State Owned Enterprises
State Enterprises Biggest Challenge to Chinese Reform
The reform of China's state owned enterprises is one of the biggest problems facing China as it restructures its economy. China's state sector has inherited the legacy of central planning, including the stereotypical 1950s factories that include everything from housing to schools for their employees, but are now building new plants just to employ the children of the original workers. Other kinds of state owned industries face problems too, from mineral resources companies forced to sell products below world market prices to trading companies and new factories that are now suffering from fierce competition. State owned firms still employ the majority of China's 170 million urban workers. But there have been reports of tens of millions of layoffs, and certainly hundreds of thousands of state workers receive reduced wages or none at all. These same state firms account for only one-third of Chinese industrial output, and over 40% are officially money losers. State firms are further saddled with bad debts, and often their managers refuse to acknowledge their company's predicament. China is therefore faced with a Catch-22: surplus payrolls mean firms can't stop losing money, but layoffs will create a potentially restive class of unemployed. Most observers think the answer is in privatization, and some foreign analysts think the government is intending to head that way. But the reality is that 80-90% of annual state bank loans, totaling over $120 billion, are to state firms, and bad debt may be as much as 25% of state bank assets. Thus, current programs allowing small firms to merge and large firms to raise private capital will never really work as long as the state maintains control. The Economist (UK), 12/14/96
Debt in State Enterprises Increases
In the first 11 months of 1996, China's state-owned enterprises took in losses of 43.6 percent over the previous year. Losses were estimated at $6.4 billion at the end of November, State Statistics Bureau figures said. The earnings of Profitable SOEs also were down 49.3 percent to $5.9 billion, Xinhua reported. Losses at the SOEs more than tripled in October and November and a Beijing economist said that December figures could even be worse. The mounting debts could spur the government to relax the money supply.
South China Morning Post (Hong Kong), 01/02/97
Multinationals are Troubled by State Debt
The huge debt being incurred by China's state sector has increasingly become a worry to multinational companies who operate in the country, according to REL Consultancy (Asia Pacific). Simon Littlewood, managing director of the consultancy said that several multinationals, especially the ones who did business with state owned enterprises, had to wait for close to three-quarters of a year before being paid after delivery. Investments are being raised by multinationals in China but some are now encountering troubles in inventories and accounts receivables. In 1996, state debt rose another $12 billion, which adds to an already existing debt of $96 billion. This figure is equal to more than 13 percent of China's GDP in 1996. Littlewood said that the multinationals concern was reflected by a new survey being done on the subject by his firm. Around 12 large companies, including many Fortune 500 companies, decided to undertake the survey, the largest of its kind in China. It is scheduled to be complete in February and will cover the revenue management process, contract management, terms and conditions, delivery, billing and collection.
South China Morning Post (Hong Kong), 01/09/97
China's SOEs Face More Rough Times
Although the Chinese economy is showing good economic figures for 1996, some economists warn that the government was too involved in keeping the money-losing state owned enterprises alive. While doing this, the government has given a huge pile of bad debt to banks which has, in turn, slowed down economic reforms, says Chen Xidong, a Beijing based economist for Crosby Securities. Loses from January to October of 1996 increased to $8.29 billion, a rise of 45 percent from the same period in 1995. He said that many of these companies will be forced into mergers or forced to declare bankruptcy. Some others will receive government assistance to "get back on their feet," he said. These struggling SOEs could seriously endanger China's economy, especially the banking sector, many analysts predict. About 60-70 percent of the loans went to state companies in 1996, said Chen. Approximately 30 percent of this amount should be counted as bad debt. Zhu Chaoyang, a Beijing-based analyst for China Securities Co. believes that the Chinese government should allow the banks to determine themselves who they grant loans to, especially for companies who are part of non-key industries.
The Asian Wall Street Journal (U.S.), 01/17/97
SOEs expected to Have Fewer Losses
Qiu Xiaohua, chief economist for the State Statistical Bureau, said that although state industries have huge debt and redundant production, fewer SOEs are expected to lose money this year. The recovery in this sector will boost the econmy upward. He said "China's economic growth in 1997 will be no lower than eight percent," while 10.5 percent was in the range of possibility. Unprofitable companies will fall from 44 percent last year to 33 percent this year.
The Asian Wall Street Journal (U.S.), 01/28/97
Heavy Burden for China's Financial Sector
Although the Chinese government has been committed to the reform and diversification of China's financial sector for the past 15 years, many daunting problems remain. These have arisen mainly from the concentration of inefficient and poorly performing financial resources in the state sector. It is a serious task to finance the SOE's massively accrued losses for the state-owned commercial banks and the central government. There was $24 billion in outstanding loans when reforms began in 1978, equaling about half of that year's GDP. However, in 1995, outstanding loans were over $600 billion, or equal to that years GDP. In that year, 49 percent (70 percent by private estimates) of SOEs were losing money and were unable to repay their debts, doubling the number of SOEs recording losses in 1982. Over the long term, government resources will not be enough to pay depositors and bond holders if SOEs refuse to service their debts. According to the World Bank, of China's 102,200 industrial SOEs only 8,000, or eight percent, are viable enterprises.
The China Business Review (U.S.), 01/01/97
Reviewing the Performance of SOEs
Although many economists believe that the 1996 GDP growth rate is sustainable over the long term, China's state-owned enterprises are a continual drag on the economy. The total value added industrial output increased 13.1 percent over 1995 but value-added SOE output rose only 6.7 percent. According to the State Statistical Bureau, unsold inventory was worth and estimated $65.1 billion. The World Bank estimated that 17 percent of China's GDP consists of "unsaleable" SOE-manufactured goods. Despite the poor performance of these firms the government continued to channel state loans to them. The government will not allow any big SOE reforms until SOE's social welfare functions, from pensions to housing, are shifted to the local level. Until that time, loans will be needed if SOEs are to provide these services to employees.
The China Business Review (U.S.), 03/01/97