Page 96 - 2018 White Paper on the Business Environment in China
P. 96
8 White Paper on the Business Environment in China
corruption and inequality. China’s basic premise is that were large state firms, including Wuhan Iron & Steel Co
economic development will alleviate these problems. In in 2015, shipper COSCO in 2011 -2012 and China Eastern
some ways it may, but if prosperity is unequally shared, Airlines in 2008, is an awkward matter for top leaders and
local communities are not consulted on projects that presents a pessimistic outlook for the country’s reform
affect them, and reforms of institutions and systems of drive. China has launched a series of reforms since 2014,
governance fail to keep pace with inflows of investment, including experiments with mixed ownership, state
then the Belt and Road could make fragile situations asset investment holding groups, salary controls and
worse. Some Chinese analysts argue that so long as merging SOEs in similar industries. None, at least so far,
the interests of ruling elites in Belt and Road countries are comparable to the harsh moves two decades ago.
are aligned with China’s, problems can be managed. “The problems of SOEs come out as the economy slows
History suggests otherwise. To mitigate risks, China and down and they may worsen as the tide of liquidity fades,”
its partners will need to deepen their understanding said Zhang Jun, Chief Economist of Huaxin Securities, the
of neighbouring countries and situations, and be more mainland joint venture of Morgan Stanley. The current
transparent, inclusive and accountable in implementing reforms were slower than market expectations and could
projects. This could include: consistently engaging not be completed in one or two years, he said (Tang).
with affected communities; taking their interests into
account; assessing the political as well as economic It is hard to overstate the importance of getting SOE
implications of projects; and ensuring that benefits are reforms right. In the 1980s, when China was starting
not simply divided as spoils among unaccountable elites to open to the world, the state sector dominated its
in backroom deals. Companies, financial institutions and economy, accounting for nearly four fifths of output. A
other organisations involved in Belt and Road projects big factor behind China’s remarkable growth since then
will have to be more rigorous in assessing and addressing has been the relative decline of SOEs, to the point that
political and security risks. Quantitative metrics and they account for less than a fifth of output today. As state
vague strategic frameworks are not enough. It requires firms stood still, a vibrant private sector sprouted around
extensive field research, engaging on the ground and them. Over the past few years the state sector has, by
making qualitative judgements. China’s own capacity to several measures, stopped shrinking. There are still more
assess political and country risk is not keeping pace with than 150,000 SOEs in operation, two thirds owned by
its sprinting ambitions. To rectify that, Beijing should local governments and the rest under central control.
empower its policymakers, universities and think-tanks Private firms are much more productive, but state firms
to engage freely with foreign counterparts and provide gobble up a disproportionate share of resources. They
frank assessments of pitfalls and policy flaws (Kovrig). take about half of all bank loans and are the main culprits
behind China’s big increase in corporate debt. Since
SOEs 2015 investment by SOEs has grown faster than private-
sector investment, reversing a decades-long trend.
China’s SOE reform faced fresh questioning in The fate of China’s state firms is also a global concern.
February 2017 as a state-controlled company was By international standards, they are already massive.
almost certain to post the greatest financial loss among China’s 200 biggest SOEs account for 9 percent of global
the country’s nearly 2,800 A-share listed firms in 2016. revenues in coal mining, 6 percent in car making, and
Sinopec Oilfield Service Corp, a Shanghai-listed unit of 5 percent in construction. A series of mega-mergers
state-owned Sinopec, the top Asian crude refiner, was currently under way is concentrating even more power
the forerunner with an estimated loss of 16 billion yuan. in the hands of a few, giving them the heft to barge into
The preliminary result, released in its exchange filing on new markets. For foreign firms this can smack of unfair
January 20, was close to the record high 16.3 billion yuan competition, as if they are fighting against the Chinese
loss registered by Chalco, the listed unit of China’s second state. The temptation for other countries to block foreign
largest aluminum producer Chinalco, in 2014. Although investments by SOEs will only increase, setting the stage
a severe fall in oil prices has also been a key factor in for bitter disputes (Economist).
the losses, the turn of events has greatly exposed the
weakness of China’s “national champions”, including rigid The Deputy Secretary General of the State-owned
management, high debt ratios, redundancy and making Assets Supervision and Administration Commission
social responsibility a higher priority than profitability. (SASAC) confirmed in June 2017 that China’s centrally
The fact that all the biggest losers in the past decade administered SOEs would be divided into three types:
96
corruption and inequality. China’s basic premise is that were large state firms, including Wuhan Iron & Steel Co
economic development will alleviate these problems. In in 2015, shipper COSCO in 2011 -2012 and China Eastern
some ways it may, but if prosperity is unequally shared, Airlines in 2008, is an awkward matter for top leaders and
local communities are not consulted on projects that presents a pessimistic outlook for the country’s reform
affect them, and reforms of institutions and systems of drive. China has launched a series of reforms since 2014,
governance fail to keep pace with inflows of investment, including experiments with mixed ownership, state
then the Belt and Road could make fragile situations asset investment holding groups, salary controls and
worse. Some Chinese analysts argue that so long as merging SOEs in similar industries. None, at least so far,
the interests of ruling elites in Belt and Road countries are comparable to the harsh moves two decades ago.
are aligned with China’s, problems can be managed. “The problems of SOEs come out as the economy slows
History suggests otherwise. To mitigate risks, China and down and they may worsen as the tide of liquidity fades,”
its partners will need to deepen their understanding said Zhang Jun, Chief Economist of Huaxin Securities, the
of neighbouring countries and situations, and be more mainland joint venture of Morgan Stanley. The current
transparent, inclusive and accountable in implementing reforms were slower than market expectations and could
projects. This could include: consistently engaging not be completed in one or two years, he said (Tang).
with affected communities; taking their interests into
account; assessing the political as well as economic It is hard to overstate the importance of getting SOE
implications of projects; and ensuring that benefits are reforms right. In the 1980s, when China was starting
not simply divided as spoils among unaccountable elites to open to the world, the state sector dominated its
in backroom deals. Companies, financial institutions and economy, accounting for nearly four fifths of output. A
other organisations involved in Belt and Road projects big factor behind China’s remarkable growth since then
will have to be more rigorous in assessing and addressing has been the relative decline of SOEs, to the point that
political and security risks. Quantitative metrics and they account for less than a fifth of output today. As state
vague strategic frameworks are not enough. It requires firms stood still, a vibrant private sector sprouted around
extensive field research, engaging on the ground and them. Over the past few years the state sector has, by
making qualitative judgements. China’s own capacity to several measures, stopped shrinking. There are still more
assess political and country risk is not keeping pace with than 150,000 SOEs in operation, two thirds owned by
its sprinting ambitions. To rectify that, Beijing should local governments and the rest under central control.
empower its policymakers, universities and think-tanks Private firms are much more productive, but state firms
to engage freely with foreign counterparts and provide gobble up a disproportionate share of resources. They
frank assessments of pitfalls and policy flaws (Kovrig). take about half of all bank loans and are the main culprits
behind China’s big increase in corporate debt. Since
SOEs 2015 investment by SOEs has grown faster than private-
sector investment, reversing a decades-long trend.
China’s SOE reform faced fresh questioning in The fate of China’s state firms is also a global concern.
February 2017 as a state-controlled company was By international standards, they are already massive.
almost certain to post the greatest financial loss among China’s 200 biggest SOEs account for 9 percent of global
the country’s nearly 2,800 A-share listed firms in 2016. revenues in coal mining, 6 percent in car making, and
Sinopec Oilfield Service Corp, a Shanghai-listed unit of 5 percent in construction. A series of mega-mergers
state-owned Sinopec, the top Asian crude refiner, was currently under way is concentrating even more power
the forerunner with an estimated loss of 16 billion yuan. in the hands of a few, giving them the heft to barge into
The preliminary result, released in its exchange filing on new markets. For foreign firms this can smack of unfair
January 20, was close to the record high 16.3 billion yuan competition, as if they are fighting against the Chinese
loss registered by Chalco, the listed unit of China’s second state. The temptation for other countries to block foreign
largest aluminum producer Chinalco, in 2014. Although investments by SOEs will only increase, setting the stage
a severe fall in oil prices has also been a key factor in for bitter disputes (Economist).
the losses, the turn of events has greatly exposed the
weakness of China’s “national champions”, including rigid The Deputy Secretary General of the State-owned
management, high debt ratios, redundancy and making Assets Supervision and Administration Commission
social responsibility a higher priority than profitability. (SASAC) confirmed in June 2017 that China’s centrally
The fact that all the biggest losers in the past decade administered SOEs would be divided into three types:
96
