In January 2022, Xian, a city in northern China, was 22 days into a lockdown due to a Covid-19 outbreak, when two private hospitals were ordered by local authorities to suspend operations for three months. They were being punished for rejecting patients , citing Covid-19 control measures based on government orders, which led to the death of an unborn baby and a man from a heart attack. As soon as the decision was made public, the stock price of International Medical – the listed company behind the two hospitals – plummeted, leading to the suspension of trading in its shares the following day. Despite the mismanagement, the two hospitals attracted some sympathy from local residents and on social media, because they were not alone in denying admission of people in critical condition. Other state-run hospitals had done it with impunity. This is far from being an isolated case of discrimination over the past few years, however, even though President Xi Jinping has repeatedly promised to “unswervingly encourage, support, guide and protect the development of the private economy.” “The business landscape in China is definitely changing, right now,” said Tao Jingzhou, an international arbitrator exercising at Arbitration Chambers in Hong Kong and London, in a commentary piece in January. “The future prospects for China’s innovation and economic growth, driven by the private sector over the past four decades, are increasingly bleak.” Economic pressure has been mounting in the country since the second half of 2021, and it appears that private firms have been bearing most of the pain, while many state-owned enterprises (SOEs) have remained largely intact, or have thrived. Shenzhen seeks loyal party cadres in oversight roles at state-owned firms A pillar of China’s economy, the private sector contributes more than half of the country’s tax revenue, 60 per cent of the gross domestic product, fixed asset investment and foreign direct investment, and more than 80 per cent of urban employment. But in the third quarter last year, the entrepreneur confidence index – a gauge of the economic climate and business prospects – dropped 7.1 percentage points from the first quarter to 118.3 for private firms, while that for SOEs only declined 3.7 percentage points to 128, according to data from the National Bureau of Statistics. “It shows that in the overall demand contraction, the weakening of expectation of private enterprises is more obvious,” said Zhong Zhengsheng, chief economist at Ping An Securities in a February 2022 report. Meanwhile, central SOEs – firms overseen by the central government – recorded a net profit of 1.8 trillion yuan (US$285 billion) last year, increasing 29.8 per cent over the previous year. How will China’s ‘common prosperity’ goal affect global brands? “The increase in profitability of central SOEs has reached the best level in history,” said Peng Huagang, secretary general and spokesman of the State-owned Assets Supervision and Administration Commission, in a press conference in January. Apart from the broader economic slowdown, direct impacts from a regulatory storm under the slogan of “common prosperity”, and strict pandemic-control policies have made the situation even worse for many private enterprises, analysts said. Since the middle of last year, regulatory crackdowns have hit a wide range of industries – property, technology and education – including some of the biggest players in the private sector. These have weighed on both smaller firms and industry giants, and led to massive lay-offs, defaults, delistings and bankruptcies. For instance, Beijing took an iron-fisted approach toward tech and internet platforms last year, and its antitrust campaign has led to a market rout that has wiped US$1 trillion off Chinese tech stocks. Meanwhile, the country’s 10 richest tech tycoons lost US$80 billion in combined net worth in 2021, equivalent to a quarter of their total wealth, according to the Bloomberg Billionaires Index. Although state media have been reiterating that the regulation crackdown was “strong and effective supervision, regulation and guidance” to avoid financial risks, rather than a form of “suppression”, it has in fact suppressed the motivation for growth in the sector, experts said. As Chinese tech tycoons retreat, some wonder about true motives The country’s ongoing zero-tolerance approach towards Covid-19 has stifled consumption and hit the service sectors – including catering and tourism, areas where small private firms are the backbone. “The pandemic has lasted for more than two years, and downstream consumer-oriented small and medium enterprises are generally facing short-term liquidity issues,” said Dan Wang, chief economist at Hang Seng Bank (China). The very few industries in the service sector that have thrived are mostly state-owned, such as brokerage firms, said Lu Ting, chief China economist at Nomura. “There are very few private firms in the [brokerage] industry. So in the process, we can say that the profits of state-owned enterprises have been much higher,” Lu said. If they build it, will you buy? China’s small firms see red flags in 2022 Private enterprises are seeing less of an advantage, even in exports, the sector that powered most of the growth of China’s economy last year, experts said. As private firms in the manufacturing sector are mostly downstream in the supply chain and their smaller size hinders their pricing power over the final products, the exorbitant cost of raw-materials has reduced their profits, as they cannot pass on the additional costs. Meanwhile, the SOEs that dominate the upper-stream supply chain are the biggest winners. “Many private manufacturing companies benefited from the export boom last year, but it should also be taken into account that with the appreciation of the yuan and the skyrocketing raw material prices in the second half of last year, the real profits may be [low],” Lu said. Private sector [companies] are actually not able to get loans at low cost. From the latest social financing data, we can see that the government-dominated sector has received most of the money. Dan Wang, Hang Seng Bank (China) The more the private firms suffer, the more difficult it is for them to get finance; banks are reluctant to lend, given their rising operational risks. As a result, even though the nominal interest rate has recently fallen, the actual financing costs for private firms are rising, according to Wang of Hang Seng. “Private sector [companies] are actually not able to get loans at low cost,” she said. “From the latest social financing data, we can see that the government-dominated sector has received most of the money.” Financing through the bond market is even harder for private companies, analysts said, as the high-profile defaults of Evergrande continue to spill over. In 2021, the number of defaulted credit bonds issued by private enterprise increased to 152, from 114 in 2020. The total default amount reached 147.5 billion yuan, rising 35.4 per cent from a year earlier, according to data from Ping An Securities. “The more private enterprises default, the more funds from banks will flow to state-owned enterprises,” said Hao Zhou, senior economist with Commerzbank. China bans unauthorised lockdowns to support ‘in difficulty’ services sector China has introduced policies to relieve the suffering of the private sector. For instance, the central government has forbidden local authorities from overzealous lockdowns when reacting to sporadic outbreaks, to help the catering and tourism industry. But economists are asking for more action and reflection on current government policies and attitudes towards the private sector. Wei Jianing, a former research fellow at the Development Research Centre of the State Council, said the crackdown on monopolistic business practices in the notion of “common prosperity” should not be based on ownership. “[The notion of] anti-monopoly is correct, but [we] should first focus on administrative monopolies and state-owned enterprise monopolies,” he said at a virtual symposium held by the Cheung Kong Graduate School of Business in Beijing in August last year. As long as the real estate market improves and private enterprises are willing to use their properties as mortgages for banks, private enterprises will get financed and recover immediately Hao Zhou “Private investment has become ‘the last straw’ of the Chinese economy ,” Wei said. “There must be legal guarantees put in place to eradicate the ‘panic disorder’ within the private sector.” In the past three months, China has cut key rates, including the mortgage reference rate and benchmark lending rates , to increase monetary stimulus and boost the slowing economy, but the outcome has not been satisfactory. “The loosening of monetary policy is not as much as was expected,” said Wang. “Unless interest rates can be significantly reduced, the financing difficulties of the private firms will not ease, and market confidence will not be restored.” The property sector – which accounts for one third of China’s economy – would also weigh on the recovery of private firms if it remains sluggish, Zhou of Commerzbank said. “As long as the real estate market improves and private enterprises are willing to use their properties as mortgages for banks, private enterprises will get financed and recover immediately,” Zhou said.