Zhu Rongji

What Trade Overhaul?

PUBLISHED : Saturday, 10 December, 2011, 12:00am
UPDATED : Saturday, 10 December, 2011, 12:00am


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'People say that in state-owned enterprises, one man works, one man watches and one man makes trouble,' former premier Zhu Rongji once quipped. He came up with a simple solution: get rid of two of the three.

But while Zhu, a reformist with a direct approach, had an undeniably dramatic impact on the mainland economy as vice-premier from 1991 and then premier from 1998, a glance at the numbers shows he was only partly successful.

Indeed, the restructuring of the state-owned industrial sector has slowed significantly since China gained entry into the World Trade Organisation in 2001.

'The reforms of the previous decade, when Zhu took a scythe to state-owned enterprises, have been very absent in the last 10 years,' said Fraser Howie, managing director at CLSA Asia-Pacific, an independent brokerage and investment group, and co-author of the recent book Red Capitalism.

Referring to enterprises charged with advancing the nation's interests, he added: 'Instead, we have seen national-champion companies take on monopoly-type roles in many sectors, not as the result of competition, but by virtue of government edict and having access to artificially cheap input costs.'

On the face of it, today's state-owned enterprises (SOEs) appear far more profitable and competitive than any that were around 10 years ago. According to Ministry of Finance data, state firms booked a total profit of 283.38 billion yuan (HK$292 billion) in 2000. By 2010, that figure had risen sevenfold to 1.99 trillion yuan. The increase outpaced revenue growth, which rose fourfold to 30.33 trillion yuan over the same period.

That would seem good news for Beijing. Between 2000 and 2010, return-on-equity ratio at SOEs rose from 4.9 to 10.2, meaning today they are creating twice as much shareholder value for the government.

The apparent transformation of SOEs from money pits to money-spinners has been accepted by most mainlanders as fact.

'In the past 10 years, SOEs, including the state-owned commercial banks, have gained the most from China's reform,' Long Yongtu , China's chief negotiator for WTO accession, told the Southern Weekly. 'The overall economy has been so good that even pretty stupid SOEs could do well without much effort.

'But good days also mean lacking the pressure or impetus to further reform,' Long added.

A popular saying in Zhu's time, when sweeping efforts were being made to downsize and privatise SOEs in the run-up to China's WTO entry, was guotui minjin, or 'the state retreats while the private sector advances'. Since the 2008 financial crisis, preferential access to stimulus-directed credit has proved a bonanza for many state firms, and that saying has resurfaced with a twist: guojin mintui, or 'state advances, private sector retreats'.

But a closer look at the finances of SOEs shows their newfound success is not all that it seems.

In a 2009 study for the Hong Kong Institute for Monetary Research, economists Giovanni Ferri and Liu Li-gang tackled the question of whether SOE profits were 'real'. They studied official finance figures for 250,000 mainland firms with annual sales over 50 million yuan between 2001 and 2005. Their conclusion: 'SOE profits might be overstated since they have historically benefited from subsidised bank credit.'

More specifically, they wrote: 'SOEs' profits would have been entirely wiped out if SOEs were made to pay the same interest rates as otherwise equivalent private enterprises.'

According to Howie: 'SOEs today have incredible power and influence both politically and economically - more than they were probably ever intended to have, and it would be very difficult for anybody coming in to try to break this state-driven model now.'

It appears Zhu's success was only partial because he fell short of his original goal of cutting SOE employment by two-thirds.

There were around 106 million people working as full-time staff in state-owned enterprises when Zhu took office in 1998. That number had plunged to around 70 million by the time he stepped down five years later - meaning almost one in three staff members at state companies lost their jobs.

Which begs the question: assuming the people who actually do the work survived the cuts, is it the ones watching or the ones making trouble who are still hanging around?