Page 100 - 2018 White Paper on the Business Environment in China
P. 100
8 White Paper on the Business Environment in China
The saving grace in the past was that the vast majority SASAC said in September 2017 that the framework for
of SOE business was within China. That is changing. The China’s SOEs was “basically complete” following five years
danger is not just that they will elbow Chinese private- of aggressive restructuring. The reforms have involved
sector competitors aside, but that in doing so they will the restructuring of SOEs through reorganizations and
provoke a backlash. Big firms in other countries will mergers, reductions in excess capacity and the relocation
demand state backing in order to level the playing field. of workers, though some analysts say much more needs
Foreign regulators, already wary of Chinese capital, will to be done, especially to address high debt levels. “The
turn more hostile. The drift away from free trade could intensity of the central enterprises’ reorganization has
easily gather steam. This is not the only worry. One been unprecedented,” SASAC Chairman Xiao Yaqing said.
of the keys to China’s economic rise so far has been its The government has ordered a series of mergers between
success in restricting the sprawl of state firms. They central government-controlled conglomerates over the
control the commanding heights of the economy, from five-year period, cutting them to 98 from 117 under the
transportation to power, but have largely been confined control of SASAC (Miller and Cheng). China seems to be
to these sectors.The manufacturers that led China’s export making progress: the government closed 2,730 SOEs in
assault on global markets were private. The tech firms 2016 and recently pushed ahead with mergers between
that dominate the Internet are private. The restaurants, SOEs in the power, steel, and shipping sectors (Sheehan).
cafés and shops that line city streets are private. This
model still works, for now. Within the Morgan Stanley Moving Forward
Capital International (MSCI) index of large listed Chinese
firms, the state accounts for more than 80 percent of China’s top leaders acknowledge that there is still
market capitalization in sectors such as energy, industry some way to go, and will continue to press on with
and utilities, but the state accounts for 40 percent or less reforms in the coming years. Given the difficulties of
of market value among consumer, health-care and IT delivering reform, progress is likely to be slow, however,
companies. With these newer sectors growing far more because of factors like local level countermeasures and
quickly than traditional industries, private companies a lack of enthusiasm from local government officials.
may well continue to outflank SOEs (Economist). “We won’t use the increase or decrease in the number of
conglomerates or the size of firms to influence our targets
China’s SOEs need reform. Currently, they take a (in restructuring of SOEs),” Xiao said. “In the coming five
disproportionate share of bank loans at less than market years, we’ll focus more on boosting competitiveness and
interest rates, are less productive than the private sector, increasing quality of management of SOEs, especially in
carry high levels of debt, and crowd out the growth of preserving and increasing value of state assets.” Beijing
private businesses. The IMF has outlined four policy also has advanced “mixed ownership”, basically allowing
approaches to reform China’s SOEs: non-state enterprises and some foreign investors to take
stakes in state-owned firms. The SOE Chief also said the
• Phase out loss-making SOEs: heavily indebted, loss risk created by high leverage within the state entries
making SOEs should be closed and local government system was “completely controllable” (Miller and Cheng).
budgets should be increased to retrain and relocate laid-
off workers. State-run media claimed in October 2017 that the 19th
National Congress of the CPC learned that since the last
• Reduce credit support: debt roll-overs and preferential congress in 2012, as many as 34 central SOEs have been
access to credit for SOEs should be phased out to reduce restructured, with their overall number falling to 98 from
support to loss-making, “zombie” companies and force 117. Central SOEs posted a record high net profit of 1.11
them to operate more competitively. trillion yuan from January to September, thanks to supply-
side reforms, which helped bring down the asset-liability
• Reduce barriers to entry: SOEs monopolistic practices ratio requirement and curbed capital outflows. As a result
should no longer be allowed in so-called “strategic” of the reform, financials of 2,041 “zombie companies”,
sectors, protected by government restrictions on private all subsidiaries of 81 major central SOEs, also improved,
or foreign firms. with their losses shrinking by 88.5 billion yuan, compared
with the same period of 2015. From January to August of
• Introduce supporting reforms: land market privatiza- 2017, debt risk at central SOEs was under control as these
tion would remove SOEs’ privileged access to land, while companies maintained a steady debt-to-asset ratio over
systems to manage SOE insolvency would speed up the the past five years, according to SASAC. By August-end,
phasing out of struggling companies (Sheehan).
100
The saving grace in the past was that the vast majority SASAC said in September 2017 that the framework for
of SOE business was within China. That is changing. The China’s SOEs was “basically complete” following five years
danger is not just that they will elbow Chinese private- of aggressive restructuring. The reforms have involved
sector competitors aside, but that in doing so they will the restructuring of SOEs through reorganizations and
provoke a backlash. Big firms in other countries will mergers, reductions in excess capacity and the relocation
demand state backing in order to level the playing field. of workers, though some analysts say much more needs
Foreign regulators, already wary of Chinese capital, will to be done, especially to address high debt levels. “The
turn more hostile. The drift away from free trade could intensity of the central enterprises’ reorganization has
easily gather steam. This is not the only worry. One been unprecedented,” SASAC Chairman Xiao Yaqing said.
of the keys to China’s economic rise so far has been its The government has ordered a series of mergers between
success in restricting the sprawl of state firms. They central government-controlled conglomerates over the
control the commanding heights of the economy, from five-year period, cutting them to 98 from 117 under the
transportation to power, but have largely been confined control of SASAC (Miller and Cheng). China seems to be
to these sectors.The manufacturers that led China’s export making progress: the government closed 2,730 SOEs in
assault on global markets were private. The tech firms 2016 and recently pushed ahead with mergers between
that dominate the Internet are private. The restaurants, SOEs in the power, steel, and shipping sectors (Sheehan).
cafés and shops that line city streets are private. This
model still works, for now. Within the Morgan Stanley Moving Forward
Capital International (MSCI) index of large listed Chinese
firms, the state accounts for more than 80 percent of China’s top leaders acknowledge that there is still
market capitalization in sectors such as energy, industry some way to go, and will continue to press on with
and utilities, but the state accounts for 40 percent or less reforms in the coming years. Given the difficulties of
of market value among consumer, health-care and IT delivering reform, progress is likely to be slow, however,
companies. With these newer sectors growing far more because of factors like local level countermeasures and
quickly than traditional industries, private companies a lack of enthusiasm from local government officials.
may well continue to outflank SOEs (Economist). “We won’t use the increase or decrease in the number of
conglomerates or the size of firms to influence our targets
China’s SOEs need reform. Currently, they take a (in restructuring of SOEs),” Xiao said. “In the coming five
disproportionate share of bank loans at less than market years, we’ll focus more on boosting competitiveness and
interest rates, are less productive than the private sector, increasing quality of management of SOEs, especially in
carry high levels of debt, and crowd out the growth of preserving and increasing value of state assets.” Beijing
private businesses. The IMF has outlined four policy also has advanced “mixed ownership”, basically allowing
approaches to reform China’s SOEs: non-state enterprises and some foreign investors to take
stakes in state-owned firms. The SOE Chief also said the
• Phase out loss-making SOEs: heavily indebted, loss risk created by high leverage within the state entries
making SOEs should be closed and local government system was “completely controllable” (Miller and Cheng).
budgets should be increased to retrain and relocate laid-
off workers. State-run media claimed in October 2017 that the 19th
National Congress of the CPC learned that since the last
• Reduce credit support: debt roll-overs and preferential congress in 2012, as many as 34 central SOEs have been
access to credit for SOEs should be phased out to reduce restructured, with their overall number falling to 98 from
support to loss-making, “zombie” companies and force 117. Central SOEs posted a record high net profit of 1.11
them to operate more competitively. trillion yuan from January to September, thanks to supply-
side reforms, which helped bring down the asset-liability
• Reduce barriers to entry: SOEs monopolistic practices ratio requirement and curbed capital outflows. As a result
should no longer be allowed in so-called “strategic” of the reform, financials of 2,041 “zombie companies”,
sectors, protected by government restrictions on private all subsidiaries of 81 major central SOEs, also improved,
or foreign firms. with their losses shrinking by 88.5 billion yuan, compared
with the same period of 2015. From January to August of
• Introduce supporting reforms: land market privatiza- 2017, debt risk at central SOEs was under control as these
tion would remove SOEs’ privileged access to land, while companies maintained a steady debt-to-asset ratio over
systems to manage SOE insolvency would speed up the the past five years, according to SASAC. By August-end,
phasing out of struggling companies (Sheehan).
100
