In short: the number of small businesses in China grows steadily, but their summary share in the economy remains stable. Data for COVID years is not available yet.
My guess the main cause is the change of business model brought by eCommerce, especially WeChat. WeChat really makes it extremely easy for everyone to open a business and get paid. There are also other popular eCommerce platforms in China like TaoBao/Tmall , Pinduoduo, JD, DouYing (TikTok), etc.
This data looks a few years old and questionable. Anyway, my opinion (China on-off since 2001, multiple businesses):
1. The government recently banned using personal electronic payment accounts to receive business funds (affects 2022 only).
2. To be listed on an ecommerce site you need a company.
3. Government handouts. To obtain local government handouts you have to put forward a corporate identity as a potential employer to justify receipt of funds. There's a lot of funds to receive, and all sorts of excuses for doing so. Some people's entire business is just a front for handouts, especially many "technology" businesses.
4. Face. If you are unemployed it's easier to maintain appearances with a company, even if you're not doing any business.
5. If you run your own company you control how much income is declared, which potentially increases profits at the expense of the tax man. A huge proportion of China's economy runs on the slightly cheaper ordering option of "不要发票" (don't need a tax-receipt). This is not a huge thing since it's rife in large companies too but it does allow for back-scratching deals that are of greater utility in a slowing economy (ie. now).
Sounds like labor being switched, i.e. from hourly worker to one-person service firm that still does the same job except as contractor. China is not like the US or EU in that you get social benefits like retirement and unemployment from the geo-locale you were born in not the place where you live and work.
Thus, the have workers in factories that cannot get social benefits in that locale as they were not born there. It makes the non-locales more pliable as a far as moving them to non-employee I would think ass they may be more hungry to make up the difference in social benefits they miss out on.