by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Enda Curran of Bloomberg Businessweek documents the Chinese government’s overreach into the country’s economy.
In the first years of his presidency, China’s Xi Jingping left the country’s state-owned enterprises pretty much alone. Some analysts think that could change. “It’s almost certain that the central government will roll out a specific plan for SOE reform in the second half of the year,” says Zhao Yang, a China economist for Nomura.
The impact of the SOEs on private enterprise is getting more damaging as the economy’s growth slows. “Many of China’s structural distortions, both economic and otherwise, are due to the dominating positions of the SOEs,” says Chen Zhiwu, a finance professor at Yale University and an adviser to China’s cabinet in 2007. State enterprises have “made competition unfair and the legal system biased against private firms and individuals.” The 150,000 SOEs account for 17 percent of urban employment, 22 percent of industrial income, and 38 percent of China’s industrial assets, according to JPMorgan Chase. With $16 trillion in assets, the SOEs do everything from building spacecraft to trading silk. These enterprises, says BNP Paribas, are also big borrowers. BNP figures corporate debt, mostly owed by SOEs, rose to 167 percent of gross domestic product in 2014, from 97 percent in 2008. The state sector stands in the way of China’s transformation into an economy driven by services and consumption.
China’s recent stock market plunge shows how the government looks out for the SOEs. These companies dominate the stock market, and have gotten the biggest boost from government intervention. PetroChina, the biggest component of the Shanghai Composite index, has benefited from government-backed buying. Its stock jumped 19 percent in the first two weeks of July, even as the broader index sank 11 percent. Analysts say the stock was targeted for support, given its weighting in the index. One reason the government wanted a floor under stocks was to keep open a source of funds for China’s debt-burdened companies, most of them SOEs. Chinese companies announced at least $226 billion this year in initial and secondary offerings.
The return on assets of SOEs ranges from a third to half that of private companies, says Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics. “If the government wants to sustain reasonable growth, the efficiency of the state sector must improve or its size must shrink further,” he says.