Commentary: Draft Law’s Definition of Private Company Remains Ambiguous

In October 2023, China released the draft Private Economy Promotion Law for public consultation, marking a significant step toward promoting the private sector. However, an ambiguous definition of “private economic organizations” within the draft has sparked concerns about misunderstandings [para. 1][para. 2][para. 3]. Article 76 defines such organizations as “profit-making legal persons, non-legal person organizations, and individual industrial and commercial households established according to the law within China and controlled by Chinese citizens,” typically implying individual ownership [para. 3][para. 4]. Several types of enterprises don't fit this definition, posing a challenge to their classification in China’s economy [para. 4][para. 5][para. 6][para. 7].

Firstly, enterprises linked to the collective ownership economy, such as collective enterprises and joint ventures involving state-owned enterprises, are excluded, lacking individual ownership despite being part of the private sector [para. 5][para. 6]. Secondly, cooperative enterprises driven by unions or employee stock ownership, like Huawei, where shares are widely held among employees and no single individual owns a controlling stake, are not considered under this draft [para. 6]. Thirdly, companies without a dominant shareholder or controller, those with dispersed ownership, are also marginalized under this draft [para. 7][para. 8]. Such definitions exclude major Chinese companies from being recognized as private economic organizations [para. 8][para. 9].

Prominent examples include Ant Group, which recently restructured its shareholder arrangements to eliminate a controlling party, and Alipay, which adjusted its governance to have no actual controlling entity [para. 9][para. 10][para. 11]. Other companies like Gree Electric, China Vanke, and Suning.com publicly reported no controlling shareholder or actual controller, aligning with modern trends in corporate governance where dispersed ownership is becoming more common [para. 12][para. 13].

At the National Development and Reform Commission's discussion, led by Director Zheng Shajie, the inclusion of major business leaders signifies a real engagement with the issue. Numerous firms, like Neusoft and Meituan, exemplify enterprises that don't comply with the “personal holding” requirement due to dispersed shareholder structure or dominance by institutional investors like Tencent in Meituan’s case [para. 15][para. 17].

The emerging trend of companies with “no controlling shareholder and no actual controller” is noticeable, with over 10% of A-share market companies in this category, highlighting a shift away from individual-centric control to diversified shareholder participation [para. 18]. The draft's stipulation of being “controlled by Chinese citizens” also adds complexity. For instance, mainland investments funded by individuals from Hong Kong and Macao — who are still Chinese citizens according to national law — complicates the classification as private [para. 20].

President Xi Jinping and the Communist Party's Central Committee emphasize equal protection of rights across state-owned, private, and foreign-funded enterprises, indicating that the nation considers all non-state and non-foreign enterprises as part of the private economy. Consequently, it is suggested that the draft's Article 76 be revised to broaden the definition of private economic organizations beyond individual ownership, including those not funded by foreign entities or controlled by state capital [para. 21][para. 22][para. 23].