KEY POINTS:
- China could face a ‘lost generation’ of enterprises, according to one economist.
- New businesses are viewed as crucial to China’s productivity growth.
The number of new company registrations in China has dropped dramatically in recent months, indicating that the country’s coronavirus restrictions may have long-term consequences for economic growth.
According to statistics from the Chinese company registration agency, “Tianyancha”, 2.3 million enterprises were formed countrywide from March to May, down 8% from the same time a year ago. With a decline of about 19% in April, it was the worst month of the year.
According to Tianyancha data, the number of registered enterprises in Shanghai fell by 63%, fewer than 49,000 in the three months following restrictions that began in March and ultimately led to a citywide lockdown.
Given how COVID outbreaks this year have prompted major lockdowns of cities including Shenzhen and Shanghai, the figures add to accumulating proof of the toll that Covid Zero is taking on the world’s second-largest economy. President Xi Jinping declared on Thursday that the zero-tolerance policy would remain, but that it will be “coordinated” with economic endeavors.
Meanwhile, the ruling Communist Party has made increasing new company registrations an economic priority over the last decade, with initiatives focusing on reducing red tape and facilitating access to finance for start-ups. According to official data, company registrations increased by 12.5% to more over 9 million last year.
New enterprises have been critical to China’s productivity in recent decades. Depending on how long the COVID lockdowns last, the country could confront a lost generation of enterprises, with enormous long-run implications,” according to Chang-Tai Hsieh, a professor at the University of Chicago Booth School of Business.
According to data provided by Hsieh, the number of new company registrations fell 50% from a year earlier in February 2020, when virus limits were first introduced across China. As such precautions were removed, registrations began to rebound in April of that year, but Hsieh noted one unknown is “whether the absent entrants turn up afterwards when the lockdowns cease.”
In China, venture capital funds have similarly slowed their investments in start-ups. According to statistics from the research firm Preqin, the value of venture agreements in the country fell 44% in the first four months of 2022 compared to a year earlier. That was about double the downward trend in the United States and nearly four times the global rate of decline.
Last month, Lu Feng, an economist at Peking University, expressed concern over the declining number of Chinese “unicorns,” or unlisted startup companies valued at more than $1 billion, which he described as a barometer of “creative capability and vitality.”
According to Lu’s estimations, China added only three unicorns in the first four months of the year, compared to 94 in the United States. China’s poor performance was owing to constrained global exchanges due to the pandemic, as well as a weak domestic growth environment, he added.
