By Chao Deng
BEIJING -- China's government has for years squeezed the private sector with policies that support state companies -- and is now looking to fix what has become a weak link in a slowing economy.
Local governments, including Beijing and Shenzhen, are pulling together funds to help private firms whose shares have plummeted on domestic stock exchanges. Authorities are rolling out tax breaks, bank loans and other financing options to bolster private businesses.
The threat is that a declining private sector -- which accounts for more than half of China's economic output -- will rob the economy of vitality, with growth having slipped to 6.5% last quarter and projected to slow further.
Support has come from no less a figure than President Xi Jinping. Mr. Xi -- who has spent much of his six years in office championing big state companies -- gathered more than 40 private business leaders on Nov. 1 to reassure them they had the continued support of the Communist Party.
Under Mr. Xi, the party has pushed businesses to set up party cells; in the speech, in the Great Hall of the People in Beijing, he told the executives that the party wasn't trying to control their companies, according to a transcript published in the party's People's Daily.
"Our country's private economy can only get stronger," Mr. Xi told his audience, which included the chief executives of auto parts maker Wanxiang Group Corp. and tech giant Tencent Holdings Ltd.
Beijing's pro-state-company agenda has worn down many private businesses. Banks see state firms as safer borrowers than private companies, which have been forced to look elsewhere for money and pay more for it. Government initiatives to reduce industrial overcapacity have fallen hardest on private business that lacked the official connections to keep them from being earmarked for closure or consolidation.
"We private firms work hard. We're the foolish heroes in all this," said Kong Shebin, who used to run a glass manufacturer in the northern city of Shahe. When his firm, Hebei Tiande Glass Co., couldn't secure sufficient bank loans to upgrade his production lines the way regulators demanded, he was forced to shut down his furnaces.
"You need to be connected with the bank bosses," said Mr. Kong. "Without the country's support, a business goes bankrupt immediately."
Private businesses, and many of their owners, were killed off by the Communist Party in the Mao era. The private sector has since rebounded during four decades of market policies.
The private sector, Mr. Xi noted to his guests, now pays more than 50% of taxes, accounts for more than 60% of gross domestic product and provides more than 80% of the employment.
But their finances have grown dire. Private firms receive only a quarter of corporate bank loans, according to China's banking and insurance regulator. That left them reliant on nonbank lenders, known as shadow banks, that the government has choked off in the past two years. A 20% tumble in China's main stock exchange this year is furthering pressuring firms that trade publicly.
"This year is a serious test for private firms," said Zhou Dewen, president of the Zhejiang Private Enterprise Investment Federation, a business group. "More firms, and bigger ones, are facing trouble."
Even some big tech companies, which mainly continue to flourish, are feeling the chill. Robin Li, the chief executive of search giant Baidu Inc., voiced uncertainty about future advertiser spending because the confidence level in the private sector wasn't high. "We don't know exactly what's going to happen," he said.
The dispirited state of private entrepreneurs is captured in a phrase getting revived use on social media that translates as "the state advances; the private sector retreats."
Many listed private companies have pledged shares as collateral to get loans that were otherwise hard to come by. The downturn in share prices threatens to trigger lenders to call in loans that are backed by shares.
The number of listed private firms in which the largest shareholder pledged more than 50% of their stock soared to 1,043 as of October, from 595 at the beginning of 2017, according to research firm Gavekal. It said pledged shares of private-sector firms now amount to 22% of their market capitalization.
Hit by the fall in share prices, some firms are in effect being nationalized, selling themselves to state companies. Jewelry designer Beijing Kingee Culture Development Co. did it for one yuan (about 14 cents) per share, according to a July statement by the firm, in a sale to Haikejin Group, a financial services firm under the Haidian district government of Beijing. It was an eighth of its share price at the time.
In a change in attitude from China's leadership, ministries and local governments are ponying up funds to support private firms. The Shanghai municipal government offered 30 billion yuan ($4.35 billion) in loans, bailout money and financing guarantees to local small and medium-size private firms; Beijing's Haidian district, which is home to many tech firms, is seeding a 10 billion yuan fund to help private technology firms.
China's central bank, banking regulator and Finance Ministry have also earmarked funds or tweaked regulations to speed financing for the private sector.
Champions of the private sector such as Zhejiang business group's Mr. Zhou said that financial lifelines only go so far and that Beijing should rather ensure fair competition between state and private firms.
Systemic bias is hard to correct and doesn't bode well for private companies, said Andrew Polk, a founder of the Beijing consulting firm Trivium/China.
"They're fighting against the structural composition of the economy," he said. "I don't think their efforts are going to be very successful."
--Grace Zhu contributed to this article.
Write to Chao Deng at Chao.Deng@wsj.com