China’s annual “Two Sessions” (全国两会)—the National Committee of the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC)—commenced on March 4 and 5, 2025, respectively. These meetings reflect the leadership’s direction and play a vital role in shaping China’s political landscape, as key speeches, policy announcements, and legislative changes are made.

For decades, the “Two Sessions” have served as a platform for the government to affirm its long-term strategic goals and immediate economic adjustments, projecting stability and unity. As such, they are seen as a crucial indicator of China’s policy trajectory, with global attention often focusing on how the government addresses key challenges such as economic growth, market reforms, and international relations.

Amid slowing economic growth, support for private enterprises, and local government debt resolution, these issues have taken center stage in this year’s meetings. At the NPC press conference, spokesperson Lou Qinjian (娄勤俭) acknowledged the economic challenges facing China but emphasized that the country’s vast market size and comprehensive industrial system would help overcome difficulties. He also reaffirmed the government’s commitment to supporting the private economy.

Revitalizing the Private Economy as a Policy Priority

In recent years, China has struggled with weakening external demand, exacerbated by global economic uncertainty, shrinking export markets, and sluggish domestic consumption, all of which have weighed on economic growth. Against this backdrop, revitalizing the private sector has become a critical strategy to boost domestic demand and stabilize the economy.

Several industries and companies are already showing signs of recovery and could stand to benefit from the new policies. For instance, the technology sector, particularly in areas like artificial intelligence (AI) and semiconductors, is receiving renewed attention from both the government and private investors. Companies like Tencent and Alibaba, which faced regulatory crackdowns in recent years, are now pivoting toward diversified ventures such as cloud computing and fintech, with increasing government support. Fintech (financial technology) refers to the use of technology to improve financial services and operations through innovation and digital tools, offering solutions such as online payments, digital currencies, and blockchain technologies. This could be seen as ‘good technology’ because it helps modernize financial systems and make them more efficient. 

Similarly, private manufacturers in high-tech industries, such as BYD in the electric vehicle (EV) sector, are benefiting from policy shifts encouraging green energy innovation and infrastructure development. Additionally, the consumer goods industry, particularly companies like Xiaomi and Haier, are experiencing recovery due to the government’s renewed focus on stimulating domestic demand. These companies exemplify the potential for revitalization, leveraging state policy support and shifting consumer preferences to regain momentum and contribute to China’s broader economic recovery.

In September 2024, the Politburo of the Chinese Communist Party (CCP) rolled out a series of incremental stimulus policies, helping China’s GDP surpass 130 trillion yuan for the year, with a growth rate of 5%. However, this growth was largely driven by government investment and exports, while private enterprises have yet to regain their former dynamism. The central government is keenly aware that long-term sustainable growth cannot rely solely on state-driven initiatives but requires a robust and thriving private sector.

Local Government Debt and Private Sector Financing Challenges

Another pressing issue in China’s economy is the growing burden of local government debt. In November 2023, the NPC Standing Committee approved a 6-trillion-yuan cap on local government debt to swap out existing hidden liabilities. By the end of 2024, 2 trillion yuan in bond swaps had already been issued, allowing many regions to complete their debt restructuring for the year and temporarily alleviating fiscal pressure on local governments. However, this measure has not fundamentally resolved the liquidity crunch faced by local governments, raising concerns about the sustainability of infrastructure investments and the availability of credit for private enterprises.

Local government debt in China significantly impacts overall liquidity, directly affecting financing challenges for private enterprises. As local governments struggle with high levels of debt, much of the available credit is directed toward servicing these obligations, leaving less funding accessible for private businesses. Local governments tend to prioritize state-owned enterprises (SOEs) and infrastructure projects, which receive favorable financing terms, while private companies—especially those in traditional industries—face higher borrowing costs and more stringent lending conditions.

This imbalance in credit allocation reduces capital available for private enterprises, stifling their growth and innovation potential. Furthermore, the burden of local government debt can create a liquidity crunch in the banking system, as banks become more cautious in their lending practices, further limiting private sector access to essential financing. As a result, private businesses, particularly small and medium-sized enterprises (SMEs), find it increasingly difficult to secure loans, undermining their ability to invest, expand, and contribute to long-term economic growth.

The Private Economy Promotion Law and Policy Easing

A key legislative highlight of the 2025 Two Sessions is the draft Private Economy Promotion Law (民营经济促进法). Lou Qinjian emphasized that “the rule of law is the best business environment,” noting that the proposed law incorporates the CCP’s long-standing policies of “two unwavering principles”(两个毫不动摇) and promoting the “two healths” (两个健康), which emphasize support for the private economy. The law’s goal is to provide a legal framework ensuring fair market participation for private enterprises and improving the overall business environment to restore entrepreneurial confidence.

The draft Private Economy Promotion Law aims to ensure that private enterprises are treated fairly in terms of access to resources, market opportunities, and government support, helping level the playing field with SOEs. The law also seeks to streamline bureaucratic processes, reduce administrative barriers, and improve transparency in government dealings with private companies. Additionally, it stresses intellectual property protection and encourages innovation, aiming to boost confidence among entrepreneurs by offering greater legal recourse in the event of unfair treatment. The law represents a tangible commitment by the government to create a more inclusive and supportive business environment for private enterprises, encouraging them to play a larger role in China’s economic development and transformation.

A noteworthy development came on February 17, when President Xi Jinping personally attended a private enterprise symposium for the first time in six years, reaffirming his administration’s consistent support for the private sector. This move has been widely interpreted as a signal of policy relaxation, encouraging private enterprises to play a greater role in China’s economic transformation.

Is the Era of “State Advances, Private Retreats” Coming to an End?

The “State Advances, Private Retreats” (国进民退) narrative refers to a trend in which the state has increasingly encroached upon sectors once dominated by private enterprises, leading to a perceived retreat of the private economy. This shift gained momentum under Xi Jinping’s leadership, particularly after the regulatory crackdowns on industries like technology, education, and fintech. Under Xi, the government has reasserted control over key sectors to ensure alignment with its political and social goals, such as reducing economic inequality and increasing control over data and national security.

This marks a significant departure from the economic policies championed by Deng Xiaoping in the 1980s, when China embraced “reform and opening up” to unleash private sector growth. However, under Xi’s leadership, SOEs have regained prominence, leading to concerns about diminishing opportunities for private companies. The shift toward greater state control reflects a broader reevaluation of China’s economic model, with Xi emphasizing the need for state direction to ensure stability and social harmony.

Despite recent pro-business rhetoric, many market observers remain skeptical, viewing the shift as a short-term response to economic challenges rather than a fundamental return to Deng’s “letting go and granting benefits” (放手让利) approach. The term originated during Deng Xiaoping’s reforms, refers to allowing market forces to play a more significant role in driving economic growth while the government supports businesses through policy incentives. The lingering effects of previous regulatory actions, combined with uncertainty about future policy shifts, continue to weigh on investment sentiment and capital flows.

2025 Growth Targets and Domestic Demand Challenges

The 2025 Two Sessions are expected to set an economic growth target of 5%. According to the 14th Five-Year Plan, China must reach a middle-income level comparable to developed economies by 2035, requiring an average annual growth rate of 4.6% to 4.7% over the next decade. Given the slowing trend, higher short-term growth rates are needed to sustain long-term objectives.

China’s strategy to balance export-led growth with greater emphasis on domestic demand is central to its long-term economic rebalancing. While exports have been a key driver of growth, China is increasingly turning toward internal consumption as a more sustainable source of expansion. The government has introduced tax reforms to reduce the burden on individuals and businesses, thereby increasing disposable income and encouraging spending.

Policies targeting rural consumption aim to narrow the income gap between urban and rural areas by enhancing rural infrastructure, improving access to credit, and raising living standards. These measures are designed to cultivate a more inclusive consumption-driven economy. The government has also focused on improving social welfare programs to boost consumer confidence and encourage spending. By shifting focus from export reliance to fostering a more robust internal market, China hopes to create a balanced and resilient economic model.

However, domestic demand remains weak, foreign direct investment has declined, and consumer confidence is sluggish amid mounting deflationary pressures. In 2023, China’s Consumer Price Index (CPI) remained below 1% for an extended period, signaling insufficient market demand. Addressing these challenges requires a more balanced growth model prioritizing internal consumption and private sector participation.

Can “New Productive Forces” (新质生产力) Revive the Private Sector?

Beijing has been pushing for the development of “new productive forces”—capital-intensive industries such as technological innovation, high-end manufacturing, and AI —are key to modernizing China’s economy and increasing long-term competitiveness, they do little to address immediate struggles of traditional private enterprises. Many small and medium-sized businesses, especially those in low-tech sectors, still face challenges like financing difficulties and weak consumer demand.

While these sectors are expected to enhance China’s long-term competitiveness, they provide little immediate relief for struggling private enterprises. Many traditional industries and small-to-medium-sized businesses still face significant challenges, such as financing difficulties and weak consumer demand.

The concept of “new productive forces” is intended to modernize the economy, increase productivity, and elevate China’s global competitiveness. While these industries should complement traditional sectors by improving efficiency and innovation, there is a risk of neglecting smaller private businesses in the transition. Many SMEs in sectors like retail, construction, and low-tech manufacturing continue to face financing difficulties, rising costs, and stiff competition from state-backed firms. Addressing these challenges will require a balanced approach that combines the development of high-tech industries with adequate support for traditional sectors to ensure that the private economy as a whole can thrive.

Conclusion: Reaffirming Commitment to Private Enterprises?

The 2025 Two Sessions mark a critical juncture in China’s policy direction, as the government seeks to revitalize the private economy amidst local government debt and financing challenges. While significant steps have been taken to support private enterprises, the success of these policies will determine the future trajectory of China’s economic model.