The Urgent Need for China to Reform its Legal Frameworks on Private Enterprises
- Enactment of the “Private Economy Promotion Law” marks a major step forward -

I. Introduction

In China, since the start of reform and opening up in the late 1970s, private enterprises have developed rapidly and played a major role as a driving force behind economic growth. However, under China's unique “socialist market economy” system, private enterprises face institutional discrimination and structural barriers in the legislative, administrative, and judicial spheres compared with state-owned enterprises, which hinder their sustainable development.

Against this backdrop, at the Private Enterprise Roundtable held in Beijing on February 17, 2025, General Secretary Xi Jinping emphasized China's intention to support the development of private enterprises. Following this, on April 30, 2025, the Private Economy Promotion Law was enacted as a major step toward addressing the existing legal deficiencies, with the objectives of creating a fair competitive environment, improving the investment and lending environment, supporting technological innovation, and strengthening the protection of rights and interests.

In this article, we will discuss the significance of the “Private Economy Promotion Law” and the challenges ahead, taking into account the current realities of discrimination against private enterprises in the legislative, administrative, and judicial spheres.

II. Discriminatory treatment of private enterprises in the legislative, administrative and judicial systems

In China's legal system, private enterprises continue to face discrimination in the legislative, administrative and judicial spheres, and improvements are needed.

1. Legislative aspect

Legislative discrimination against private enterprises in China is structurally built into the Constitution, which is the country's supreme law. Specifically, Article 6 of the Constitution states that “The foundation of the socialist economic system is socialist public ownership of the means of production,” and Article 7 states that “The state-owned economy is the leading force of the socialist market economy,” clearly indicating the basic hierarchical structure of the national economy. In contrast, although the private sector, as the “individual and private economy,” is positioned under Article 11 as “an important component of the socialist market economy,” its status clearly remains supplementary.

This hierarchical structure is also evident in the provisions governing the protection of property rights. While Article 12 of the Constitution defines “socialist public property” as “sacred and inviolable,” Article 13, which was added in the 2004 constitutional amendment, merely stipulates that “the lawful private property of citizens” shall not be “infringed.” This represents a substantial difference in the level of legal protection.

China's laws other than the constitution ostensibly provide for equal treatment of all enterprises, but there remains room for state-owned and private enterprises to be treated differently depending on how the wording is interpreted. For example, with laws containing ambiguous provisions that leave much room for interpretation, private companies may face discrimination depending on how these laws are implemented.

2. Administrative aspect

In terms of administration, the principle of free market entry has been adopted and a negative list system that clearly specifies restricted areas has been implemented, but the system continues to be applied in a way that is disadvantageous to private companies. In strategic industries such as finance, communications, and energy, entry into many sectors is effectively prohibited. In addition, administrative agencies responsible for environmental regulations, enforcement of safety standards, labor supervision, and tax audits tend to crack down more strictly on private enterprises than on state-owned enterprises.

In a survey conducted by Remin Zhiku (People’s Forum Think Tank) in March 2025, creating more equitable development opportunities and protecting the legitimate rights and interests of private enterprises and entrepreneurs emerged as key issues. The findings of this survey can be summarized as follows (Note 1):

1) Creating more equitable development opportunities

At present, the implementation of the policy is seen to be deviating from its original intent. There are actual and potential barriers to market entry and fair competition, and many infrastructure sectors have not yet been fully opened to private companies. According to the survey, both “the removal of barriers to market entry and competition” and “fair opening up of the infrastructure sector” are highly anticipated. These measures are expected to enhance market vitality and contribute to creating a fair, competitive environment.

2) Protection of the legitimate rights and interests of private enterprises and entrepreneurs

Many companies are experiencing difficulties and delays in collecting accounts receivable, which is affecting their cash flow. In addition, excessive fees, fines, inspections, and asset seizures remain persistent problems at the local level, hindering normal business operations. The survey indicated high expectations for the “resolution of unpaid debts” and “correction of unfair practices.” The implementation of these policies should reduce the burden on companies, normalize market order, and improve economic vitality.

Considering these challenges facing private enterprises, General Secretary Xi Jinping emphasized at the Private Enterprise Roundtable that the following measures, mainly related to administrative law enforcement, should be promoted (Note 2):

1. 1. Remove obstacles to private enterprises' equal access to production factors and fair participation in market competition.
2. 2. Open the competitive arena in the infrastructure sector to all business entities on a fair basis.
3. 3. Focus on resolving problems such as the difficulties in corporate financing and high costs of funding.
4. 4. Resolve the issue of defaults (unpaid debts) to private companies.
5. 5. Strengthen oversight of law enforcement and correct unfair practices such as excessive fees, fines, inspections, and asset seizures.
6. 6. Protect the legitimate rights and interests of private enterprises and entrepreneurs in accordance with the law.
7. 7. Take strict action against any illegal activities, regardless of the ownership structure of the company.
8. 8. Treat all types of companies equally in the implementation of support policies.
9. 9. Promote the building of honest and close political-business relations.

3. Judicial aspect

The lack of judicial independence creates room for political interference in trials. For example, when private companies have conflicting interests with the government or state-owned enterprises, judicial decisions tend to be influenced by political considerations.

In China, the judicial system is controlled by the Communist Party and lacks independence. Courts at all levels are overseen by the Party's Political and Legal Committees, which influence the appointment of judges, the running of the courts, and verdicts and sentences. Judges are expected to follow the party's ideology and uphold the principle of party supremacy over the judiciary (Note 3).

At the 2017 Conference of Presidents of National High Courts, Zhou Qiang, President of the Supreme People's Court of China, strongly criticized concepts such as “judicial independence,” “separation of powers,” and “constitutional democracy” as “erroneous Western ideas,” and state that the idea of “judicial independence” poses a threat to the Party's leadership and must be resolutely resisted (Note 4). This clearly indicates that the judiciary itself acknowledges that it should remain under Party control and reflects a stance that is fundamentally opposed to judicial independence.

III. Enactment of the “Private Economy Promotion Law”

The government is accelerating legal system reforms to improve the environment for the development of the private economy. As a major step toward this goal, the “Private Economy Promotion Law” was passed by the Standing Committee of the National People's Congress on April 30, 2025 (effective on May 20, 2025). The pillars of this law are: 1) “basic principles and policies,” 2) “creation of a fair competitive environment,” 3) “support for corporate financing,” 4) “promotion of innovation,” 5) “standardization of management,” 6) “improvement of administrative services,” 7) “mechanisms for protecting rights and interests,” and 8) “clarification of legal responsibilities.”

1. 1.Basic principles and policies
   This law clarifies the position of the private economy under the socialist market economy system and aims for sustainable, high-quality development. While adhering to the leadership of the Communist Party of China as a fundamental principle, China also recognizes the private economy as an important foundation for national economic development. Furthermore, the fundamental policy is to value the contribution of the private economy to the construction of socialist modernization and to promote its development.
2. 2. Creation of a fair and competitive environment
   To realize a fair competitive environment between private enterprises and other economic entities, a fair competition review system will be introduced. This law clearly prohibits discriminatory treatment in areas such as market access and government procurement, and mandates that all companies be given a fair opportunity. In addition, market supervision departments are empowered to prevent and crack down on monopoly activities and unfair competition practices to maintain a healthy market environment.
3. 3. Support for corporate financing
   Financial institutions are required to actively provide financial services to private companies and to promote the development of specialized financial products. Notably, a loan system that uses accounts receivable, intellectual property rights and other assets as collateral is being promoted, thereby opening the way for private enterprises to raise funds by leveraging their diverse assets. In addition, this law supports fundraising from the capital market through bond issuance to strengthen the financial base of private enterprises.
4. 4. Promoting innovation
   This law encourages investment in basic research and applied technology development to help private enterprises enhance their innovative capabilities. The government supports technology research projects led by private companies and provides services such as technology verification, standardization and quality certification to reduce barriers to technological innovation. It commits to protecting the fruits of innovation by strengthening intellectual property rights protection and implementing a punitive damages system for infringement of those rights. It also supports the development of an innovation ecosystem by promoting collaboration between industry, academia and research, and by building a system for technology transfer and human resource development.
5. 5. Standardization of management
   The importance of Party organization building in private enterprises is emphasized, along with a call to improve corporate governance. Enterprises must fulfill their social responsibilities by complying with laws and regulations, ensuring workplace safety, protecting the environment, and managing product quality. Additionally, to promote harmonious labor-management relations, the role of labor unions should be respected, and a management approach that balances the protection of employees' rights and interests with the development of the enterprise is encouraged. The establishment of internal control systems and the assurance of transparency in financial and accounting systems are required, with an emphasis on building a sound management foundation.
6. 6. Improvement of administrative services
   Government agencies must establish smooth communication channels with private enterprises and actively welcome legitimate opinions and suggestions from enterprises. The goal is to simplify and streamline administrative procedures and establish a service system that supports the establishment and development of private enterprises. In particular, to curb unreasonable regulations and administrative measures, the transparency and fairness of administration should be enhanced by guaranteeing companies the right to express their opinions and by establishing a mechanism for corrective action.
7. 7. Strengthening mechanisms for protecting rights and interests
   The property rights and management rights of private enterprises and their owners shall be legally protected, and no organization or individual shall unlawfully infringe upon them. Emphasis is also placed on protecting corporate trade secrets by providing a legal framework to prevent information leaks. Provisions will be established to protect companies from malicious accusations and defamation, with clarified remedies for online slander and similar acts. Unjust inspections, seizures, and asset freezes by administrative agencies are prohibited, and mechanisms are established to prevent improper interference in business operations. Additionally, government agencies are obligated to fulfill contracts with private enterprises and make timely payments.
8. 8. Clarification of legal responsibility
   Finally, legal responsibility for violations will be clarified. Strict accountability, including disciplinary actions against responsible parties and compensation for damages will be enforced for breaches such as violations of fair competition review obligations, discrimination in financing, and failure to fulfill government contracts. To promote compliance with the law, unfair administrative penalties and contract breaches against private enterprises will incur liability and compensation obligations.

Overall, the “Private Economy Promotion Law” provides a comprehensive legal framework for the Chinese Government to clearly position the private economy as an important driver of national economic development and foster a fairer and more dynamic market environment. It focuses on protecting the rights and interests of private enterprises and supporting their development, aiming to maximize the contribution of the private economy to the high-quality development of China's overall economy and the building of a modern socialist nation.

IV. Unfinished legal framework for private enterprises

With the enactment of the “Private Economy Promotion Law,” the legal status of the private economy has been clearly defined for the first time. This is a legal expression of the government's new emphasis on private enterprise and is of great symbolic significance. However, many problems remain.

1. 1. Guarantee of equal status with state-owned enterprises under the Constitution
   At the constitutional level, the primacy of the state-owned economy remains. To achieve true equality, the constitution needs to be amended to elevate the status of the private economy and put it on an equal footing with the state-owned economy.
2. 2. Ensuring the effectiveness of the law
   The contents of the “Private Economy Promotion Law” do not create a new system, but merely reaffirm existing laws and policies. Although there have been laws in the past that claim to protect the private economy, there have been many problems with their implementation in practice due to selective enforcement by local governments and informal regulation frameworks. Therefore, the real question is whether the law is effective. As a countermeasure, detailed implementation rules and operational guidelines need to be prepared as soon as possible, and administrative discretion needs to be restricted.
3. 3. Strengthening judicial independence and enforcement
   Even if laws are established, the rights and interests of private enterprises will not be adequately protected unless political influence on the judiciary is eliminated. Reform of the entire judicial system is necessary, including establishing the independence of the courts, guaranteeing the fairness and consistency of rulings, and eliminating local protectionism, as well as establishing a system that enables the swift and reliable enforcement of final rulings.
4. 4. Participation of private enterprises in the policy-making process
   There are still insufficient mechanisms in place to reflect the voices of private enterprises in the policy-making process. It is necessary to create a system that will allow representatives of private companies to be effectively involved in decision-making, and to strive to democratize the policy-making process and ensure information disclosure.
5. 5. Correcting disparities in resource allocation
   Both disparities in resource allocation and asymmetries in market access remain between state-owned and private enterprises. To correct this, a more comprehensive review of industrial policy is needed, including promoting the entry of private companies into strategic sectors such as finance, energy, and information and communications.
6. 6. Changing social and cultural attitudes
   It is necessary to dispel prejudices against private enterprises, such as the tendency to view them as “non-mainstream” or “unstable,” and to establish a recognition throughout society that they are central players in the market economy. The government should actively promote the contribution and value of the private economy through education, the media and other means.

Setting out a concrete path to overcome these challenges, based on the principles of the “Private Economy Promotion Law,” will be the key to realizing the sustainable development of the private economy.