The economic downturn, compounded by mounting fiscal pressure on local governments, is fundamentally reshaping the risk landscape for private entrepreneurs in China. The focus has shifted from losing money to losing liberty. This is not alarmism. Tax enforcement is tightening, financing chains are strained, business-government relations are increasingly sensitive, and internal corporate conflicts are intensifying. Any misstep on any of these four fronts can turn a business problem into a criminal case. This article sets out the policy and legal basis clearly: which red lines must not be crossed, what the legal authorities say, and what to do if a line is crossed.
I. The Dual Signals from Policy and Law
On the policy side, the “tailwinds” are clear:
In 2023, the CPC Central Committee and the State Council issued the Opinions on Promoting the Development and Growth of the Private Economy, providing support for the private sector across 31 areas, including fair competition and rule-of-law guarantees.
On April 30, 2025, the Standing Committee of the National People’s Congress adopted the Private Economy Promotion Law of the People’s Republic of China, effective from May 20, 2025 — the first law in China dedicated specifically to the private economy, enshrining “equal protection” in legislation.
The state’s commitment to protecting the private economy has never wavered.
On the enforcement side, the “tightening” is equally clear:
Under fiscal pressure, tax supervision has intensified. The “Golden Tax Phase IV” system now cross-checks invoice flows, capital flows, and logistics data, dramatically narrowing the space for past practices.
In September 2021, six central authorities, led by the CCDI and the National Supervisory Commission, jointly issued the Opinions on Further Promoting the Simultaneous Investigation of Bribery and Corruption, turning “cracking down on both giver and taker” from a slogan into an institutional arrangement.
The Criminal Law Amendment (XI), adopted in 2020, raised the maximum penalty for embezzlement to life imprisonment — a clear trend toward heavier punishment for economic crimes.
Policy encourages innovation while enforcement grows stricter. Together, these mean the room for compliance error for private entrepreneurs is narrowing.
II. Risk One: Tax — When Enforcement Tightens, False Invoicing Has No “Exit”
Legal basis: Article 205 of the Criminal Law (crime of issuing false special VAT invoices); Article 201 (tax evasion); in 2024, the SPC and SPP issued the Judicial Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases Endangering Tax Collection and Administration (Fa Shi [2024] No. 4), which significantly refines the standards for determining false invoicing.
Policy background: With Golden Tax Phase IV in operation, practices such as “invoicing without goods,” “over-invoicing,” and “re-labeling invoices” are increasingly exposed. The pathway from tax audit to criminal referral to public security is well established, and the number of tax-related criminal filings has risen markedly.
Common scenarios:
1. Arranging third-party invoicing to satisfy financing conditions or customer demands — once verified, reaching the filing threshold means facing criminal prosecution.
2. Concealing revenue through private-account collections or dual bookkeeping — this implicates tax evasion. Tax evasion retains an “exit” for first-time offenders: if, after the tax authority issues a payment demand, the taxpayer pays the tax due and late fees and has accepted administrative punishment, criminal liability is not pursued. However, the crime of issuing false special VAT invoices has no such mechanism — this is the most critical difference between the two offenses.
Defense focus: Under Fa Shi [2024] No. 4, where the act was not aimed at fraudulently offsetting tax liability and no state tax revenue was lost through offsetting, the conduct does not constitute the crime of issuing false special VAT invoices. Upon receiving a tax handling decision, respond lawfully within the payment deadline — do not delay or destroy account books and vouchers.
III. Risk Two: Financing — The Tighter the Cash Flow, the Further from “Guaranteed Returns”
Legal basis: Article 176 of the Criminal Law (illegally absorbing public deposits); Article 192 (fundraising fraud); Article 175a (fraudulently obtaining loans); the SPC Interpretation on Several Issues Concerning the Specific Application of Law in Trying Criminal Cases of Illegal Fundraising, as amended in 2022, which further details the “four characteristics” test — illegality, publicity, inducement, and public targeting.
Policy background: During the downturn, banks have tightened or withdrawn credit lines, leaving corporate cash flows generally strained and private financing demand surging. Fundraising-related cases have entered a high-incidence period.
Common scenarios:
1. Publicly promoting fundraising to unspecified persons with promised repayment of principal and guaranteed returns — the line between private lending and illegal fundraising is drawn on three criteria: public promotion, targeting of unspecified persons, and promises of repayment with returns. All three together cross the criminal threshold.
2. Fabricating projects and exaggerating profitability to “raise money” — this implicates fundraising fraud, punishable by up to life imprisonment.
3. Obtaining bank loans with false contracts or false financial statements — this implicates fraudulently obtaining loans. After Criminal Law Amendment (XI), conviction requires “causing major losses or other serious circumstances,” but in practice the “serious circumstances” prong remains subject to expansive interpretation. Do not rely on wishful thinking.
Defense focus: The use of funds, whether they were repaid, and whether they were applied to production and business operations directly determine the charge and the sentencing range. After involvement, immediately organize the capital-flow records and preserve evidence that funds were “used for production and business operations” — this is often the key to turning a case around.
IV. Risk Three: Bribery — “Cracking Down on Both” Is Not a Slogan
Policy basis: In September 2021, six central authorities led by the CCDI and the National Supervisory Commission jointly issued the Opinions on Further Promoting the Simultaneous Investigation of Bribery and Corruption, making clear that bribe-giving conduct will be “investigated with priority and severity.” Bribery is no longer a “low-cost, high-return” unspoken rule.
Legal basis: Articles 389 and 390 of the Criminal Law (bribery); Article 393 (unit bribery — fines against the unit and criminal liability for the directly responsible persons); Article 164 (bribery of non-state functionaries).
Common scenarios:
1. Transferring benefits to state functionaries to win projects or approvals.
2. Bribery conducted in the name of and decided by the unit — the determination of “unit will” in unit bribery is a core defense battleground.
3. Paying kickbacks to SOE procurement personnel or financial institution employees — bribery of non-state functionaries is likewise criminalized.
Defense focus: Key review points include whether “improper benefits” were sought, whether the client was extorted, the calculation of the bribe amount, and the mitigating circumstances of voluntary confession and cooperation. These cases are investigated by supervisory authorities; the client and family should retain experienced criminal defense counsel early and exercise their rights lawfully.
V. Risk Four: Internal Strife — In Downturns, the Most Dangerous Threats Come from Within
Legal basis: Article 271 of the Criminal Law (embezzlement — maximum penalty raised to life imprisonment by Criminal Law Amendment (XI)); Article 272 (misappropriation of funds); Article 163 (taking bribes by non-state functionaries); and the 2022 Filing and Prosecution Standards for Criminal Cases under the Jurisdiction of Public Security Organs (II), which set the filing threshold for embezzlement at RMB 30,000.
Policy background: When business is difficult, conflicts between shareholders, and between management and employees, erupt. Internal reporting and mutual accusations between shareholders have become the most common triggers of criminal cases.
Common scenarios:
1. A shareholder or executive transfers company funds into a personal account — embezzlement.
2. Unauthorized lending of company funds to relatives or friends, or use for personal investment — misappropriation of funds.
3. Accepting kickbacks or commissions in procurement or sales — taking bribes by a non-state functionary.
Defense focus: These cases rely heavily on capital-flow records, approval documents, and meeting minutes. Companies must establish standardized financial approval, seal management, and related-party transaction review systems. Mixing personal and corporate accounts is the most dangerous habit.
VI. Entrepreneurs Are Shifting from “Expansion Logic” to “Survival Logic”
Many private enterprises have already changed their real strategies:
1. No longer blindly expanding asset scale, but prioritizing cash flow.
2. No longer readily entering industries requiring government licensing and resource allocation.
3. Reducing complex related-party transactions, nominee holdings, and the mixing of personal and corporate accounts.
4. Remaining cautious about local government investment-promotion promises, industrial subsidies, and government cooperation.
5. Establishing clearer legal separation between family assets, corporate assets, and business liabilities.
6. Organizing tax, employment, financing, data, and historical equity documents in advance.
7. Avoiding building enterprise security entirely on a particular official, relationship, or oral promise.
This is not “lying flat.” It is a reassessment of risk in a highly uncertain environment. In the past, entrepreneurs pursued scale, speed, and leverage. Today, the more important capabilities are controlling exposure, preserving evidence, isolating liability, and maintaining the ability to exit.
VII. Five Practical Suggestions for Private Entrepreneurs
1. Make criminal compliance part of daily operations. Contracts, invoices, and capital flows must reflect genuine business. Eliminate “round-tripping” and “pass-through” arrangements — this is not merely an accounting issue; it is a criminal issue.
2. Use lawful financing channels. Stay away from the “public promotion with guaranteed returns” red line. Do not fabricate projects or falsify financial statements.
3. Conduct business-government relations properly. Participate in bidding lawfully. If solicited for bribes, preserve evidence and report promptly. Since 2021, “cracking down on both giver and taker” has been an explicit institutional arrangement.
4. Treat the company as a company. Institutionalize financial approval, seal management, and related-party transactions. Keep personal and corporate accounts completely separate.
5. Engage counsel immediately after involvement. Criminal procedure is irreversible. Early intervention secures maximum room in evidence preservation, change of coercive measures, and charge defense.
Conclusion: What the Private Economy Needs Most Is Not Encouragement, but Certainty
One of the core contradictions of the current political and economic situation is that the state needs the private economy to provide employment, tax revenue, innovation, and growth — yet has not fully resolved the uncertainty created for enterprises by the expansion of power, local fiscal pressure, and arbitrariness in law enforcement.
What private entrepreneurs truly need is not to be repeatedly told that they are “important,” but confirmation of three things:
1. Lawfully acquired property will not lose protection because of policy changes.
2. Ordinary business failure will not be readily recast as a criminal offense.
3. When confronting local governments and powerful counterparties, the law can still provide effective remedies.
If these three points cannot form a stable expectation, no amount of industrial support, financing policies, or investment-promotion promises can do more than provide short-term emotional relief.
The vitality of an economy ultimately depends on whether people are willing to invest their wealth, time, and lives in the future. When entrepreneurs begin to believe that “not investing is safer than investing, not growing bigger is safer than growing bigger, and not exposing wealth is safer than creating wealth,” the problem no longer belongs to one industry, one region, or one group of enterprises — it has become an institutional cost that the whole society must bear.
The retreat of the rule of law may hurt entrepreneurs first, but the final cost will be borne by employment, public finance, innovation, and the future of every ordinary person.
Author: Wang Guan, Attorney at Law | Co-Founder, Beijing Haolue Law Firm
Tel: +86 17813108512
Address: F2, East Tower, Hademen Plaza, No.8 Chongwai Street, Dongcheng District, Beijing
This article is for legal research reference only and does not constitute formal legal advice. Policy documents and legal provisions cited herein are subject to official published texts.