China’s huge apparatus of state-owned enterprises (SOEs) is a popular punching bag: economists decry its inefficiencies; foreign politicians complain about unfair competition; and many Chinese citizens criticize public displays of waste, like elaborate banquets. The Chinese government would counter that they provide a foundation for the economy as a whole.
As China’s economy evolves (and it does, albeit slowly at times), the clamor for SOE reform grows louder from all sides. What is the potential for reform? How damaging are SOEs to the Chinese economy? On the flip side, how have SOEs strengthened the system?
But first, a little background. According to Xinhua, at the end of 2011, there were 144,700 state-owned enterprises with total assets of 85.4 trillion yuan, revenues of 39.25 trillion yuan, and profits of 2.6 trillion yuan (43 percent of China’s total industrial and business profit).
Most SOEs are controlled by local governments, though it is those in the care of the central government that receive the most attention. Of those companies, there are three categories: those controlled by the State-Owned Assets Supervision and Administration Committee (SASAC), banking and finance organizations, and “media, publications, culture and entertainment companies,” administered by other agencies (for more details, see this China Economic Review piece.)
Recently, SOE profitability has taken a hit, reports this May Xinhua article: in the first quarter of 2013, SOEs reported 5.3 percent growth, compared to 2012’s first quarter growth figure of 7.7 percent. According to China Enterprise Research Institute researcher Li Jin, slower growth is attributable to “overcapacity, inefficient cost control, and slow industrial upgrading.” As for the types of SOEs that recorded slower growth, Li identifies them as “mainly in the traditional industries instead of high-tech or emerging industries” that “rely largely on expanding investment to boost growth.” Overall SOE profits are largely supported by just a few massive SOEs, such as PetroChina and China Mobile, according to China Economic Review, that are able to reap substantial profits by way of their “monopoly positions.”
This “monopoly position” of SOEs is one of their greatest advantages. State-owned enterprises are given government subsidies and have much easier access to credit than independent firms. The Wall Street Journal China Real Time blog notes that SOEs are the “beneficiaries of unfair subsidies and below-cost financing.”
Indeed, 85 percent of loans in 2009 were issued to SOEs, because banks themselves are state-owned, and are directed to let credit flow to other state-owned businesses. SOEs can get money more cheaply, paying lower rates for borrowing, and are more blasé about repaying these loans: SOE borrowing was a major source of non-performing loans in past crises.
In some industries, SOEs are granted a monopoly, with private enterprise not allowed to participate, especially in sectors related to national security. As the Wall Street Journal comments, “Beijing frequently justifies the state’s grip on key companies that form the “commanding heights” of the economy – like energy, power, steel, telecoms and shipbuilding.”
To be fair, this is true of many other countries, as well. However, as Andrew Batson, consultancy GK Dragonomics’ research director notes, “state firms do have a continuing and large presence in obviously non-strategic sectors — like restaurants — that is increasingly difficult to justify in a market-driven economy.” These structural advantages make it difficult for private enterprise to compete.
State-owned enterprises have a number of structural and organizational problems. In May, Xinhua reported the results of a National Audit Office audit of ten SOEs, which found a number of issues, including inaccurate accounting, incomplete financial statements, illegal practices and “poor management of investment decisions.”