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A worker assembles musical instruments at a factory in China’s Hebei province. Business-registration data shows that small and micro-sized firms are making a comeback. Photo: AP

China’s new business registrations rose after zero-Covid, but boosting ‘vitality’ of national economy will take time

  • Small and micro-sized firms across China bore the brunt of pandemic-control measures, but their lost contribution to the economy is gradually coming back
  • Catering and tourism saw a particularly sharp year-on-year increase during the first quarter of 2023

After three years of hardship, struggling to stay afloat – or outright folding – under the weight of zero-Covid lockdowns across China, small entrepreneurs are once again rolling up their sleeves and setting up more new businesses, according to registration data.

In the first three months of the year, nearly 7.57 million small and micro-sized enterprises – those with registered capital of less than 5 million yuan (US$727,000) – were registered. That marked a 16 per cent increase compared with the same time last year, according to statistics from business database platform Qichacha.

Meanwhile, the number of deregistrations was also down in the first three months, to 1.12 million, or around half of the total in the same period last year.

“These are encouraging signs that the economic recovery is quite strong,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

“We are probably still at the early stage of the recovery, as firms need time to set up their business and push capacity utilisation up.”

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Ding Shuang, chief Greater China economist at Standard Chartered Bank, said the trend is likely to continue in the following months as the economy recovers, as many small entrepreneurs are still in the early stages of planning.

“The overall vitality of China’s economy has not yet recovered to pre-pandemic levels,” Ding said.

Among all small firms, those in the catering sector saw a rapid rebound in the first quarter of 2023, as the number of new registrations exceeded 751,000, up 28.9 per cent year on year, while the number of deregistrations was around 56,000, down 78.3 per cent.

For the tourism sector, the registration total in the first three months increased by 44.6 per cent, year on year, while deregistrations dropped by 78.7 per cent.

The data is aligned with China’s official purchasing managers’ index of the services sector, with the March reading soaring to 56.9, the highest level since March 2012 and much higher than the 51.9 reading for the manufacturing sector in the same month.

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“The catering sector does not require too much preparation to set up a new business, so it can bounce back as soon as demand returns,” Ding said. “But growth will also level off sooner, compared with other sectors.”

Small firms are considered the “backbone” of China’s private sector, which underpins the national economy. They account for half of China’s tax revenue, 60 per cent of its gross domestic product and 80 per cent of urban employment.

They also bore the brunt of the economic downturn wrought by the pandemic and Beijing’s strict containment measures, failing at a historic pace in the past three years.

“The small and micro-sized enterprises account for a large share of jobs. Their strength will lead to a lower unemployment rate and higher consumption,” said Zhang at Pinpoint Asset Management.

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Premier Li Qiang has vowed to “pursue an employment-first strategy” as the country is set to see another record number of university graduates this year, with 11.58 million entering the workforce.

Ding said that, as external demand continues to weaken, China’s economic recovery this year will have to rely on a rebound in consumption, which is dependent on employment and an increase in household income.

Last month, the Ministry of Finance announced a preferential tax policy for small and micro-sized firms, by lowering the tax rate from 25 to 20 per cent for the portion of their annual taxable income below 1 million yuan, effective from the start of 2023 to the end of 2024.

It will also halve the income tax rate for owners of household businesses, for the part of their income less than 1 million yuan.

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