Once the driver of China's meteoric growth, private-sector companies in the country are struggling to bounce back from the pandemic downturn as they lose ground to a bloated public sector. Profits slide for first time while state-owned companies benefit more from stimulus.

Profits at private-sector industrial enterprises with mainline revenues of at least 20 million yuan ($2.9 million), including manufacturers, mining companies and electricity companies, fell 7.2% in 2022 in National Bureau of Statistics data. This marked the first decline since tracking began in 1997.

State-owned counterparts, in contrast, saw profits climb for a second straight year, by 3%. Overall industrial profits, including for foreign companies operating in China, fell for the first time in three years, by 4%.

The decline stemmed largely from China's zero-COVID restrictions, including a monthslong lockdown in Shanghai. Private-sector companies tend to sit further down the supply chain and struggled to pass along surging materials costs to customers amid cutthroat competition.

A record 18.5% of private-sector companies were losing money as of the end of 2022, nearly doubling from 8.8% five years earlier.

State-owned companies tend to be in fields higher up the supply chain, such as resource and materials processing. Rising resource prices thus lifted their profits. Hong Kong-listed units of three leading state-owned oil companies logged record January-June net profits in 2022.

State-owned companies enjoy greater access to low-interest financing, thanks to their government backing. They were also the main beneficiaries of China's COVID-19 stimulus measures, such as infrastructure development.

Majority state-owned companies accounted for 44.8% of the total market capitalization of China's top 100 listed companies at the end of 2022, according to the Washington-based Peterson Institute for International Economics.

The figure topped the share for companies that were less than 10% state-owned -- 42.8% -- for the first time in three years. The trend extends into other industries like real estate, which is estimated to account for 30% or so of China's gross domestic product.

Tougher financing restrictions implemented in 2020 and 2021 dealt a heavy blow to private-sector developers, pushing many to stop acquiring land rights for new condominium construction. Country Garden, China's leading developer, shrank such acquisitions in 2022 to a twentieth of the year before.

Private-sector developers' share of sales will eventually sink to around 10% to 20% from the current roughly 70%, brokerage BOC International (China) predicts. Financial authorities have urged state-owned companies to take over private-sector projects.

For Chinese President Xi Jinping, the growing footprint of state-owned companies makes it easier to manage the economy as a whole. The problem is that they tend to be inefficient. At the end of 2022, 24.5% of state-owned industrial companies were in the red.

The International Monetary Fund has expressed concern about the growing economic role played by China's state-owned enterprises. "As SOEs tend to be less productive, this risks further widening productivity gaps with advanced economies," the IMF said in a Feb. 3 report.

As the population shrinks and ages, there is concern that reduced productivity will exert further downward pressure on future growth.

The economy is at risk of "zombification," warned Wei Jianing, a research fellow at the Development Research Center of the State Council, in a December speech reported on by Radio Free Asia. He raised alarm over a bloated public sector and a weakened private sector.