Caixin
Jul 18, 2013 06:30 PM

Closer Look: SOEs Can Brag They Are Big – but Not Strong

Eighty-five Chinese corporations made the latest Fortune Magazine Global 500. That is an increase of 16 from last year.

But let's take a closer look at the numbers. Nearly 90 percent of the Chinese companies are stated-owned enterprises (SOEs) and just two of the new additions are private businesses. Forty-five of the Chinese companies are central-level enterprises and 33 are state held. Only seven are private. 

Chinese SOEs tend to be big rather than strong. Their overall profitability is lower than average of the top 500 – and the very fact that these enterprises keep growing is actually not good news for China's economy. 

Feng Xingyuan, a researcher at the Rural Development Institute of the Chinese Academy of Social Sciences, argues that to safeguard the country's economic security, most SOEs should aim to stop growing since they are often structurally inefficient and post continual losses.

Although SOEs show substantial book profits, this includes many deductions such as rent, taxes and preferential funding that should have been included in the costs originally, Feng says.

The balance sheets are also skewed by the fact that these firms are often administrative monopolies that benefit from state subsidies. Without all these advantages, the performance of SOEs is far below the average level of Chinese companies as a whole.

Moreover, state-owned firms are often at the head of the industrial supply chain, allowing them to "pinch the necks of private enterprises and consumers" to sell them products and services at a high price, Feng argues.

State-owned firms started growing even bigger with the beginning of SOE reform in 2006, when the government promoted the "advance and retreat" merger strategy to achieve scale. Private companies were doing the "retreating."

The harm for the country's economy includes inefficiencies and a lack motivation to control costs, with salaries and non-monetary income generally higher than the national average. The complex system of nepotism and recruiting standards at these firms – sometimes even stipulated in writing – are at odds with the requirements of the market economy.

Feng argues that SOEs should not set foot in sectors where a private company can perform well by competing in the free market. As Premier Li Keqiang put it recently, the government should abide by the principle of decentralization -- or subsidiarity -- and resolve to leave day-to-day business to the market and society.

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