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SCMP Reporter

IF there is one branch of the Chinese state which ought to wither away, and fast, it is the moribund state enterprises.

  It is one of the very few areas in which foreign and Chinese economists agree on the direction of the mainland economy - and it is not difficult to see why.

  About a third of all employees in the state sector are redundant, about half of the state-owned enterprises (SoEs) are losing money, and subsidies to them add up to three per cent of the nation's gross domestic product.

   Many SoEs which enjoy preferential credit lines also find it hard to repay the loans. The loans are mostly from the specialised banks, which are to be converted into commercial banks under the financial and banking reforms.

   The facts suggest that unless SoEs are forced to shape up, they will continue to bleed the treasury dry, something a country desperate for funds can ill-afford.

   Some argue that nothing is as crucial to China's transformation from a planned to a market-oriented economy as the restructuring of the state sector.

    Ernest Stern, the World Bank's managing director, has suggested that the country's push for effective fiscal management and monetary discipline hinges on the success of state-sector reforms.

   Nicholas Kwan, senior economist at Merrill Lynch and Co, adds: ''Not until they have restructured the state sector can they press ahead with the other reforms.''    The state banks, for example, have argued that because of their substantial loans to SoEs, they cannot move ahead without genuine reform to the state sector.

   ''It is hard to argue either way, as reforms really have to move hand-in-hand. But, overall, I would agree that success of state-sector reforms holds the key to the transformation from a planned to a market economy,'' Mr Kwan said.

  And Beijing appears to be recognising the problem. Trevor MacMurray, managing director of McKinsey and Co's Hong Kong office, said: ''China has undergone a sea change in its attitude and approach towards the management of the state sector in a remarkably short period.''   Instead of grabbing the bull by the horns, it was treading with great care. Rather than forcing all the moribund SoEs to shut down, Beijing was embarking on a pilot project whose symbolic importance was paramount, but which would only scratch the surface.

  Paul Schulte, analyst at CS First Boston (Hong Kong), in a report on SoE reforms, says that the central government is sending teams to 16 industrial cities to liquidate one or two enterprises in each city which cannot be turned around.

  ''The central government has set aside seven billion yuan (about HK$6.24 billion) to cover loans forfeited in these bankruptcies,'' says Mr Schulte.

   And the plan includes the first meaningful audit of 10,000 firms, the dispatch of supervisory watchdogs to 1,000 ill-managed ones, and the implementation of a company law in 100 high-quality firms.

   Why the softly, softly approach? A look at the state sector's role will help explain why the restructuring has to be handled with such care.

   Figures culled from reports of independent US broking houses in Hong Kong show that:    Last year, SoEs hired more than 110 million workers, which is about the size of the workforce in the US, or the Asean countries. If their dependents were included, the figure would go up to 340 million - or 25 per cent of China's population under the state system.

    Based on the latest available figure in 1992, the SoEs' wage bill worked out to 309 billion yuan.

   Last year, SoEs accounted for 50 per cent of industrial output, and 44 per cent of retail sales.

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

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

   In the state sector, the capital intensity of each worker is four times as high as that of the non-state sector, but it absorbs at least 80 per cent of the formal credit.

   ''Given their absolute size and enormous contributions to economic output, the reform of the SoEs will be a mighty undertaking . . . it will not happen without some pain,'' says Mr Schulte.

   Because so many workers' livelihoods are tied to the SoEs, Beijing understandably has to be sensitive to the repercussions of exposing SoEs to market forces.

   It is slowly but surely experimenting with moves to revamp the ownership and management structure of some SoEs through corporatisation and, to an extent, privatisation.

   Some SoEs have gone public, others have invited foreign investors to inject funds and technology, and still others have been sold.

   ''But all of these still represent a very small portion of the estimated 200,000 SoEs in the country,'' said one economist.

   Yet another reason why Beijing is not tackling the SoE reform head-on is that related reforms on labour mobility and markets, housing, unemployment compensation, and other social security measures have yet to be fully put in place.

   These limitations notwithstanding, some economists believe that China can afford to be more daring in pushing the SoEs to be responsible for their own bottom line, or be forced into bankruptcy.

   ''To a large extent, the worries over the triangular debts and unemployment are somewhat overblown,'' Mr Kwan said.

   As it is, a big proportion of the workers in SoEs are under-employed, and are actually involved in unproductive social services provided by the SoEs.

   ''Because many of these workers also moonlight, the impact of the lay-offs may not be as serious as it has been suggested,'' he said.

   So far, the debate on state enterprise reform has tended to focus on how ownership structure should be reformed.

   ''The basic question, however, is efficiency - the application of commercial principles,'' said Mr Stern.

   To paraphrase a saying coined by paramount leader Deng Xiaoping: ''It matters little whether the cat is black or white, as long as it catches mice.''   There is no middle path between subsidy and competition. SoEs will become efficient only by exposure to market forces.

     ''Maybe the biggest problem is not so much the state sector itself but the determination of the government to deal with it,'' Mr Kwan said.

   And what better way to demonstrate the government's political will than to allow inefficient enterprises to go bankrupt to send home the message: shape-up or go under.



State sector holds key to future