A total of nearly 124 million sole proprietorships were registered across China by the end of 2023, representing an 11.4% increase on the previous year, amidst the challenges of a complicated economic recovery.
At a press conference held on January 31st by the State Council Information Office of China (SCIO), Ren Duanping, Director of the Business Registration Bureau of the State Administration for Market Regulation, announced that China had registered 22.582 million new sole proprietorships, an increase of 11.4% on the previous year.
Nearly 124 million sole proprietorships were registered nationwide by the end of 2023, accounting for 67.4% of total business entities and supporting nearly 300 million employed people.
Sole proprietorships and one-person companies are widespread business configurations among small traders in China. They “play an important role in stabilizing growth, promoting employment and improving people’s livelihoods,” stressed Ren Duanping, before adding that the State Administration for Market Regulation will continue to take measures to support and promote their development.
Tax measures to support entrepreneurship
In May, China’s Ministry of Finance introduced a package of tax relief measures to bolster self-employment and sole proprietorship, as the world’s second-largest economy struggled with a post-COVID recovery.
Against a backdrop of weak demand, both at home and abroad, China’s economic recovery had been losing steam since April. This situation increased pressure on policymakers to revive the economy, as many companies faced falling orders, financing difficulties, and declining profits.
The Minister subsequently announced tax cuts for various demographic segments, including higher education graduates and individuals recently emerging from poverty, with the objective of fostering entrepreneurship.
Individuals who ventured into self-employment were exempted from value-added tax, city maintenance and construction tax, additional education tax, additional local education tax, and personal income tax up to 20,000 yuan ($2,800) annually for three consecutive years starting from the registration date.
He additionally declared the abolition of VAT for small taxpayers with monthly sales of less than 100,000 yuan ($13,921.95). Further, he outlined a reduction of the rate on taxable sales income to 1% for those normally eligible for a 3%, extending this favorable rate until the end of 2027.
The standard VAT rate for businesses in China is normally 13%, but there are also reduced rates of 9%, 6% and 3% for smaller companies. Interest income from micro-loans granted by financial institutions to sole proprietorships had also been exempted from VAT until 2027.
The self-employed, 44.53% of the job market
Sole proprietorships and self-employment have proliferated in China since the 1980s, when the country intensified economic reform and global market integration. While a few have become world-renowned entities, such as heavy equipment manufacturer Sany Group or household appliance maker Midea Group, the majority remain modestly-sized family businesses operating in niche markets, predominantly in manufacturing and trade.
In 2021, the number of self-employed workers accounted for 44.53% of the Chinese labor market, according to World Bank data.
There are several reasons why the Chinese are turning to entrepreneurship.
Firstly, amid the current downward trajectory of the country’s economic growth rate, companies are seeking to reduce costs by optimizing their employment structure, often translating into a reduction of staff numbers. Outsourcing workloads to freelancers or sole traders enables companies to cut costs.
Contributing to this shift is the prevalence of Millennials and Gen Z generations, who now represent the majority of the workforce, are more receptive to flexible working methods. According to a recent Deloitte survey, four out of five respondents said they would be committed to freelance or contract work, and 61% were prepared to accept flexible part-time work.
And these generations are struggling to find work in China. The unemployment rate for young people aged 16 to 24 in the world’s second-largest economy — excluding students — stood at 14.9% last December, according to monthly data from the National Bureau of Statistics of China. This stands in contrast with the country’s total urban unemployment rate of 5.1% for the same month.
All these factors combined have opened up a period of growth for the new generation of self-employed individuals and the entrepreneurship market.
Self-employment, “unemployment in disguise”?
The situation is not entirely optimistic, however. According to Shuting Xia, a sociology researcher at Cambridge University specializing in the study of self-employment in China, “in fact, it is no exaggeration to claim that the rise of self-employment in China is just disguised unemployment.”
She explains that self-employed workers are usually the most precarious on the labor market: “one fifth of the rural-to-urban migrants, often the poorest in cities, engage in self-employed activities, a proportion much larger than that of their non-migrant urban counterparts.” The most frequently cited reason for self-employment is not, in fact, the desire to take advantage of good entrepreneurial opportunities, but rather the fact that there are simply no better alternatives for generating income.
In her view, self-employment is essentially a “subsistence” activity, and the majority of self-employed people work in the underdeveloped service sector. They often engage in low-paid tasks, such as hairdressing, sewing, selling groceries, and photo finishing. She explains that due to the predominance of the sole proprietorship structure and the underdevelopment of capital markets in China, independent businesses do not grow large; self-employed workers and sole proprietors rarely evolve into employer status.
In this sense, she concludes by pointing out that self-employment in China is often a reaction to structural disadvantages in accessing the labor market. It would make sense to give greater support to the non-independent private enterprise sector, which contributes 60% of China’s gross domestic product and is the largest source of employment.
Easing market regulations
Last week, the International Monetary Fund (IMF) published a report stating that China’s economic decline is set to continue over the next four years as the country faces a series of challenges such as a rapidly aging population, rising unemployment, and the real estate crisis.
In the report, the global financial policy body predicts that China’s economic growth will fall to 4.6% in 2024, from 5.2% in 2023, and then to 3.4% by 2028.
The IMF has recommended that the Chinese government encourage its citizens to find new ways of investing and pursue market-oriented reforms, among other things, to stimulate the country’s economy.
