Major setbacks for China's private sector have driven many companies into the safety of state financing and control, posing problems for reform policies that could last for years.
On Oct. 20, the South China Morning Post published a detailed account of the "privatization in reverse, or re-nationalization" that has swept the private sector as a result of financing problems.
The troubles have been aggravated by China's stock market slump, the steepest since 2015.
By mid-October, at least 32 listed companies on the Shanghai and Shenzhen exchanges had sold controlling interests to the state at various levels, including six takeovers by the central government.
The SCMP story followed an earlier report by the official Shanghai Securities News, cited by The New York Times, that 46 private companies had agreed to sell shares to state-controlled firms so far this year.
The pace has picked up as the markets have worsened, suggesting there may be more state sector expansion to come.
Since September, at least 14 listed private companies have sold controlling stakes to central, provincial or local governments, the SCMP said, based on data from financial services firms Shanghai Wind and China International Capital Corp. (CICC).
The double-digit slide in share prices due to "economic headwinds" is only partly responsible for the shift toward state ownership. Pressures from financial risks and government policies have been building for years.
An unchecked boom in private investment at home and abroad from hidden financing sources in 2014 led to a government crackdown in a pattern of excess on both sides.
The spree in asset acquisitions by high-flying corporations and conglomerates like HNA Group, Anbang Insurance Group and CEFC China Energy Company Ltd. came to a series of abrupt halts, marked by official warnings, forced sales, prosecutions and ousters of top officials.
This year, the reactions have been felt more broadly across the private sector with complaints of limited access to bank loans, due in part to the government's belated drive to reduce financial risks.
Government officials have repeatedly promised to support private companies, pushing back against reports that state banks prefer to make loans to state-owned enterprises (SOEs).
"This kind of understanding and practice is completely wrong," Vice Premier Liu He told the official Xinhua news agency on Oct. 19.
"There must be no irresolution about working to consolidate and develop the public sector," Liu said. "And there must be no irresolution about working to encourage, support and guide the development of the non-public sector."
Still important to the economy
In the wake of reports on the private sector's woes, state media have escalated estimates of its importance to the economy.
Non-state businesses contribute more than 50 percent of China's tax revenue, 60 percent of gross domestic product, 80 percent of urban employment, and 90 percent of new jobs, Xinhua said.
But the reported bias in state bank lending policies favoring SOEs has set the stage for the private sector's growing problems following the stock market plunge.
The trend threatens to reverse decades of at least rhetorical dedication to economic reforms, exemplified by the rise of web-based and tech-driven giants like Alibaba and Baidu.
Shares in many of the new entrepreneurial ventures have been hit hard, giving rise to a debate over whether business without state control should be allowed to continue at all.
Meanwhile, centrally-controlled SOEs have done relatively well following a series of government-directed mergers and consolidations that had been expected to curb their influence over the economy.
Instead, with the benefit of better access to state bank financing, the SOEs have reported a 23.9 surge in total profits of 1.05 trillion yuan (U.S. $151.6 billion), gaining 23.9 percent in the first seven months of the year. SOE revenues of 16 trillion yuan (U.S. $2.3 trillion) rose 10.6 percent from a year earlier, state media said.
While voicing support for the private sector, President Xi Jinping seemed to leave little doubt in recent comments about where the balance of power in the economy should lie.
"Such statements as 'there should be no state-owned enterprises' and "we should have smaller-scale state-owned enterprises' are wrong and slanted," Xi said during a visit to a China National Petroleum Corp. (CNPC) facility, according to The Times.
At a meeting with entrepreneurs in Beijing last Thursday, Xi spoke in favor of private enterprise in more measured terms, saying that "the country will unswervingly encourage, support and guide the development of the non-public sector," Xinhua reported.
The official English-language China Daily quoted Xi as saying that "the strengthening of the public sector does not contradict support for the private sector."
In a commentary Saturday on Xi's meeting, Xinhua promised that "private enterprises are about to embark on a new journey and embrace a brighter future."
"With the new commitments to supporting the private sector, more favorable policies are expected to be rolled out soon," it said.
The government’s real intention
The ascendancy of the state sector will fuel arguments about the government's real intention in promoting its public-private partnership (PPP) initiative for the past several years.
On its face, PPP investments were supposed to draw modern management methods into the SOEs along with fresh capital from the private sector to make them more competitive, as well as profitable.
With the recent tipping of the scales toward the state, it may now become clearer that the intention was to co-opt private firms and incorporate their resources all along.
One argument against that interpretation is that the stock market slump and its consequences were unforeseen.
China's excesses in investment, shadow bank financing, and regulatory crackdowns seem likely culprits for the private sector's current problems, although more PPP deals may be a result.
But the growth of private share sales to the state and asset swaps to state banks will raise suspicions over the government's motives.
The question is whether it is engaged in a necessary bailout similar to the Troubled Asset Relief Program (TARP) in the United States during the 2008 financial crisis, or something else.
Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, said that so far, the government's response looks more like a TARP-style rescue than the result of a long-term plan.
But even if the boost for state control is unintentional, the impact on private business could last for years.
"I would call it a bailout more than a takeover," Scissors said. "But the key question is, if this is supposed to be temporary, how does it get reversed?"
"Will the state sell its shares when the market is deemed sufficiently stable? That may not happen for a long while," he said.
"What we'll probably get is a very slow, tentative sale of state shares, which means some of these companies have been nationalized for years to come," Scissors said.
Indirect relief measures
In the meantime, the cabinet-level State Council and the central bank have rolled out a series of complex indirect relief measures for private companies that rely largely on the bond market.
On Oct. 22, the People's Bank of China (PBOC) said it would provide "funding support" to smaller lenders in backing the bond issues of private enterprises "by offering part of the initial capital," Xinhua reported.
Although details of the assistance were unclear, Bloomberg News reported that the PBOC planned to give 10 billion yuan (U.S. $1.4 billion) to China Bond Issuance Co., which provides guarantees for notes sold by small and medium-sized companies, as well as bond insurance.
China's bond market has also suffered in the economic downturn. In late September, Reuters reported that 25 issuers had defaulted on 60.1 billion yuan (U.S. $8.6 billion) worth of bonds so far this year.
The value of the defaults rose 56 percent over all those recorded in 2017, Reuters said.
Among other measures, the PBOC will issue 150 billion yuan (U.S. $21.5 billion) in "relending and rediscount credits" to encourage financing for "micro, small, and medium-sized enterprises" with liquidity problems, Xinhua said.