Stronger State Firms or a Stronger Chinese Economy?

By Editorial board
Published: 2008-09-08

If not for the 98 private businesses on the list, China's Top 500 Enterprises, released last week, could instead be called the Top 500 State-owned Enterprises. In terms of profit distributions, the lists appear virtually the same.

Many analysts wouldn't agree with this viewpoint. Their argument being that this year, another 9 private enterprises made it to the top 500 list, is an amazing accomplishment that reflects the rapid growth of private businesses in China and the results of various economic reforms.

That argument seems to make sense, but becomes shaky upon further scrutiny. In reality, the list has told us that SOEs are increasingly controlling more resources and enjoying larger shares of profits.

There are 331 SOEs on the list, 19 less than last year, accounting for 66.2% of the whole list, as opposed to the 6.2% ratio garnered by private enterprises. In terms of profit, nearly 80% of the 500 enterprises' combined revenues are contributed by the SOEs.

In other words, the capacity of SOEs is strengthening and a larger share of profits are flowing and concentrating into the hands of SOEs.

Last year, the profits for some 150 SOEs that fell under the jurisdiction of central government (central-SOEs) exceeded one trillion yuan, mainly coming from from major industries such as oil and gas, telecommunication, and power generation. These enterprises also occupy the top ten ranking of the 500-strong list.

In contrast, the total profits made by all private enterprises on the list amounted to 105.5 billion yuan, about 10% of the central-SOEs earnings.

Let us contemplate another set of data - in 2007, the total profits for all large-scale enterprises, or those with an annual income above five million yuan, in China reached nearly two trillion yuan, yet central-SOEs accounted for half of the revenues.

Moreover, according to an analysis by the Federation of Chinese Enterprises, SOEs have been enjoying the highest profit margin - on average 6.56% - compared to all other businesses.

Central-SOEs aren't necessarily smarter in generating profits, instead, the above are the results of them having control over the most profitable and secured industries.

This power of control also means wealth; as these monopolized industries are mainly the foundations of the sectors concern.

Having controlled these foundations, any mid- or down-stream industries – mainly comprised of private businesses – in these sectors inevitably have to acquire the services or deal with the SOEs.

Moreover, the private businesses – unlike the SOEs – face steep domestic and global competition, thus they have less rooms to transfer their costs to end users.

The success of the SOEs also owes much to the reform spearheaded by the State-owned Assets Supervision and Administration Commission (SASAC) in the recent five years.

Following a series of massive restructuring and consolidations, these state-giants have developed absolute control and unshakable influence in targeted sectors and industries. The profits came hand-in-hand with new economies of scale.    

As the central-SOEs become more powerful, the sectors they occupy have become "restricted areas" for private capital. Coupled with macroeconomic controls over the past years, the government has basically discreetly disarmed any efforts by private businesses to enter these "restricted areas".

The SASAC is currently strategizing for another round of restructuring and integration, a move expected to further strengthen SOEs and their influence in the Chinese economy.

As the manager of state-owned assets, it is the duty and responsibility of SASAC to enhance the performance of SOEs through strategic planning. However, as the country's policy and decision makers, they should consider if their moves would truly benefit the Chinese economy as a whole and serve the utmost interest of the people's welfare.

To a certain extend, the SASAC has already remapped the Chinese economy in the past five years by reshuffling key players in various sectors and industries. In that process, it is hard to tell how the policymakers have balanced the interests of various parties from a larger national economy point of view.

The already wealthy central-SOEs have become wealthier, while the hard pressed private businesses have faced more difficulties. Amidst this gap, foreign capital is lurking around the corner.

Whether in boom times or during economic declines, these state-giants would have sufficient resources to rise above. This is evident from the "bonus submissions" paid out last year by SOEs to the central government to the tune of 60 billion yuan.

In contrast, we may one day witness the exuberance of private businesses being extinguished; and the monopoly players become bolder, flexing their muscles indiscriminately to ward off competitors.

This is not the future we wish to see under the national economic strategic planning and restructuring; and this should not be the final outcome of the 30 years of economic reform and opening-up.

The China's 500 Top Firms list has offered us some insights into the future of our economy, but that should not be the final results. We are lucky to be offered such data for reflection. The issue now is to consider how to improve the situation, and to prevent a future still under construction from becoming a reality.