Private companies are the lifeblood of corporate China, coursing through the veins of the world’s second-largest economy.

But the fallout from the trade war has added downward pressure on firms and clotted the arteries of a myriad of businesses.

Back in March, Premier Li Keqiang addressed the problem at the National People’s Congress in Beijing when he warned of the “inaccessible and expensive financing for the real economy.”

“[Last year,] the Central Bank cut required reserve ratio four times to reduce costs for financial institutions so that more money [would] flow to our private companies. This year, we will take a multi-pronged approach in this respect,” he said in his keynote address to Communist Party delegates.

More than three months later, the private sector has yet to feel the “drip, drip” effect.

Buffeted by what is rapidly becoming a new economic Cold War between China and the United States, many private firms are short of cash and struggling.

In a move to address the situation, they are accepting IOU payments, or commercial acceptable bills, from clients.

“[Roughly,] US$200 billion in i.o.u.s are floating around the Chinese financial system, according to government data,” The New York Times reported earlier this week.

Credit squeeze

Indeed, this credit squeeze has tightened because the “big five” state-owned banks are reluctant to lend to the private sector, despite Li’s incessant statements to loosen the purse strings.

By the end of last year, the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the China Construction Bank and the Bank of Communications had total assets of nearly US$15 trillion, according to figures released on Monday by the China Banking and Insurance Regulatory Commission.

The only problem is that they tend to lend exclusively to state-owned enterprises backed with the central government’s seal of approval.

Also, Beijing’s decision to further crackdown on the unregulated “shadow banking” sector because of a rising debt bubble has affectively reduced credit to a trickle.

“China’s private sector is shrinking for the first time in two decades – an extraordinary development contrary to the hopes seeded by [China’s] 2013 economic reform objectives and decades of talk about withdrawing the state from the marketplace,” a report released last year by the Asia Society Policy Institute and the Rhodium Group pointed out.

The ramifications of that statement are immense.

There are 27 million private companies and they are vital to the nation’s economy as they contribute more than 50% of the tax revenue, 60% of GDP, or gross domestic product, and 70% of technological innovation.

They also supply 80% of the jobs in urban areas, including 90% of new employment opportunities.

“The private sector and the country’s economic and social development have been closely related to each other, and formed a community of a shared future,” Liu Shijin, the deputy director of the economic committee of the National Committee of the Chinese People’s Political Consultative Conference, told a media briefing.

Growing concerns

But that “future” is in jeopardy as more firms to turn to commercial acceptable bills.

Already the alarm bells are ringing with China’s banking regulator stepping up checks amid growing concerns.

Wang Zhaoxing, the vice-chairman of the China Banking and Insurance Regulatory Commission, has pledged to tighten scrutiny and reduce financing costs for businesses.

His remarks came after President Xi Jinping addressed a symposium of entrepreneurs last year and promised “unswerving support” for the private sector.

“The country’s private economy could only expand, not be weakened,” he said in a report by the official Xinhua news agency.

Still, his rallying cry appears to have fallen on deaf ears.

“China will increasingly rely on innovation to spur economic development in the future … a process that needs risk-takers from private businesses, while state firms, always slower and more cautious in decision-making, are not that willing to take risks,” Fan Gang, the president of the China Development Institute, a think tank based in Shenzhen, said.

“In a new era of reform and opening up, China needs to ponder how to further propel the private sector in a bid to make the broader economy more vibrant,” he added.

Unblocking the financial arteries would certainly be a step in the right direction.