Since the introduction of market-oriented economic reforms in the early 1980s, China’s government has encouraged private sector growth of the national economy, and downgraded the role of state-owned enterprises (SOEs). But in the last few years, the pendulum has begun to swing the other way. Given the changing domestic and external economic conditions, the SOEs are making a comeback at the expense of the private sector. There is concern that Beijing will shift away from the market and return to the command economy. A heated debate is now going on in China’s business and intellectual circles, which regards this new phenomenon as “Guojin Mintui” (The state advances as the private sector retreats). This change has new implications for China and the world economy.
The Resurgence of the SOEs
When China officially announced economic reforms and an open-door policy in 1984, the SOEs were urged to initiate a “responsibility management system”. But it failed to reverse the money-losing behavior of the SOEs. Then in the early 1990s, Beijing started structural reforms of the SOEs by “grasping the big, letting go of the small.” This meant the government retained some large, vital SOEs, while allowing most of the country’s medium and small businesses to become private. The central authorities in 1999 further redefined the SOEs’ status as follows.
They can remain only in three economic domains: (1) industries related to national security; (2) natural resources which the state monopolizes; (3) industries that produce public goods and social welfare. Many SOEs had to leave the competitive industries in order to make place for the private sector. Subsequently, the SOEs almost disappeared in food and beverage, textile and apparel, home appliance and other consumer good industries. Legally, non-state-owned enterprises were even allowed to enter such industries formerly monopolized by the state as finance, electricity, telecommunications, railroads, civil aviation, petroleum, etc.
As a result, the share of SOEs in China’s industrial production has fallen from approximately 80 percent at the outset of the reforms, to about 30 percent in 2008.
The fate of SOEs, however, has experienced a favorable turnaround since 2003 when the State Council set up a new organ---the State-owned Assets Supervision and Administration Committee (SASAC). This agency was tasked to revitalize the SOEs and to reorganize them from money-losing into profitable firms, through restructuring and consolidation. Li Rongrong, the Chairman of SASAC declared that the country’s seven major industries, including electricity and grid, petroleum and petrochemical, telecommunications, coal, civil aviation, and maritime, should be exclusively owned by the state, while excluding any domestic private entities.
In the meantime, Beijing was welcoming and attracting foreign investments to the SOEs. Indeed, these new policies have benefited the SOEs’ performance. They began to make money by reaping annual profits of $147 billion in 2006. Among 149 centrally controlled SOEs under the direct supervision of the SASAC, 19 were on the Fortune 500 list. The SOEs had started to resurface again.
The 2008 global financial crisis also gave the SOEs a new impetus. Most of the government’s 4 trillion yuan, or US$586 billion, stimulus package, already designated for rebuilding infrastructure such as railroads, highways, airports, and construction, were contracted to centrally controlled SOEs. In addition, these enterprises also enjoyed privileges by borrowing from state banks. In 2009, around 80 percent of bank loans, 9 trillion yuan, or US$1.4 trillion, went to SOEs.
Conglomerates and Monopolies
As the global financial crisis weighed on China’s economy, China’s exports declined, bankruptcies and the unemployment rate rose. Beijing issued its “Plan on Revitalization of Ten Industries” in early 2009, to encourage large SOEs in steel, automobile, shipbuilding, equipment and other industries to merge with medium and small private enterprises, thus transforming them into giants that could compete in the world market.
The SOEs, supported by financing from central and local governments, made an impressive comeback after 2008. The following examples cite some major mergers and acquisitions in 2009:
----In the steel industry, the Shangdong Iron and Steel Group Co. Ltd., long a money-losing SOE, acquired the private Rizhao Iron and Steel Co. Ltd. It, in turn, created the second largest steel company in China. The Baoshan Steel Group, a famous SOE, acquired the private Ninbo Steel Company.
----In the oil industry, the China Petroleum (CNPC) acquired most of the non-state oil companies in Heilongjiang Province.
----The China National Cereals Group invested in and purchased private Mengniu Dairy Company, the largest-ever deal in the Chinese food industry. Its business goes far beyond food and beverages, to include residential and commercial real estate.
----In Sangxi, the provincial government ordered a reorganization of the coal industry. The share of private capital in that industry is not supposed to exceed 30 percent.
Such SOE acquisitions and merges took place in almost every industry such as in automobiles, shipbuilding, civil aviation and finance. The consolidation process has also formed the behemoth SOEs that typically squeezed private sector development and stifled market competition. Currently, the SOEs enjoy a monopoly over almost all of China’s resource industries: petroleum, telecommunications, electricity, tobacco, coal, civil aviation, finance, insurance, etc. As a consequence, private enterprises had to exit from these industries.
A New Enclosure Movement
One of the most adverse effects of the advance of the state-owned sector has been the increasing real estate market bubble.
Since the Beijing government liberalized the real estate market in 1992, the non-state sector has been the major player in this market. But gradually, the share of SOEs increased to 60 percent from an initial 8 percent. Many central and local SOEs that never were involved in real estate have competed for a share of this now booming market. According to official data, over 70 percent of the 136 centrally controlled SOEs, like China Chemical, China Railroad and China Metallurgy have entered the new real estate market.
Among the country’s top ten most expensive plots of land for building, around 60 percent are connected with the SOEs. In the light of the global economic slowdown, most Chinese manufacturing companies have experienced overcapacity. Their executives saw the real estate market as the easiest way to make a profit. Relying on low-cost loans from state-owned commercial banks and a high credit rating, they always succeeded to win land auctions in “golden districts” of Beijing, Shanghai and other metropolitan areas, which smashed price records and created one or more “land kings”. This generated a public outcry. More people now call this excessive acquisition of land by the SOEs as the Chinese-type of “enclosure movement”.