## Getting China’s ‘Trusted Sons’ Back into Shape _IMF News, April 27, 2017_ ## Source details **Canonical URL:** [Getting China’s ‘Trusted Sons’ Back into Shape](https://www.imf.org/en/news/articles/2017/04/26/na042717-getting-chinas-trusted-sons-back-into-shape) ## Other formats - [Markdown version](/en/news/articles/2017/04/26/na042717-getting-chinas-trusted-sons-back-into-shape/index.md) - [Structured JSON version](/en/news/articles/2017/04/26/na042717-getting-chinas-trusted-sons-back-into-shape/index.json) - [Bundle manifest](/en/news/articles/2017/04/26/na042717-getting-chinas-trusted-sons-back-into-shape/bundle-manifest.json) ## 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).* --- ## References - [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus) - [PRESS CENTER](http://presscenter.imf.org/) - [IMF Country Focus](https://www.imf.org/en/news/country-focus) - [Read the book](http://www.elibrary.imf.org/view/IMF071/23209-9781513539942/23209-9781513539942/23209-9781513539942.xml?highlight=true&result=4&rskey=pKXD6l) - [Country report](http://www.imf.org/en/Publications/CR/Issues/2016/12/31/The-People-s-Republic-of-China-2016-Article-IV-Consultation-Press-Release-Staff-Report-and-44181) - [China's corporate debt](http://www.imf.org/en/Publications/WP/Issues/2016/12/31/Resolving-Chinas-Corporate-Debt-Problem-44337) - [Modernizing China: Investing in Soft Infrastructure](http://www.elibrary.imf.org/view/IMF071/23209-9781513539942/23209-9781513539942/23209-9781513539942.xml) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2017/04/26/na042717-getting-chinas-trusted-sons-back-into-shape_