Here is an interesting empirical fact about the Chinese economy that does not easily fit into the usual narratives: under Xi Jinping, more new private-sector companies are being created every year than at any period in its modern history. This of course is exactly the kind of factoid China’s government regularly trots out to demonstrate the vitality of its private sector. In March, the People’s Daily published a front-page article extolling the fact that the number of private companies had quadrupled from 10.9 million in 2012, when Xi took office, to 44.6 million in 2021. (I don’t actually read the People’s Daily every day, but I do subscribe to Manoj Kewalramani’s invaluable Tracking People’s Daily newsletter). Company formation is one of the ways of tracking what is usually called business dynamism: how much entrepreneurial activity is happening in an economy.

The figures are even more interesting than the propagandists seemed to realize. While the official publication of company registration data has been intermittent at best, the People’s Daily article and accompanying chart allow some of the holes in that published data to be filled in. The combined data provide a picture of private-company formation in China over roughly the past two decades. Before 2012, the population of private local companies was increasing by around 1 million or less every year (this is the net increase; there is even less data available on the gross number of new company registrations). Net company formation accelerated over 2013-15, and since 2016 has been running steadily around 4 million or more per year. There’s been an even more dramatic acceleration in the formation of new sole proprietorships (getihu: not companies with a separate legal existence, but businesses run as part of a household): the net increase was over 10 million in both 2020 and 2021, up from around 3 million in 2021.

That is a pretty dramatic change in the trend. The cause is well-documented: a systematic official effort, beginning around 2014 and continuing through the present day, to lower the costs and simplify the process of forming new companies (I wrote a piece about it back in 2014). The OECD is one of the few organizations that have attempted to systematically evaluate the effects of these changes (the much-maligned Doing Business survey of the World Bank was another). Here is some commentary from its just-published 2022 Economic Survey of China, which quantifies the administrative burdens on start-ups relative to other countries:

Enterprises in China are subject to somewhat lighter burden than in the average OECD country, though higher than in Japan, Germany or Italy. In some major non-OECD economies, such as Brazil or South Africa, the burden is much higher than in China. … Only one institution needs to be contacted to start a business in China, compared with the OECD average of around four. This is the same as in the frontrunner countries of Australia, Canada, Greece, Korea, Latvia, Lithuania or New Zealand, where to set up a new firm it is also enough to contact a single institution. There is neither minimum capital requirement nor monetary costs for registering a limited liability firm in China, which is in line with the best practice in OECD countries.

Substantially reducing the barriers to company formation to close to rich-country levels is a pretty decent accomplishment. It’s not a bad legacy for Premier Li Keqiang, whose signature initiative this has been and who is finishing his last year in office. What’s curious, though, is that the enormous boom in private-company formation in recent years has not had very visible macroeconomic effects. Economic growth is not any faster: growth in labor productivity has averaged 6.6% annually in the seven years since 2015, compared to 8.4% in the prior seven years. Of course, a lot of factors have combined to slow China’s economic growth recently, so growth might have slowed even more without this boom in company formation.

But there also hasn’t been any noticeable change in the structure of national income. Since barriers to company formation have fallen, and the pace of company formation has increased, we might reasonably think that a greater share of economic activity is now taking place inside legal corporate entities rather than in the informal economy. Yet the share of corporate profits in national income (technically, gross operating surplus in the fund of flows) has remained basically unchanged around 26% since 2015. Business profits generated by households rather than companies (through sole proprietorships, getihu), have also been stable around 5% of GDP. (The chart below uses the OECD’s presentation of China’s flow of funds, which is more standardized and easier to interpret than the one published by the National Bureau of Statistics; thanks to Bert Hofman for the pointer).

In other words, although the population of private companies in China has gotten much larger, the share of economic activity generated by those companies has not. Some of the increase in private company formation could thus be because it is now easier for people to create multiple corporate legal entities, rather than because there has been a true increase in the rate of entrepreneurship.

The flow of funds data goes only to 2019, and so doesn’t show what happened during the two pandemic years of 2020 and 2021. By all accounts, these were horrible periods for small businesses in consumer-facing services like restaurants and tourism. They lost huge revenues during the initial lockdown of 2020, enjoyed a few months of rebound in the latter half of 2020, and then settled in for months of disappointment in 2021 as waves of intermittent Covid restrictions discouraged travel and recreation. Things have obviously gotten even worse in 2022. Data from OECD countries show that new firm creation generally fell substantially in 2020, so the fact that in China net company formation actually picked up is surprising. Of course, China’s pandemic economic trajectory in 2020 was quite different from the OECD countries. But it’s also possible that the well-documented mass closures of small business during lockdowns are not fully showing up in the company registration data: companies could stop operating without canceling their registration. (Friends who have companies in China tell me that canceling your registration is difficult and time-consuming and often not worth the bother.)

The biggest surge in registrations has not been for private companies but for sole proprietors/getihu: the pace in 2020-21 was roughly double that of 2015-16. Because sole proprietorships have inherent limitations to scale (they can’t hire more than a few people) and no limited liability, they are usually more of a vehicle for self-employment. The desire to be an entrepreneur can be a reason to choose self-employment, but in developing countries like China, self-employment is often the result of a lack of more stable job opportunities. It can also be the channel for more modern forms of unstable employment: drivers for delivery and ride-hailing services often register as sole proprietors, which makes them contractors not employees. The increase in sole proprietorships does appear to be part of a broader structural change in China’s employment patterns: an important 2020 article by Scott Rozelle and colleagues documents a sustained rise in the share of employment in informal, low-wage service sectors.

It’s certainly not a bad thing that it has become easier for Chinese people to establish companies. But the rather ambiguous economic evidence suggests that the surge in private-company formation over the last several years is not a simple story of rising business dynamism.