State enterprises carry dead wood

PUBLISHED : Monday, 28 June, 1993, 12:00am
UPDATED : Monday, 28 June, 1993, 12:00am

CHINA'S runaway economy is presenting state enterprises with many hopes and opportunities. How these companies respond to change is crucial to the development of the country.

Despite the bloom of private enterprise, 90 per cent of the country's output is still generated by state-controlled firms.

Restrictions are being eased on many industries as powers are devolved to the regions. But the inefficiencies caused by central planning have accumulated over the decades and state enterprises remain a massive drain on public-sector finances.

Huge government subsidies are thrown away to cover losses on goods which are left to rot in warehouses. The central planning system has, however, been used to conceal the true scale of state enterprise losses as buyers have been forced by the authoritiesto buy unwanted goods.

State-owned enterprise losses became more acute following the 1984 decision to reduce central controls and extend reforms from rural to urban industries. For some, this proved a rude awakening to market realities as subsidies and other perks long-enjoyedby state firms slipped away.

Research by analysts at stockbroker Smith New Court suggests that problems plaguing state-owned enterprises have gone largely unresolved.

The brokers point out that official estimates of direct state subsidies are equivalent to 2.5 per cent of China's gross domestic product (GDP) last year. Bank loans needed to cover the losses, amounted to three per cent of last year's GDP.

And almost one-half of all new commercial bank lending to state companies in 1992 went to finance the production of goods which no longer have a market.

Issuing shares in states enterprises has been seen as an effort to knock laggard companies into shape by encouraging a restructuring of operations.

Although the total number of private-sector companies makes up only 2.5 per cent of all of China's industrial firms, they create about half of the national production value.

Private sector employment last year grew by 8.5 per cent, compared to a two per cent rise in the labour force as a whole.

More than a quarter of all jobs created in non-rural areas came from private enterprises, which Smith New Court says should include the municipally-owned Town and Village Enterprises.

These include the collectives, which liberated from state restrictions, are showing themselves capable of turning a profit. It was not long ago that the idea of profit-centred collectives would have been the ultimate in counter-revolutionary thinking. Buttimes have changed and the authorities have recognised that ties binding the economy to moribund state enterprises must be cut away.