China’s paltry support for private sector leaves its economic backbone in more dire straits than state firms

In sharp contrast with these types of private plights, strong cash flow and greater loan capacity have helped state-owned enterprises (SOEs) recover relatively faster this year after Beijing put an abrupt end to zero-Covid controls in December.

Jason Liang, who manages a state-owned trading company in Guangdong, pointed to a recent deal that illustrates how state firms continue to have a leg up on their private counterparts.

“A very simple example – we are now able to send more than US$10 million worth of products to the warehouse of a big buyer [a supermarket chain] in Australia, where they sell the products first, and then we collect the final payment after 90 or 120 days,” Liang said. “Few private company peers can make such big concessions, which means they can’t compete for orders from such big customers.”

As the backbone of China’s 121-trillion-yuan economy, the private sector – a major source of employment and contributor of fiscal revenue – was hit hardest under zero-Covid and continues to point to worrisome uncertainties about what the future holds.

Despite officials from all levels of government continually trying to sweet-talk and reassure private firms and investors since late last year, many continue to flag suboptimal conditions including weakened demand, potential policy changes, weak support and poor growth prospects.

Already this month, Zheng Shanjie, director of the National Development and Reform Commission (NDRC), has held two discussions with private entrepreneurs to “listen to the real situation [of private companies] from various sides”, including different industries and regions.

And in response to specific appeals and suggestions raised by enterprises, China’s top economic planner has vowed to assess the current policies and unveil new supportive measures to help the private sector.

Meanwhile, from industrial output to investment totals and revenue, a recovery in the private sector has been slower than at the state level.

For the first five months of this year, fixed-asset investment by private firms fell 0.1 per cent from the previous year, in sharp contrast with the rise of 8.4 per cent among their state-owned rivals.

Profits of private industrial enterprises with annual revenues of at least 20 million yuan fell 21.3 per cent to 683.8 billion yuan in the first five months of this year, compared with a drop of 17.7 per cent to 962.5 billion yuan by SOEs.

According to the latest data from the State Administration for Market Regulation, the number of registered private enterprises in China surpassed 50 million in early April and reached 50.9 million by the end of May – a 3.7-fold increase from 10.86 million at the end of 2012.

And private enterprises now account for 92.4 per cent of all companies in China, the official figures show.

Experts and analysts say that only increased fairness in access to resources and financing, with certain and stable policies, are likely to quell the current confidence crisis among private enterprises. And in the absence of such measures, some say China’s recovery outlook could be delayed.

“The lack of confidence in private capital has been an issue of great significance that may lead to systemic impacts,” said Liu Yuanchun, president of Shanghai University of Finance and Economics, in an interview with the Finance 40 Forum think tank in late June. “In particular, we should pay attention to the existence space for the private sector, its availability to funds and whether it can enjoy fair competition.

“We should also aim to help SMEs effectively obtain orders and reverse the worsening of profits and balance sheets.”

Even in the most promising private sectors, such as new energy, investors are not immune to the effects of policy uncertainties.

Earlier this year, Billy Wang leased a piece of land spanning nearly half a square kilometre in Guangdong province, to install centralised photovoltaic power panels.

Wang registered the solar-energy project with local authorities but was told two months ago to put plans on hold, as local authorities had tightened restrictions on land use to ensure that enough cropland was available – in line with a nationwide campaign to ensure that China feed its people.

So now Wang is at risk of losing his nearly 20-million-yuan investment if the project ends up being axed.

Lin Caiyi, vice-president of the China Chief Economist Forum Research Institute, said the lack of resources and confidence are behind the disparity in a post-pandemic recovery, and that support for the private sector should not be merely lip service.

“The most important thing is to ensure the rule of law. At the beginning of China’s reform and opening up, policies were very stable, thus giving people strong confidence, which led to prosperity in the private sector. However, in recent years, private enterprises have seen great instability and unstable policies,” Lin said.

“Funds flying into SOEs, such as in property financing, have been much more than those to private firms,” she added. “The private sector is underprivileged in obtaining resources. Despite pledges to treat them equally and fair, concrete moves are still lacking.

“On the other hand, SOEs can rely on state support as a last resort in difficulties, while entrepreneurs have to take risks and bear losses all by themselves. Only once they are confident will they be willing to invest. Currently, however, the general expectations are quite unsettling.”

According to a Fitch report released in early May, steady new contract signings and a large backlog of orders in water resources management, hydropower, renewable energy, environmental protection and municipal development have helped ensure that state-owned engineering and construction companies are achieving above-industry-average growth rates in 2023.

That will lead to private peers ceding more market share to state-owned enterprises, Fitch expects.