Opinion: The Lessons of Shenzhen’s State Firms Since 1980
Zhang Siping is a former deputy mayor of Shenzhen. This article, edited for length, was first published in China Reform magazine.
Shenzhen state-owned enterprises refer to the municipal state-owned enterprises (SOEs) funded by the Shenzhen Municipal Government. They do not include enterprises invested and developed by the central and inland local governments in Shenzhen, nor do they include district state SOEs invested by the city’s district governments. Unlike the founding and development of central enterprises and inland SOEs, Shenzhen’s SOEs are “new state-owned enterprises” — formed after reform and opening up.
The SOEs in the Shenzhen Special Economic Zone (SEZ) have a nearly 40-year history. The total assets of these municipal SOEs grew from 161 million yuan ($23.2 million) in 1980 to 2.3 trillion yuan in 2017, and their net assets increased from 61 million yuan in 1980 to 862.6 billion yuan in 2017. How they developed over the last 40 years is illustrative of many unique phenomena.
How can one evaluate the relationship between government resources obtained by SOEs and their contribution to Shenzhen’s economic and social development? How can one calculate the gains and losses that these SOEs bring to Shenzhen’s economic and social development? How can one objectively evaluate the efficiency of state-owned enterprises’ use of government resources? The questions can be answered based on the disparities in the following five areas:
First, there is a huge disparity between the total amount of assets held by state-owned enterprises and the huge resources they have received from the government. For decades, Shenzhen SOEs have obtained great resources from the government, including land, financing, preferential policies, franchise rights, etc. Those should have produced huge state-owned assets and state-owned capital. However, by the end of 2017, municipal SOEs in the city had 862.6 billion yuan in assets and 593.8 billion yuan in capital and equity. There is obviously a serious disparity between the large number of resources that state-owned enterprises obtain from the government and the state-owned capital and equity generated from said resources, resulting in huge losses and waste of government resources.
Second, there is a serious disparity between the financial resources obtained by Shenzhen’s SOEs from the banking system and the economic and social benefits generated from those resources. For a long time, banks have given huge support to SOEs. From a national perspective, loans obtained by private enterprises accounted for about 25% of total bank loans, yet the private firms made 50% of the tax contributions and accounted for 60% of total GDP. The situation is similar in Shenzhen. In 2017, the city’s SOEs had 1.52 trillion in total liabilities, while private enterprises had 1.49 trillion in liabilities with a liability-to-asset ratio of 63.4%.
From the banks’ perspective, the interest rate on loans to private enterprises is usually at least one-third higher than that of state-owned enterprises. This means that even if the actual loss brought by a large amount of nonperforming assets and bad debts of state-owned enterprises historically is not in consideration, the interest income that banks received from the loans was greatly reduced.
In 2017 Shenzhen’s municipal SOEs had total assets of 2.4 trillion yuan and reported total profits of 85.1 billion yuan, amounting to only a 3.6% return on total assets. Although the return on total assets of Shenzhen’s state-owned enterprises is much higher than the average of about 2% for centrally administered and other city-level SOEs, it is far lower than the average bank loan interest rate, which is about 5% for state-owned enterprises.
By comparison, the average interest rate on bank loans to private enterprises is usually about 8%, and private enterprises’ cost of financing is about 10%. This phenomenon shows that while SOEs are profitable from their own perspective, but from a comprehensive societal perspective, they are actually operating at a long-term loss.
In an objective evaluation of the gains and losses of Shenzhen’s SOEs, the mistakes in the development of SOEs and the lessons in the reform cannot be covered up.
The third is the disparity between the government land resources occupied by SOEs and the contributions that these enterprises make to Shenzhen’s economic development by relying on such land resources.
For decades, state-owned enterprises have obtained a large number of high-quality land resources in the center of the original special economic zone. This land is a valuable resource for Shenzhen’s economic and social development and has produced huge value-added benefits. Although these resources constitute an important part of the existing state-owned net assets, the large amount of land obtained by SOEs is seriously at odds with their contributions to the economic and social development of Shenzhen.
Over the past few decades, the amount of waste and loss caused by SOEs in land use is staggering, and the value is difficult to estimate. For example, Shenzhen Nanyou Group Holdings Ltd. obtained about 20 square kilometers (7.7 square miles) of valuable land from the government in the 1980s. By the beginning of the 21st century, most of the land was wasted, and the company was facing insolvency. Examples like such are not an isolated phenomenon in the history of the development of SOEs.
Fourth, a large disparity exists between the huge resources that SOEs obtain from the government and the contributions they make to Shenzhen’s economic development.
In addition to land and financial resources, SOEs also benefit from a large number of government-sponsored preferential policies and important resources that help companies grow, such as finance, franchise rights and corporate listing indicators.
For example, over time, the government has given SOEs licenses, operating permits, and qualifications for general contractors to many financial institutions. However, for various reasons, these important licenses were lost as the SOEs ran into operational difficulties, and faced closures, reorganizations and transfers. For example, in the 20th century, with the support of relevant state departments, Shenzhen’s earliest financial institutions, including Shenzhen Development Bank, China Southern Fund Corp., and Shenzhen Commercial Bank, were closed or taken over. With the exception of Vanke Group, much of the first batch of SOEs listed in Shenzhen has disappeared.
Fifth, Shenzhen SOEs have lost more money than they have made in their 40-year history. At the beginning of the 21st century, when SOEs in competitive sectors withdrew, the government failed to recover any funds in the restructuring of many state-owned enterprises and paid considerable reform costs in repayment of debts, placement of employees, and handling historical issues. Losses caused by mistakes in investment decision-making were countless and huge in the 1990s.
In 2002, the amount of loss of state-owned assets written off by the three companies, SDIC, Xianke, and Foreign Trade, reached 3 billion yuan when they implemented debt-to-equity swaps. During the restructuring and withdrawal of state-owned enterprises in 2003, the amount of nonperforming assets of enterprises written off was as high as tens of billions, which far exceeded the total profits made by these enterprises over the years.
These five aspects exemplify key disparities between the resources allocated to Shenzhen SOEs and their contribution to society. The underlying causes are multiple and complicated, including the deficiencies and mistakes in Shenzhen’s reform and development of SOEs, as well as the inevitable mistakes in reform and opening up and the development of SOEs.
In an objective evaluation of the gains and losses of Shenzhen’s SOEs, the mistakes in the development of SOEs and the lessons in the reform cannot be covered up, and the historical role of the development of Shenzhen’s SOEs in the SEZ, as well as the important experiences the SOEs gained in reform, cannot be denied.
Translated by intern reporter Hou Xinle.
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