Since 2013, China has witnessed a marked increase in the number of registered firms, individual businesses, and farmers’ specialized cooperatives. At the end of 2013, China counted 61 million such “market entities”. Eight years later, in 2021, it had 154 million. The number of registered market entities per year increased from around 11 million to 25 million in the same period (Figure 1). This increase has happened despite a gradual slowdown in the GDP growth rates during the same period.
Figure 1: Newly registered firms and market entities in China per year, 2013-2021
This increase in the numbers of registered companies has happened along with the implementation of a large reform initiative aimed at decreasing the time and cost of starting a new business. In 2013, it used to take more than a month to start a business. Nowadays, leading cities like Beijing have made it possible to register a business within hours. A recently published World Bank paper on business registration reforms in China describes this reform process in detail.
In 2014, the Chinese government launched a national multi-year initiative to streamline administrative procedures for business registration and strengthen post-registration supervision. Its key features included:
- Using a unique business identification number across the country
- Easing incorporation requirements such as minimum capital requirements;
- Streamlining or even removing requirements to obtain certain operation permits before registering a business;
- Strengthening post-registration controls by investing in a corporate social credit system where the firms’ social credit information is collected, shared and publicized for greater oversight by stakeholders;
- Digitizing services for entrepreneurs to start a business;
- Strengthening data sharing and coordination among government agencies at various levels.
This successful business registration reform story is the result of a combination of strategic planning and learning from local experimentation. Reforms were undertaken in stages over years, taking stock of the lessons learned though a strong monitoring and evaluation system and follow-up adjustments. Most of the reforms were initially piloted in selected cities and free trade zones before being replicated on a larger scale or across the country. This approach has proven to be very useful in tailoring good international practices to China’s own context.
The overhaul of China’s business registration system has required substantial legal and institutional adjustments. China passed new (or revised) legislations which were complemented by regulations and guidelines at subnational and local levels. Cross-agency coordination groups were set up both at ministerial and local levels to support the reforms. The central and local leading agency for the reforms was also restructured into a new agency with a more comprehensive role.
Digital solutions were also a key enabler to facilitate business data collection and sharing and to improve efficiency. Building on its development of e-government services over the past two decades, the government has been investing heavily on digital infrastructure and one-stop shops for business registration. In addition, the central government has created several national platforms on corporate social credit information to support the collection, sharing, and publication of firm registration and operational information. This has largely improved data transparency and facilitated data sharing.
Is this enough to spur and sustain entrepreneurship? Not quite. China has made a promising start, but it still faces challenges to bring the business system reforms to full fruition.
First, despite improvements, cross-agency coordination and data sharing continue to pose a challenge. When different government agencies set up their own information systems, they did not consider the need for data sharing. As a result, these information systems have different data standards and in some cases are completely incompatible. This problem exists among peer agencies as well as among authorities at different administrative levels. Without a more holistic and permanent institutional set-up, many public agencies may still feel reluctant to exchange data.
Second, China faces challenges in setting up the new post-registration oversight mechanism based on corporate social credit information. In the design, authorities collect a firm’s social credit information including financial information, business registration information, tax and social security payment information and information on the administrative penalties the firm received; some of this information is made publicly available, such as firm registration information, information on permits, administrative penalties received and movable pledge registration information, etc. However, in practice, collecting each firm’s social credit information in a timely and accurate manner and using it effectively are not easy tasks. Furthermore, implementation of the corporate social credit mechanism could increase firms’ compliance burden, raise data privacy issues and make the mechanism vulnerable to discretionary use.
Third, public access to information is important to improve transparency and facilitate external accountability during the reform process. It would be useful for China to further improve public access to information by publishing regulations online and opening up access to relevant data, such as business registry data. Private sector feedback mechanisms could also be strengthened to make sure that the needs of entrepreneurs are promptly addressed.
Finally, individual businesses and micro-, small-, and medium-sized enterprises (MSMEs), which accounted for more than 90 percent of all market entities in China, need stronger policy support to survive and grow. Chinese MSMEs struggle with various challenges, including an uneven playing field, skill shortages, and limited access to credit. Broader reforms would be needed to improve market conditions for MSMEs while making it easier for them to be established.
Such further adjustments would allow China to continue to benefit from the significant achievements of the business system reform initiative that was launched in 2014. This ongoing process of reform could also hold useful lessons for other countries as they look to understand China’s experience.
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