China Briefing | Why now is the time for China’s leaders to bite the bullet on economic reform
The history of the past 30-odd years has shown that every major breakthrough in China’s reforms happened at a time when the economy was in a bind without little room for manoeuvre, which forced officials to push through painful change. China is now at that point again.
Back in the late 1990s, former premier Zhu Rongji launched a tenacious three-year plan to turn around the fortunes of ailing state-owned enterprises which seriously threatened to wear down the mainland’s fragile banking system and derail the Chinese economy. The critical situation was worsened by the outbreak of the Asian financial crisis in 1997, which created unprecedented economic uncertainties for the region’s economies.
But with sheer determination and through forceful measures, Zhu largely kept his promise, earning him the nickname “China’s economic tsar”. By the year 2000, tens of thousands of small and medium-sized SOEs were privatised, merged, or liquidated, resulting in more than 20 million employees laid off. Meanwhile, most of the remaining bigger firms began to turn a profit, with many of them listed on stock markets at home and abroad.
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Zhu’s economic reforms, of which restructuring state enterprises was a key part, helped pave the way for China’s economy to take off in the first decade of the 21st century, particularly after the former premier presided over the nation’s accession to the World Trade Organisation in 2001.
At the same time, unfortunately, the drive for SOE reform largely stalled and even went backwards in many areas. As the economy boomed with double-digit growth rates, SOEs expanded aggressively and reported faster revenue and profit growth, giving them little incentive to improve productivity and efficiency. Just a few years ago, some cocky officials at certain state banks even boasted to reporters that they felt “somewhat embarrassed” to announce their profitability as it was so good.
Now their smug smiles have long gone. As the Chinese economy is slowing down to single-digit growth amid global economic uncertainties, the SOE sector is again at a critical juncture with many of the major firms in the traditional industries and the energy sector facing a bleak future scenario of life or death.
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SOEs reported a 6.7 per cent decline in profits last year amid rising debt levels and excess capacity. As China’s construction boom has eased, the eight industries of steel and iron, coal, cement, glass, oil, petrochemicals, iron ore, and non-ferrous metals were particularly hard hit. All eight industries combined reportedly contribute between 70 and 80 per cent of the fall in industrial output and over 80 per cent of them are losing money. Without financial support from local authorities, many are on the brink of collapse if they did not get financial support from local authorities – they are commonly known as zombie enterprises.