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SOE monsters

13 November 2012 By John Foley

State-owned enterprises are China’s economic version of the giant vampire squid. The 20,253 industrial companies owned and controlled by the government soak up capital, and pay little out. Their costs are low and their bosses powerful. If China’s new leaders are serious about making households wealthy, they need to make these industrial giants behave more like normal companies.

China’s SOEs feed on cheap credit. One reason is their party ties: it’s easy for powerful bosses and party chiefs to pressure local bank managers, particularly at state-owned banks. The other is that SOEs come with an implied state guarantee. The idea of an SOE, or a bank that lends to one, being allowed to fail outright is virtually unthinkable. Given the choice, banks would rather lend to safe borrowers at low interest rates.

Little of what goes in comes out. Earnings at the 117 centrally managed SOEs have grown by 20 percent a year for the past eight years, but dividend payout ratios are often just 10 to 15 percent of earnings. Excess funds are either reinvested, or deposited with banks to help finance more heavy investment. That helps explain why corporate deposits have overtaken household deposits in the past decade to reach 80 percent of GDP, and why China’s consumption as a percentage of its overall expenditure remains stunted.

A tough shareholder would demand higher dividends. But SOE bosses are just too bedded in. Many are party secretaries and de facto vice ministers who rank above the state asset manager in the government hierarchy. At this week’s 18th Party Congress, the watchword from SOE bosses was “stronger and better”. With half of urban employees working for SOEs at the end of 2010, the clout their companies wield is huge and growing.

If China’s new leaders are serious about growing household incomes, they will need to squeeze state-owned enterprises and get some of that capital flowing to services and private sector companies. At the least that means beefing up supervision and eventually appointing bosses who aren’t also politicians. If the squid isn’t tamed, it will suck the vitality out of China’s economy.


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