Getting China’s ‘Trusted Sons’ Back into Shape
IMF News, April 27, 2017
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Bibliographic details
- Authors: W. Raphael Lam, Alfred Schipke
- Published: April 27, 2017
Role and current footprint of state-owned enterprises (SOEs)
- SOEs are described as the “trusted (eldest) sons of the People’s Republic of China,” reflecting their contributions to economic development.
- The share of state enterprises in total value-added and employment has declined to less than 20 percent, down from 40 percent in the late 1990s.
- Eight of the top ten companies by market capitalization listed on the Shanghai stock exchange are state-owned.
- Some 167,000 nonfinancial enterprises owned by the central or local governments still operate nationwide.
- SOEs account for more than half of bank credit and about 60 percent of total corporate debt.
- SOEs are heavily represented among “zombie” firms and in sectors with excess capacity, such as coal and steel.
- Lower productivity partly reflects SOEs’ non-commercial functions (implementing national development strategies, smoothing business cycles, running fringe benefits such as schools and hospitals, serving as employer of last resort) and implicit support (land endowment, protected markets).
Growth and risk context
- IMF material cited suggests reforms could raise China’s output by 3–9 percent over a decade.
- The 13th Five-Year Plan covers the years 2016 to 2020 and features SOEs in key national policy and reform documents.
- The recently concluded National People’s Congress called for “leaner, healthier, and more productive” state enterprises, as noted in the 2017 Report on the Work of the Government.
Limitations and obstacles to reform
- Progress has been limited due to resistance from vested interest groups and a reform scope that emphasizes consolidation and mixed-ownership rather than deeper restructuring.
- Ambiguity remains on the role of the market relative to the state; reforms stress both greater market discipline and stronger state leadership, risking conflicting objectives and weakened market discipline.
Key objectives of comprehensive reform
- Deal with excessive debt.
- Channel new resources to the most productive users.
- Create a level playing field for private and foreign companies.
Key elements of successful reform (policy recommendations)
- Restructure fundamentally sound enterprises and liquidate nonviable ones.
- Emphasize operational restructuring and improving corporate governance.
- Kick-start efforts with a few high-profile pilot cases for indebted enterprises.
- Transfer noncore objectives, such as social functions, to the government budget.
- Use government budget support to complement local safety nets for retraining and relocating workers who lose their jobs.
- Harden budget constraints.
- Gradually end implicit guarantees (such as preferential access to credit) by tolerating defaults and carefully allocating losses to firm owners and creditors to improve market assessment of credit risks.
- Remove implicit support to address excessive debt and improve efficiency of new credit allocation.
- Transfer a larger portion of profits (currently less than a half of the target of 30 percent by 2020) to the government budget and allocate capital to social security funds to help harden budget constraints.
- Reduce entry barriers and phase out privileges.
- Allow entry of private or foreign firms into state-dominated service industries such as logistics, health care, and telecommunications (currently more restrictive than in Organization for Economic Cooperation and Development markets).
- Break up administrative monopolies.
- Promote the growth of dynamic small and medium-sized enterprises.
- Advance complementary reforms.
- Grant access to public services regardless of where a household resides.
- Reform rural land property rights.
- Establish a framework for insolvency and resolution of state-owned enterprises.
- Implement fiscal measures to improve portability of social security benefits across provinces and cities and align intergovernmental finances to address legacy issues in providing social functions.
Outlook and historical lesson
- China’s late 1990s bold reform of state enterprises created conditions for strong growth despite short-term costs (such as a temporary rise of unemployment).
- The article argues it is time to further reshape these “trusted sons” to help ensure a bright future.
Source: IMF Country Focus — "Getting China’s ‘Trusted Sons’ Back into Shape" (April 27, 2017).