In China’s post-Covid economy, there may be hope for the struggling private sector made up of millions of small businesses. It needs to stay that way.

Unlike previous recoveries, fixed asset investment in the private sphere is rising, continuing an upward trend by climbing 9.1% in September compared to a year earlier, while growing at a slower pace in the public sector after declining in the previous month. Manufacturers of cars and other industrial equipment, for instance, are consuming more power and their profits are rising, too. That’s a turnaround from the lows private enterprises (more so than their state-owned peers) hit in February, when cash was tight and many were pushed to the brink.

There are other signs of improving financial health. A look at the prospectus of credit facilitator Lufax Holding Ltd. shows that in the third quarter, the ratio of overdue loans as well as delinquency rates improved significantly. Lufax, backed byPing An Insurance Group Co., is one of the largest non-financial service providers, with about around 300 billion yuan ($38 billion) of loans outstanding to small firms. At Jack Ma’s Ant Group Co., delinquency rates over the past year tapered off and have plateaued at around 2% to 3%.After plunging earlier this year, employment is beginning to look better. Small and medium firms account for around 80% of urban jobs. This matters. The government is generally thought to be able to engineer recovery for state-owned enterprises. In fact, it can actually do the same for the private sector, which accounts for more than 60% of gross domestic product, 75% of industrial production and 60% of fixed asset investment, according to analysts from HSBC Holdings Plc.

Over the next couple of weeks, Beijing will unveil the latest five-year plan – a blueprint for how it will steer the economy, including an indication of priority sectors and where money will go. Innovation and all things automation will be front and center. The private sphere and small businesses – which are more efficient on a return-on-assets basis — are what’s needed here. In keeping with that, robot production volumes are up sharply over the last six months.

Sure, there’s the risk that repeated outbreaks and lockdowns will once again derail small companies. The flip-flopping availability of credit could also sap their working capital. They remain financially underserved.(2) But on a monthly basis, capital expenditure financing is growing – for now. New players like Ant and Lufax are playing a larger role.

Can Beijing maintain this momentum? Going by the temporary measures to tide companies through the Covid-19 recovery – like tax exemptions and refunds, and lowering value-added tax, rent and utility bills on small businesses – perhaps. Social security tax cuts amount to around 16% of first-half profits for such companies, according to HSBC analysts. Trouble is, these aren’t sustainable. How will the government build its social safety net if exemptions drag on? How long can it go with reduced tax revenues?

State planners now want to match domestic supply with domestic demand. If demand can’t be maintained and the private sector recovery fades, it won’t work. Many people and small firms have already been displaced by the uneven recovery, and they won’t be able to drive demand. If construction slows dramatically, suppliers of materials, machinery and equipment could struggle. As new sectors are pushed to boost productivity, older ones are shrinking. The latter amount to a big chunk of the manufacturing labor market. 

Longer-term measures in the form of tax incentives and credits for small companies will be needed to drive a prolonged recovery. Crucially, Beijing must make sure money keeps getting to these firms. Without them, the recent comeback risks going pear-shaped.

(1) The credit balance for loans below 500,000 yuan is estimated to increase from 6 trillion yuan in 2019 to 26 trillion yuan in 2025, according to consulting firm Oliver Wyman LLC. Both Lufax and Ant have cited the prediction in documents for their imminent initial public offerings.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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