For years Guangzhou's inefficient, debt-plagued state-owned companies with their almost unmarketable products have been among the country's worst performing. In strong contrast to the city's vibrant private and foreign-invested sectors, state firms continue to wallow in deepening pools of red ink. A recently published provincial survey revealed that realised profits at Guangzhou's 66 large and medium-sized experimental enterprises dropped 40 per cent during the first six months of the year - 30 of the firms reported losses. Perhaps most importantly, losses increased three-fold from 412 million yuan (about HK$383.16 million) during the first half of last year to 1.24 billion yuan. There are about 4,000 state-owned firms in Guangzhou, not including subsidiaries. That represents only about 8 per cent of the registered businesses in the city. However, state firms control about 60 per cent of the city's productive assets, or 150 billion yuan. Guangzhou's state sector also employs more than 60 per cent of the city's workforce, or 1.26 million people last year. About one-third of state employees are productively employed, resulting in a situation municipal officials often describe as 'three people eating from one person's rice bowl'. Wu Bai, director of research for Guangzhou's economic restructuring commission, said that finding silver linings in such dark clouds was difficult, but not an impossible task. Mr Wu admits the city's primary industrial sector faces daunting challenges. He also concedes that reducing Guangzhou's state-owned workforce will not be easy. However, Mr Wu points to some trends that provide room for optimism. Guangzhou's large state-owned group enterprises are in far better shape than their smaller counterparts, he pointed out. Such disparity was underscored by a survey published last week by the Guangzhou Municipal Social and Economic Research Centre, indicating that the debt-asset ratio at the municipality's largest state-owned firms stood at a reasonable 43.99 per cent - far lower than the 62.74 per cent recorded for large state firms, 68.44 per cent for medium-sized state companies, and 87.62 per cent for the smaller state-owned enterprises. The survey also found that return on assets for Guangzhou's large state-owned group companies stood at a respectable 2.55 per cent, compared with negative 6.81 per cent for small state-owned companies, and negative 3.31 per cent for medium-sized firms. The policy of zhuada fangxiao - or grasping large and viable firms and releasing or restructuring smaller ones - was basically correct, Mr Wu said. '[Guangzhou] does not have the large enterprise groups of Shanghai,' he said. 'We don't have a Baoshan Iron & Steel.' However, the city has been working to cultivate sectors in which municipal companies are able to manufacture to advantage, including chemicals, pharmaceuticals, beverages and paper products. To foster competitiveness in these areas, Guangzhou embarked on a wave of reorganisation this year that has seen 13 state company mergers and one bankruptcy involving assets of 640 million yuan. Moreover, Mr Wu said, the city had been able to rely on the job-creation ability of its vigorous tertiary sector to help re-employ those who had been made redundant by restructuring. For example, during the first quarter of the year non-state business, including household enterprises, absorbed about 10,000 of the city's 51,000 laid-off workers. Nevertheless, Mr Wu admitted, qualitative changes for most of Guangzhou's state-owned firms remained elusive, with progress excruciatingly slow towards the creation of the type of trans-regional, shareholding and integrated business groups the city aims to foster. How much longer the city is prepared to shoulder its state sector's mounting losses is another question.