persistent structural and enforcement challenges that undermine its effectiveness, objectives, and purpose (delivering economic stability, a semblance of fairness vis-à-vis state-owned enterprises, and consistent rules for private-sector development).

Symbolism Versus Accountability and Enforcement

Rather than implementing bold and substantive new legal requirements or innovative tools to ensure compliance, the PEPL is a rehash of preexisting laws and policies derived from the state Constitution, the Foreign Investment Law, and other sources.

The PEPL contains no robust accountability mechanisms, as the final version dropped a provision from the draft version that would have required the State Council and local governments to periodically report to the National People’s Congress (China’s rubber-stamp legislature) standing committees on their private economy promotion efforts.

This could have enabled real legislative oversight and improved compliance, but the law instead relies on vague calls for “coordination mechanisms” (for example, intra-governmental coordination for complaints and disputes) without specifying penalties for violations or independent enforcement bodies.

Exclusion of Foreign-Owned Companies

The law narrowly defines “private economy organizations” as for-profit entities controlled by Chinese citizens, while explicitly excluding the majority of foreign-invested enterprises. This breakdown continues the division of China’s economy into state, domestic private, and foreign sectors and denies foreign companies direct benefits under the law. The result is a direct undermining of a key objective: to increase foreign direct investment in China.

State-Owned Enterprise Favoritism in Contracts and Procurement

Despite mandates for equal treatment in the law, state-owned enterprises continue to receive preferential access in government procurement, contracts, and bidding processes, often due to implicit biases and local protectionism.

Studies show that state-owned enterprises are 20 percent to 50 percent less productive than private companies but get favored subsidies, lower-interest loans (for example, 20 percent lower rates for former state-owned enterprises), and resource allocations, distorting competition. The result is a misallocation of capital and a negative impact on profitability in a command economy.

Persistence of Local Protectionism

Local governments often favor regional state-owned enterprises or impose “invisible barriers” such as selective enforcement and cross-jurisdictional prosecutions (“deep-sea fishing”), violating Article 24’s requirement for unified standards implementation. And there are no penalties for failing to curb abuses (and “misaligning” with national priorities).

Ideological Mandates

Articles 2 and 5 mandate ideological alignment with CCP guidance, which stifles innovation and risk-taking. This contrasts sharply with Western-oriented free-market systems, where companies operate without political mandates that foster cronyism and reduce transparency.

Concluding Thoughts

Perhaps the most egregious shortfall of the new Private Economy Promotion Law has to do with its silence on the capricious nature of the CCP’s central planners. In trying to micromanage China’s economy and out-think the market, the communists inevitably and unpredictably tinker with regulations, enforcement priorities, and support measures, creating uncertainty for businesses. These include sudden regulatory clampdowns (for example, on tech, real estate, or excessive competition in manufacturing), policy reversals from stimulus to tightening (or vice versa), and inconsistent implementation of reforms.

One example is the use of involution to achieve arbitrary economic goals. Involution is excessive, self-defeating competition such that companies are required to invest ever-increasing effort and resources but achieve diminishing or zero marginal returns, frequently resulting in overcapacity and eroded profits (and employee burnout). The communists applied this to the new energy vehicle sector in recent years, resulting in intense price wars and overcapacity.

These arbitrary practices undermine trust among entrepreneurs and investors, leading to hesitancy to commit capital amid fears of retroactive rules, fines, or sector-specific restrictions that could wipe out returns.

Lastly, the PEPL fails to support creative destruction, the primary driver of economic growth in Western economies. The CCP’s central control insulates state-owned enterprises and zombie companies from failure through subsidies and bailouts, prioritizing stability over efficiency.

The verdict: PEPL will not provide the economic relief long desired by the Chinese people.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.