As those of us in the West are exposed to more stories of successful state-owned businesses in China, Gady Epstein--Beijing bureau chief for Forbes--reminds us that the spoils of "authoritarian state-let capitalism" have not reached everybody in the world's largest country.  There are plenty of losers, Epstein notes, among China's private entrepreneurs.  And it appears that the best way to operate as a private investor is to try to fly under the radar, and that means not being too ambitious:

Indeed, the best way to stay alive as a private entrepreneur in an industry the state dominates — and there are many of those — is to stay small. “Our principle is that we don’t make trouble for the SOEs, and they don’t consider us competition,” Wang Junjin, chairman of JuneYao Airlines, told me. “Don’t do the things they don’t like. Don’t make them think you’re going to squeeze them out of the market. You cannot step on others to climb up.” Not exactly the capitalist credo you might pick up in business school.

In any case, it is difficult to expand without financing, and Chinese state capitalism is terrible at lending to private businesses. This was glaringly true during the financial crisis: While state banks made headlines globally for their gigantic lending spree to mostly state-owned enterprises, thousands of private companies faced bankruptcy, desperate for underground loans at high interest rates (see “Chinese Credit” for more on where such companies turn for cash). Bank of China Chairman Xiao Gang explained the warped but very rational incentive system that drives bank lending in his commentary last week, “Don’t blame it on the government,” writing:

While expanding their loan portfolios, Chinese banks are smart enough to take the risk-averse approach and to focus on lending to large State-owned enterprises (SOEs). These SOEs often enjoy monopoly in their sectors and favorable conditions in an industry and enjoy quasi-government credit ratings.

In other words, banks figure the large SOEs won’t go bankrupt and default on their loans. It is not so much that they are too big to fail. They are too government to fail. That was one reason why the president of a third struggling private airline, Okay Airways, told me, “The SOEs laugh at us, ‘Yeah, we’re the government’s companies, of course the government will help us’.”

Read The Winners And Losers In Chinese Capitalism here.