Mon, Sep 24, 2018 - Page 7 News List

China’s imperial growth delusion will not die

By Anjani Trivedi  /  Bloomberg Opinion

The big state-owned Chinese enterprise is back. However, this time, it is not looking sturdy enough to prop up the nation’s economy.

As growth stumbles, Beijing is falling back on a tried and trusted solution: using large, government-backed companies to spur activity.

That is squeezing out private and small firms.

The economy certainly merits concern. Trade frictions and Beijing’s crackdown on the underbelly of the financial system have combined to sap confidence. Higher borrowing costs, weak household spending and rising prices point to the beginnings of what could be a wider consumption downgrade.

Meanwhile, fixed-asset investment growth is near record lows and the fiscal situation is looking increasingly constrained.

A superficial reading suggests the renewed pulling of state levers is working: Chinese industrial company profits are humming along, climbing 16 percent in July from a year earlier. Earnings at state-owned enterprises (SOE) rose 24 percent, almost double the 13.4 percent rate for private companies.

A closer examination presents worrying signs. While upstream industries, such as mining and energy, posted gains of more than 100 percent, manufacturing sectors, such as machinery and equipment, slowed sharply.

Drill down through other encouraging data and there is a similarly mixed picture. A measure of Chinese companies’ ability to service their debt has improved, leverage levels have stopped rising and their liquidity in the form of cash to short-term debt is at its highest level in a decade.

However, for private companies, measures of debt are still broadly climbing. They also lack the preferential access to cheap credit of their state-owned counterparts.

Operating conditions for small companies are getting worse, they are holding inventory for longer and the time it takes them to convert working capital into cash is increasing, Goldman Sachs Group Inc found in an analysis of more than 4,000 Chinese companies.

Key to the resurgence of gargantuan national champions, such as China State Construction Engineering Corp, have been supply-side reforms including strict curbs on environmentally unfriendly companies and factory closures in industries with overcapacity. Chinese President Xi Jinping’s (習近平) Belt and Road Initiative has also driven business their way.

These policies have pushed out marginal players.

Meanwhile, the wide-ranging campaign to reduce debt has hurt demand and left private, smaller companies in the lurch.

The number of money-losing private industrial companies jumped about 40 percent as of June from a year earlier, while the number of unprofitable state-backed firms stayed flat.

China has a long history of using state-owned behemoths to drive economic activity — dating back to imperial times. Such industrial giants first appeared during the Qing Dynasty in 1864, as the government attempted to revive a weakened economy after the end of the Taiping Rebellion.

What little industrialization resulted from the so-called Self-Strengthening Movement “was characterized by a focus on heavy industries’ serving the government’s military and defense purposes,” as historians William Goetzmann and Elisabeth Koll wrote in A History of Corporate Governance Around the World: Family Business Groups to Professional Managers.

One difference this time: Beijing has talked about bolstering small and medium-sized enterprises through legal protections and providing more credit.

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