State Takeovers Risk Stifling Private Sector, Government Adviser Warns

The wave of takeovers of private businesses this year by state-owned enterprises (SOEs) and attempts to interfere in their management risk stifling the vitality of the private sector, a senior government adviser warned, urging companies to instead manage their acquisitions as investments that should ultimately be sold off.

Private companies have been the worst hit this year by the slowdown in China’s economic growth, Li Yang, president of the National Institution for Finance & Development, a government think tank, said at a forum in Beijing on Sunday. They are struggling with rising input costs due to the government’s campaign to reduce excess industrial capacity, which has squeezed supplies of raw materials such as steel and coal. They are also suffering from a severe credit crunch led by a regulatory crackdown on banks’ off-balance-sheet lending activities — the main funding source for a sector that has long suffered from limited access to bank loans, he said.

The increasing number of takeovers of private firms could be linked to a last-ditch, desperate effort by entrepreneurs to “seek shelter” to save their businesses from the brink of collapse, he said.

“I’d rather regard this round of state sector expansion and private sector contraction as a self-preservation move under the enormous downward pressure of the economy,” Li said. “If they (private companies) don’t do that, they will probably be denied funding and won’t be able to lower their costs.”

Li’s comments came after an article went viral on the internet last week suggesting that the private sector should “gradually withdraw” from the Chinese economy now that it had “completed its mission of assisting the development of the state sector,” in an apparent mockery of government policies favoring state companies.

Trust the state

The commentary, written by Wu Xiaoping, a private business owner who used to be a senior manager at investment bank China International Capital Corp., generated heated controversy. The People’s Daily, the official newspaper of the ruling Communist Party, responded with a commentary aimed at reassuring entrepreneurs that the private sector was not under threat of being wiped out and that they should “trust the consistency of the nation’s policies and make efforts to grow the private sector in a better way.”

Li noted that SOEs have assigned officials to key posts at the private firms they acquired or installed their own people as party secretaries, moves he warned were “very likely to stifle the vitality” of the companies.

“It's commonly understood that the efficiency of SOEs is generally lower than private companies,” he said. SOEs “should not get involved in their management, send cadres to the companies, or eject their entire management team. They must not do that,” he added.

The government needs to actually implement an SOE reform strategy that involves state capital being just a passive financial investor in private companies, refraining from interfering in their day-to-day operations, and ultimately realizing the return on their investment by selling their stakes after the firms overcome their current hardships.

Authorities “can inject capital and (favorable) policies (into the private companies) through takeovers by SOEs,” he said. “We may come up with a very efficient way (to reform the SOEs) that is also consistent with the philosophy of a market economy with socialist characteristics if we enter (the private companies) when they are in the greatest difficulty and sell them back to the private sector after they improve.”

Contact reporter Fran Wang (fangwang@caixin.com)