This is a very interesting editorial that was featured in 南方日报 Southern Daily a few days ago detailing how private industry in China has been cut out by large SOE’s due to the enormous advatage their government connections have given them, most important being regulatory power over the market.
I have translated this from Chinese, original can be found Here
China’s Biggest Economic Threat Has Already Emerged
Ye Tan, Southern Daily
In the past few days, like a shooting star that is gone in a flash, the immeasurable amount of young female powerful elite has aroused people’s intense interest in the bagua or balance of finance and economic problems. Strip the cover off these ornamental surface issues, and the story behind the news is a refraction of private enterprises frantic inability to find a return on investment. Another just as important piece of news that lightly glided out of people’s vision: in 2006 State Owned Enterprise (SOE) economic performance increased by 18.2%, absolute profit rose, but relative decline, after experiencing the high growth of 2003 and 2004, centrally controlled SOE’s profit rate of increase declined by over 5%, central SOE’s have entered a declining passageway, the realization of over capacity and rampant production has taken a step closer to reality.
Private capital is unable to find a channel of investment, the commanding height of SOE’s monopolized profits are entering a decline, both sides folded together are the biggest threat to China’s economy. A key factor has been that until now, China has been unable to devise a way to efficiently use it’s resources. With the lack of high-efficiency enterprises, which are propped up by the internal demands of the market, this could imply the development of Chinese enterprises is unsustainable.
The worry of China’s SOE monopolized profits is being completely replaced by an even deeper worry: if the production of these high-grade, resource consuming gigantic enterprises see a decline in production, or if medium and small sized companies are unable to absorb the supply in raw materials provided by big SOE’s in China, what kind of economic situation will emerge?
This gradually recessive danger is emerging on the surface. The newest data from the State Statistics Department show that in 2006, raw materials and fuel wholesale purchasing prices increased by 6%, and that factory pricing of industrial products only increased by 3%. China’s capacity of production is in serious excess. The previous figures reflect the reality that the chain of raw materials and finished products between the upper and lower reaches of industry has become disconnected. The upper reaches of industry depend on price fixing power in order to increase production, and when they actively seek to make people admire their returns on investment, the lower reaches of the economy is left to do nothing but piece together a fight for survival. On the other hand, due to the decrease in profits for large-scale SOE’s, whose profits come from bank loans and the capital market, both which are almost completely owned by large SOE’s, we may yet see another push of state assets being shifted to the capital market.
Recently, this overcapacity has existed due to two main characteristics: the first is much of this phenomena been seen in the capital-intensive heavy chemical industry, for example: steel, electric power, petrochemicals, auto industry and construction materials etc. Secondly, government investment or government leadership takes up a considerable portion; the majority of industries experiencing overcapacity are solely dominated by large SOE’s. This reality warns us that the intentional and controversial bias in planning the allocation of resources has not achieved much success. Special privileged SOE.s in order to construct a high rate of return on investment, contrary to planning can create a devastating aftereffect.
Hong Kong Chinese University president Mr Liu Zunyi in the past pointed out that macro-economic in-stability is because of the bankruptcy of large scale enterprises, their failure will very quickly influence other companies. These failed companies faced with a heavy burden, will drag suppliers with them, and then suppliers will pull in other companies. This chain of events will ultimately lead to the closing of the banks, thus leading to a full-scale economic crisis. Even if it doesn’t lead to a full scale crisis, the dramatic reduction in costs by large companies in the heavy chemical and natural resources industries will still be hard for people to bear; banks, tax revenue, employment and the stability of society will all be seriously effected.
Both upper and lower enterprises can create a healthy industry chain through the means of implementing market adjustment to the pricing system, thus reaching a rough balance in supply and demand. Yet, due to the systematic differences in China’s upper and lower reaches of it’s economy, in reality what exists is a system of plundering, oppression and exploitation, leaving insufficient small companies with a thorough loss of space for making a profit. Today, with private capital losing space for survival, it is also time for the glacier like big companies to melt away.
This model will not only harm private industry concentrated at the lower reaches of the economy, but will sooner or later lead them to falsely accuse big industry for not allowing the enterprising of private companies, blind production, and the loss of global market price fixing ability. Increasing domestic demands and exports in order to solve this problem is not a realistic solution, expanding internal demand over the years has not seen significant progress: China’s trade surplus has already become the biggest drawback of economic development, leading to conflict at every turn. So-called expanding exports are no more than a meaningless term. The first step in solving these hard problems is immediately cutting preferential treatment for heavy industry. These man made special privileged companies simply in the pursuit of quick profits, are endangering China’s long-term economic security.
MIT processor Huang Yasheng’s research has indicated that China’s small and medium sized entrepreneurs after the golden boom of the 1980’s and early 1990’s have sunk into decline. The scope of China’s private industry is still incomparable to the peak time of growth for India’s private industry at the beginning of the 1980’s. (It created large barriers to limit the nationalization of banks, restriction of foreign investment, and the heavy hindrance of private enterprise.) The exhaustion of China’s private companies can be seen everywhere. Private industry is still unable to transgress the market entry threshold, large declining private companies have been bought out by SOE’s, investment faces obstructed channels, entrepreneurs are often chased off by the government, thus forth large private entrepreneurs seek the refuge with SOE’s, using a “Mixed economic model” to achieve success. These conditions without exception reflect the helplessness of private investment. Central SOE decrease in profits, represent private investments lack of a fair competitive platform, these hidden dangers are already unable to be covered up.
We almost always seem to fall into a state of hallucination upon hearing the cheery figures of China’s SOE’s, but their profit sources and investment return should warn us, this hallucination cant sustain for long, as this non-market economy which is the biggest threat to China, has already begun to emerge.