Cycle of debt at heart of problem

PUBLISHED : Monday, 26 September, 1994, 12:00am
UPDATED : Monday, 26 September, 1994, 12:00am

THE reform of state enterprises in post-Mao Zedong China has been a key area of change in the Chinese economy. In its simplest sense, policy has been encouraging the introduction of more market-orientated practices and greater autonomy in this sector with a view to reducing, or, in some cases, removing the burden these companies represent to the state.

China's 70,000 state enterprises account for half of its industrial output.

In the first quarter of this year, as many as 49.6 per cent of them reported losses, 15.4 percentage points up from the same period of last year.

Output by state enterprises in 1993 grew by only 8.9 per cent, against 40 per cent from collective firms and more than 50 per cent from rural enterprises.

Last year, state enterprises hired more than 110 million workers, which is about the size of the workforce in the United States, or the Association of Southeast Asian Nations (ASEAN). By the end of the century, the sector needs to employ a further 280 million workers to avoid huge unemployment problems in China.

If their dependents were included, the figure would go up to 340 million. There would then be 25 per cent of China's population under the state system.

State enterprises in China are on the frontline of macro-economic change and current challenges to the state structure, both economically and socio-politically.

They present the state polity in Beijing with some of its biggest challenges, which, if not resolved, would threaten to overwhelm the ability of the state bureaucracy and the policy makers to determine economic policy and policy outcomes.

World Bank economist Fan Qimiao states in a recent article that reform at state enterprise level began in 1979 to improve economic efficiency.

From 1979 to 1983, there were experiments intended to enlarge enterprise autonomy and expand the role of financial incentives inside the old planning system.

A second stage of reform came from 1984 to 1986, affecting the taxation system and increasing the emphasis on profit and its retention.

A double-track system was established and, after 1987, the influence of market forces was included with the contract management responsibility system (CMRS).

Mr Fan said: 'The main purpose of these measures is to reduce government intervention in the running of state enterprises and to make them financially independent, and to introduce profit rather than plan fulfilment as the indicator of enterprise performance.' Restrictions were lifted on the non-state sector, while state enterprises were kept under government control.

By 1990, the non-state sector accounted for 40 per cent of industrial output and 63 per cent of employment.

Tremendous strides have been made in reforming this key part of Chinese society. But there remain some fundamental structural problems that go to the heart of the economy.

In the first, the World Bank is keen to support the changes already in train, but it is concerned that the Beijing policy makers defiantly support soft policy constraint.

Under the hard policy constraint, economic realities, including bankruptcy, liquidations and redundancies, would become an everyday reality as in the West.

Economic reform with Chinese characteristics appears to be firmly embedded in the realm of soft policy constraint, to avoid serious social dislocation if many state enterprises go broke.

There is no social welfare system - or, to date, a tax structure to support one - to act as a net for people falling outside state enterprise employment, and who cannot get a job in the private sector.

An employee's welfare, the education of that person's family and even their accommodation is, to a large extent, in the hands of the state enterprise.

Under the soft policy constraint, dual pricing, which in many cases is linked to quotas, is common as are its associated distortions.

A distortion linked to the soft policy constraint is the problem of triangular debt.

Triangular debts are where state enterprises and banks are in debt to each other. The debt chains occur when enterprises or departments are unable to pay off their debts to other organisations because they themselves are owed money by yet more enterprises.

In some companies, the debt chain has grown to previously unheard of proportions. China's largest iron and steel works, Anshan, for example, owes other enterprises six billion yuan (about HK$5.4 billion) and, in turn, is owed eight billion yuan.

Individual Chinese economists have claimed Beijing needed to make available credit of up to 1,000 billion yuan to clear all triangular debts.

Last year, there was no improvement in the debt owed by state firms, which reached 56.9 billion yuan, accounting for 48 per cent of their profits, while they remained plagued by cash shortages, with billions tied up in triangular debts owed to each other.

Private sector economists estimate that triangular debt among state enterprises is as high as 600 billion yuan, equivalent to 20 per cent of the country's money supply.

Official government statistics show China's state-owned companies owed each other 360.4 billion yuan at the end of June, up 78.4 per cent from a year before.

In the past 15 years, state enterprises have accounted for about 66 per cent of total investment, of which more than 70 per cent was in industry.

The big problem for state enterprises, said Morgan Stanley economist Michael Taylor, was their desperate under-capitalisation, even to the extent that they relied totally on banks, in some cases, even for their basic working capital.

This triangular debt problem is at the heart of many troubles facing economic reform in China. It exists in many aspects because the soft policy constraints are being followed.

While economists are focusing on China's overheating and expanding economy, it is likely state enterprises will wade out of this debt pit.

The growing influence of the price market mechanism in China and the increasing autonomy of these organisations holds out the prospect that many may make it out of the debt mire.

Yet the triangular debt cycle represents a large structural weakness in the Chinese economy and capital structure.