Tuesday, 1 September 2009
China’s Distorted Economy: SOEs Crowd out Private Enterprise
The great adjustment of China’s macro-control policies in the global slowdown has turned out to be a huge boost for its state-owned enterprises (SOEs), unfortunately at the cost of driving out the private investment in companies the government claims it needs to set the economy to rights. The current active fiscal policy and loose monetary policy has been heavily slanted towards rapid investment growth by SOEs, fast expansion of SOEs, and the relative shrinking of private enterprise.
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China’s Distorted Economy: SOEs Crowd out Private Enterprise
CSC
01 September 2009
The great adjustment of China’s macro-control policies in the global slowdown has turned out to be a huge boost for its state-owned enterprises (SOEs), unfortunately at the cost of driving out the private investment in companies the government claims it needs to set the economy to rights. The current active fiscal policy and loose monetary policy has been heavily slanted towards rapid investment growth by SOEs, fast expansion of SOEs, and the relative shrinking of private enterprise.
China’s private enterprises are, in aggregate, much more efficient than its SOEs. From January to May, among enterprises with annual sales of over five million yuan, SOEs and state holding enterprises realized profits of 246.7 billion yuan, down 41.5%, year-on-year, collective enterprises had profits of 20 billion yuan, down 0.7%, share-holding enterprises took profits of 454.3 billion yuan, down 24.1%, and foreign and overseas-invested enterprises realized profits of 243 billion yuan, down 22.4%. Amidst all this loss, private enterprises profited by 230.3 billion yuan, up 2.4%, year-on-year. After June, the National Bureau of Statistics, perhaps mercifully, no longer releases data about SOEs whose profits are declining the fastest.
Taking advantage of policy barriers and their dominance over credit, SOEs have been moving back into the most profitable areas occupied by private enterprises: real estate, iron and steel, and investment. SOEs with abundant funds often conduct cross-over management, and the easiest way is to enter the stock and property markets. The recent “New Land Kings” are bought by SOEs entering the real estate. The frothy prices in the asset market are largely driven by SOE speculation with borrowed funds.
With the help of Zhejiang provincial government, Baoshan Iron and Steel has “reorganized” (taken over) the assets of Ningbo Iron and Steel, a firm mainly led by private capital. Laggard, loss-making Shandong Iron and Steel, a state-owned group, has swallowed Rizhao Iron and Steel Group, a profitable private enterprise with advanced technology and equipment. Privately owned but state-backed Jianlong Group’s efforts to grab Tonghua Iron and Steel Group were set back when the general manager sent over by Jianlong to rationalize the place through massive lay-offs was beaten to death by the enrage workforce.
Even in areas with developed private economy, the government has chosen to develop SOEs first, especially to cooperate with large central-enterprises, to maintain economic growth and high GDP. Taizhou City, for instance, in eastern Zhejiang Province, is introducing an SOE petrochemical project in which is being invested 100 billion yuan. It is hoped this project will be the beginning of a petrochemical industrial cluster and prove a boon to local business.
Taizhou is implementing a strategy to change the private economy and increase its proportion of SOEs. Taizhou is a representative city of China’s private economy, with 95% of its GDP created by private enterprises. The first registered share-holding enterprise since reform and opening was born there. It is this ownership structure that makes Taizhou’s vibrant economy.
For local government, though, GDP is more important than economic dynamism. Despite opposition by local residents on environmental issues, the introduction of the project has been decided. Officials in Taizhou say that SOE investment will increase economic aggregate in a short term.
Taizhou’s SOE development represents a trend. Driven by the government’s vast stimulus package, investment in and by SOEs has reached a new height. Project funds come mainly from government finance and loans from state-owned banks. The banks prefer to invest in these projects because they do not need to consider risk when lending to SOEs.
The current development of SOEs is not conducive to China’s economic structural adjustment. It leads to duplication and production surpluses, not only wasting financial resources, but also increasing banks’ credit risk. SOEs tend to lack any sense of responsibility for society and disrupt the normal market order, as with the “enclosure movement” in real estate. With the advantage of dominance in finance and state favour, they exacerbate unequal social distribution. Their ill-use of economic resources and driving out of private investment inhibit employment growth. SOEs are the dinosaurs of China’s economy, and it is time that evolution began to consider extinction.
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