China creates new giant state-owned enterprises

The biggest economic theme in China over the next six to 12 months is likely to be “a surge in domestic mergers and acquisitions”, says David Millhouse for Bloomberg View. With the authorities already curbing “irrational” overseas acquisitions by Chinese firms, the next step is likely to be consolidation of state-owned enterprises (SOEs), especially in key sectors such as coal, power, heavy equipment manufacturing and steel. The mega-deals are already underway: China Cosco Shipping offered $6.3bn for Orient Overseas International in July, for example.

Getting these reforms right is vital, says The Economist. In the 1980s, when China was opening up to the world, “the state sector dominated its economy… a big factor behind China’s remarkable growth since then has been the relative decline of SOEs… they account for less than a fifth of output today”. Yet these mega-mergers are likely to concentrate “even more power in the hands of a few”. The risk is that these new giants will “crowd out private investors, hogging capital and allocating it poorly”.

In recent years, the financial performance of SOEs has been “heavily driven by big increases in debt, rather than improvements in underlying profitability”, says Andrew Batson in The Wall Street Journal. “Burdened by poor investment decisions, state-owned firms are falling further and further behind China’s vibrant private-sector firms” and becoming a drag on growth. That’s one reason driving the mergers. Yet it is not clear that there is the political will to shut down or sell chronic poor performers, nor to reduce credit support to SOEs, which gobble up a disproportionate amount of Chinese bank loans.

Indeed, the SOEs’ debt pile now amounts to 120% of Chinese GDP, says Shuli Ren for Bloomberg Businessweek. The authorities unveiled an aggressive reform agenda in 2013, yet so far it has been “all bark, little action and entirely no bite”. Yet that could all change if Wang Qishan, a close ally of President Xi Jinping, gets an expanded role at the crucial Communist Party Congress this autumn, say Tom Mitchell, Gabriel Wildau and Henny Sender for the Financial Times. Wang was deeply involved in the restructuring of the state-owned banks in the early 2000s and is regarded as “the sort of tough enforcer and political infighter needed” to take on the vested interests that have stifled previous efforts at reform.