Upgrade China to ‘Attractive' amid private sector resurgence
by iFAST RESEARCH TEAM
OVER the past few years, China's economic trajectory has increasingly drawn negative sentiment. One of the most significant concerns has been the country's pivot toward a more centralised, top-down economic model. This shift has been characterised by a series of regulatory crackdowns across various sectors, most notably within the technology industry.
Leading private enterprises, once seen as flag bearers of China's economic dynamism, were subjected to stringent oversight, resulting in a chilling effect on innovation and investment. These actions led to prolonged periods of depressed valuations for some of China's most prominent technology firms.
While many of these challenges remain unresolved and will take significant time to unwind, the past six months have brought encouraging signs of policy recalibration. Targeted support measures for private businesses suggest a renewed recognition among Chinese leaders that the private sector is not a threat to control, but a necessary engine for sustainable growth.
A Turning Point
In February, a symbolic policy shift took place as President Xi Jinping convened a high-profile symposium with top tech entrepreneurs, including the long-absent Jack Ma. His reappearance — after years on the sidelines — sent a clear signal of political recalibration. Xi's message, encouraging entrepreneurs to contribute to national innovation, signals a strategic recognition that private enterprise is essential to advancing China's tech ambitions. The move also serves as a measure aimed at rebuilding trust with the business community and investors.
This rhetorical shift was quickly followed by tangible policy action. During the annual 'Two Sessions' in March, policymakers unveiled a series of measures aimed at institutionalising support for the private sector.
These included commitments to expand financial access for private firms, enable their participation in major infrastructure projects, and foster involvement in advanced manufacturing and the digital economy through a new public-private partnership (PPP) framework. These moves are intended to diversify capital channels and re-anchor private enterprise within the national development agenda.
A further milestone came with the implementation of the Private Economy Promotion Law on May 20, 2025, the first law explicitly dedicated to supporting private businesses. The legislation aims to ensure fair competition, equal access to market resources and legal protections for private enterprises. Its passage marks a significant shift, signalling that private sector growth is now supported by a robust legal framework.
These developments collectively suggest a strategic rebalancing of China's economic model. Looking ahead, we believe that China's economic growth will become increasingly diversified, driven by both the scale and stability of state-owned enterprises and the agility and innovation of the private sector, laying the groundwork for a more resilient and competitive Chinese economy.
Key to Economic Growth
According to All-China Federation of Industry and Commerce vice chairman Qiu Xiao-ping, the private sector is a cornerstone of China's economy — contributing over 50% of tax revenue, 60% of GDP and more than 80% of urban employment. Its vitality is essential to tackling core challenges.
China's bleak labour market has been a focal point of criticism in recent years. The downturn began in 2022, when regulatory crackdowns on the technology and education sectors led to widespread layoffs. This abrupt policy shift not only disrupted employment but also severely eroded investor confidence, triggering an equity market slump. By mid-2023, youth unemployment had soared to over 23%. The resulting labour market fragility weighed heavily on household sentiment and dampened consumption demand.
Recent signs, however, point to a gradual reversal. With the government now signalling stronger support for high-tech sectors, job creation is beginning to show green shoots. A notable example is Tencent Holdings Ltd's announcement of its largest internship recruitment programme, which plans to onboard 28,000 interns over the next three years, with a strong focus on full-time conversion. As leading technology firms expand, they are likely to absorb a significant portion of China's educated youth, who will be a key demographic for long-term productivity.
A more stable labour market is fundamental to China's strategic shift toward consumption-driven growth. In 2025, retail sales have shown encouraging resilience, with year-on-year (YoY) growth surpassing 5% since March.
While short-term stimulus measures, such as consumption vouchers, have contributed to the rebound, their impact is inherently limited, as seen in the fading effects of similar efforts in 2024. As such, a healthier labour market, anchored by private sector expansion, would provide the structural support needed to maintain momentum, especially in the face of external trade headwinds.
Consumption and AI Momentum
As China's policy direction increasingly leans toward stimulating consumption and accelerating artificial intelligence (AI) adoption, the positive impact is becoming visible in corporate earnings. The MSCI China Index has shown a notable rebound, with the first quarter of 2025 (1Q25) earnings growth gaining strong momentum. Information technology led the pack with nearly 40% YoY earnings growth, followed by communications services at 21%, while consumer staples and consumer discretionary also posted robust double-digit gains.
China's emerging AI wave is at the heart of this rebound. In 1Q25, companies deeply integrated into the digital economy and AI development saw substantial revenue uplifts. Alibaba Group Holding Ltd, Tencent and JD.com Inc all reported double-digit growth in marketing revenues, powered by AI-driven advertisement targeting tools that improved customer segmentation and conversion efficiency. Meanwhile, cloud revenue surged by 18% for Alibaba and 42% for Baidu Inc, as AI workloads drove greater demand for scalable infrastructure.
While AI software innovation in China is accelerating, hardware remains a strategic bottleneck. US export controls have effectively blocked access to cutting-edge AI chips, such as Nvidia Corp's A100 and H100, creating a critical gap in China's AI development stack. In response, Chinese tech leaders are intensifying efforts in domestic chip design. Huawei Technologies Co Ltd's Ascend series, though still behind Nvidia's chips in raw computing power, are capable of supporting inference tasks for models like DeepSeek's R1, underscoring progress in localised solutions.
Notable strides are also being made in consumer-grade chips. Huawei's Kirin 9000 and Xiaomi's recently launched XRing O1, the first Chinese-designed smartphone system-on-chip built on a three-nanometres (nm) process, represent significant advancements. While these chips have yet to match the performance of Western-designed counterparts in AI training, they function as important commercial enablers.
China's drive for domestic chip production has also spurred growth for its leading foundries, notably Semiconductor Manufacturing International Corp (SMIC) and Hua Hong Semiconductor Ltd. However, Chinese foundries lack access to ASML Holding's cutting-edge extreme ultraviolet light (EUV) lithography tools, limiting them to 7nm processes using older deep ultraviolet (DUV) technology — with yield rates reportedly still below 50%. This creates a cost-efficiency trade-off: While chip demand is climbing, foundries face heavy capital expenditures for research and development (R&D) and equipment upgrades, putting pressure on short-term profitability.
Despite these headwinds, the broader push underscores China's long-term commitment to semiconductor self-reliance. Foundry investments are increasingly viewed not just as commercial endeavours but as strategic imperatives. Even at the expense of near-term margins, sustained policy support suggests these efforts will remain a national priority amid rising geopolitical and technological competition.
Upgrading Valuation
The recent structural reforms supporting China's private sector represent a pivotal shift in the country's economic trajectory. By creating a more favourable environment for private enterprises, these changes are expected to boost earnings growth, innovation capacity and productivity, especially in the technology sector, which sits at the nexus of AI advancement and rising domestic consumption.
The views expressed are of the research team and do not necessarily reflect the stand of the newspaper's owners and editorial board.
This article first appeared in The Malaysian Reserve weekly print edition
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