DURING one recent weekend in Shanghai, an enthusiastic crowd of several hundred entrepreneurs gathered in a trendy loft space near the city's Fudan University. The music was blaring, the lampposts were festooned and a giant banner declared cryptically, in English: "Right here, right now!" It was the launch party for an offshoot of Innovation Works, a Beijing-based incubator and venture-capital outfit that has already helped several dozen firms take off. Start-ups work together at the firm's hip, open-plan offices. "It's just like Silicon Valley, except they're all Chinese," gushes one investor.
Such heady scenes may suggest the private sector is alive and well in China. Look closer, though, and the crowd is still more full of hope than success; entrepreneurs all desperate to pitch business plans to investors. Mendy Pang, a Shanghai native in his mid-20s, is struggling to win backing for his firm, a business-to-consumer insurance start-up. "The big banks won't see me," he sighs. So he went to a small bank and they just laughed at him. "Banks here give money only to big companies."
The dark truth is that bamboo capitalists like Mr Pang are increasingly getting squeezed by the state. Experts disagree on whether the state now makes up half or a third of economic output, but agree the share is lower than it was two decades ago. For years from the late 1990s state-owned enterprises (SOEs) appeared to be in retreat. Their numbers declined (to around 114,000 in 2010, some 100 of them centrally controlled national champions), and their share of employment dropped. But now, even while the number of private companies has grown, the retreat of the state has slowed and, in some industries, reversed.
Moreover, the statistics obscure the state's growing power, says James McGregor, an influential analyst with APCO, a political consultancy, in a new book on China's "authoritarian capitalism."* Foreign investors add that the playing field, never level for private firms, is tilting further in favour of domestic champions. The American and European Chambers of Commerce have each just published scathing reports arguing for a resumption of SOE reform and market opening.
Though fewer in number, today's SOEs are more powerful than ever. One reason is that they can be vast (see chart) and so their market power is often greater in a given industry. Their shrinking number is the result of a concerted effort to consolidate disparate SOEs into national champions in a range of "strategic industries", which range from telecoms to shipbuilding.