Editor’s Note: After a fast-tracked legislative process spanning just over a year, China’s national legislature, the Standing Committee of the National People’s Congress, approved the Private Economy Promotion Law [民营经济促进法] on April 30. During that time, it reviewed the bill at three consecutive sessions—in December 2024, February 2025, and April 2025—and published (only) the first draft for public comment. Following the Law’s second review, friend of the site and Senior Fellow at Yale Law School’s Paul Tsai China Center Jamie P. Horsley authored a commentary for the Brookings Institution, in which she argues:
The first draft . . . contains little new in terms of legal or policy initiatives, apart from its somewhat problematic definition of promoted private businesses. It restates existing policies and legal requirements that have failed to resolve the sector’s legal challenges, emphasizes political correctness, and seems unlikely to succeed on its own to substantially reassure private investors and spark entrepreneurial enthusiasm. [And] the draft notably excludes majority foreign-owned companies and maintains a segregation of the Chinese economy into state, [domestic] private, and foreign-owned sectors.
In this follow-up piece, Horsley highlights notable new clauses in the Law’s final version and identifies several measures that lawmakers could have incorporated to improve government compliance with the Law but ultimately did not.
By Jamie P. Horsley
China’s first “foundational” [基础性] law intended to support and regulate its crucial domestic private sector, the Private Economy Promotion Law (PEPL), was promulgated on April 30 and takes effect on May 20, 2025. In official commentary surrounding its drafting and adoption, authorities recognized that the private sector has faced “difficulties and challenges in terms of fair participation in market competition, equal use of production factors, obtaining investment and financing support and service guarantees, and protection of legitimate rights and interests,” due in large part, as the PEPL makes clear, to Chinese government failures to abide by legal requirements. Official commentary also asserted that the PEPL now provides a legal guarantee and institutional support for its “sustained, healthy, and high-quality development.” However, the final PEPL, like the earlier drafts discussed in my previous analysis, contains little new in terms of substantive legal requirements, protections, or policy. It rather serves to emphasize and fortify pre-existing laws—including the state Constitution—and policies that apply to, but have not been uniformly and fairly implemented with respect to, the private sector.
Compared to its December 2024 draft, the PEPL’s final version adds new language in over half of its 78 articles and strengthens certain provisions on both the private sector’s obligations (for example, with respect to workers) and protections with more specific language. Some commentators praise the PEPL’s role in providing clearer bases for private entities to obtain relief through the courts to protect their rights. Article 12, for example, now emphasizes that the state should ensure that private sector actors are “equally eligible under the law” to enjoy the state’s policies to support development. A new clause in the PEPL’s Article 61 prohibits entities [单位] from unlawfully collecting fees from, imposing fines on, or apportioning [摊派] financial burdens to private businesses. This provision tracks the language of Article 12, paragraph 1(9) of the Administrative Litigation Law [行政诉讼法], which lists the same acts as grounds for bringing a lawsuit against an administrative agency. A new clause in Article 45 barring the retroactive application of new legislation and other official documents that affects the private sector cites as its legal basis the Legislation Law [立法法], and serves to emphasize the supportive legal framework that the PEPL strengthens. Similarly, the final version spells out in Articles 71–73 the cautionary legal principle that when government departments violate the law in their treatment of private businesses, their responsible officials and directly responsible personnel will be personally sanctioned in accordance with the law.
Yet while observing that “any notable increase in cases of ‘private firms vs government’ would be a sign of the law’s usefulness,” one Chinese expert notes that private businesses are typically reluctant to litigate, since they hope to maintain positive relationships with their regulators. The PEPL does call for establishing or improving a dozen administrative mechanisms—relating to, among others, complaints and dispute resolution, intra-governmental coordination, credit information, services, and protection of overseas interests—that are intended to facilitate development of the private sector. However, apart from invoking the usual filing complaints and resorting to litigation, the PEPL notably failed to codify concrete government accountability measures that might have helped ensure, in particular, that the Chinese government at all levels carries out its legal obligations when dealing with the private sector.
One such measure officially reported to have been added to the second, February 2025 draft of the PEPL would have required the State Council and local governments to periodically report to the standing committee of the respective level of people’s congress on their efforts to promote the private economy. Such reporting requirements can have a positive impact on compliance within the Chinese political system. Surprisingly, that promising provision was not only dropped from the final version, but it was not even mentioned in the official legislative report relating to the February draft that was issued along with the final PEPL on April 30.
Another incentive that was not mentioned in any of the PEPL drafts but was raised in detailed July 2023 guidance jointly issued by the Chinese Communist Party (CCP) and the State Council to boost growth of the private economy would have been to specifically mobilize the opaque government creditworthiness system that is a part of China’s much misunderstood social credit system to better protect the private sector from government misconduct. Indeed, the PEPL is the first law to regulate, in Article 54, the specific social credit mechanisms for disciplining untrustworthy behavior [失信惩戒] and for credit repair [信用修复] as applied to the private sector. The PEPL might have also constructively incorporated provisions from the July 2023 guidance that required improving government compliance with agreements, establishing and refining a recording and discipline system for untrustworthy government behavior [政务失信记录和惩戒制度], and including information on breach of contract, default in accounts payable, and refusal to enforce judicial judgments by government agencies and public institutions in the National Credit Information Sharing Platform, although notably not in the public-facing Credit China platform.
Moreover, while the PEPL was undergoing final revisions, the CCP and State Council issued in March 2025 a policy on improving the social credit system. It more specifically requires refining the criteria for identifying and imposing discipline for untrustworthy government behavior—including during public resource transactions, investment promotion, talent recruitment, public-private partnerships, industry support, investment and financing, and enterprise-related fee charges, all of which are issues mentioned in the PEPL as particularly impacting the private sector—and to reflect the discipline in the relevant agencies’ credit records. The March policy further imposes restrictions on the eligibility of untrustworthy government actors to apply for fiscal funds and projects, pilot and demonstration programs, and awards. The inclusion of such provisions in the PEPL would have further signaled the party-state’s seriousness about demanding creditworthy government behavior toward the private sector in particular.
The PEPL, not surprisingly, also did not include language providing compensation for general policy changes that deprive private firms of their reasonably expected economic benefits. Such an indirect expropriation or regulatory taking arguably happened in July 2021. Amidst a broader regulatory crackdown on tech companies that shook domestic and foreign investor confidence, the Chinese government abruptly ordered private online tutoring companies to not only restrict the scope of their successful businesses, but also to convert to nonprofits, wiping out billions of dollars in market capitalization. The PEPL does require compensation of losses in a variety of contexts, including when policy commitments to or contracts with private businesses need to be changed in the public interest, but its scope appears to be limited to situations where specific commitments had been given to the specific private firm involved. While the details of such an indirect expropriation regime would have to be separately legislated, the promise of compensation for unexpected policy swings might boost domestic investor confidence, as well as act as a restraint on government overreach. Moreover, China has already committed to compensating foreign investors for indirect expropriations in over 150 bilateral investment agreements, such as the 2019 China-Mauritius Free Trade Agreement (see Article 8.7 and Chapter 8-Annex-B).
The PEPL was never going to completely resolve the many challenges facing the private sector in China, including the ideological ones discussed in my earlier piece and important structural ones. Its impact lies in serving as a political statement of the CCP’s intent to better ensure China’s private firms continue to invest, hire, train, innovate, and otherwise contribute to the country’s socioeconomic development. Numerous complementary and supporting initiatives are being rolled out to implement the various promises made in the PEPL. Time will tell whether the PEPL helps China attract and effectively utilize more domestic private investment, which in turn might attract greater foreign investment as well.
Jamie P. Horsley is a Senior Fellow at the Paul Tsai China Center, Yale Law School and Nonresident Senior Fellow at the Brookings John L. Thornton China Center. At Yale since 2002, she formerly was Executive Director of the Yale China Law Center. Her research primarily involves issues of governance, regulatory developments and administrative law in China, including transparency, government accountability and, more recently, data governance.