State-owned Enterprises

Ex-Morgan Stanley Asia head warns against ‘Japan-like’ approach to Chinese SOE reform

Although it is a ‘very important challenge’, Roach sees no risk of any imminent crisis if no major progress is made in the short term, adding potential lay-offs from this round of SOE reform is likely to be limited

PUBLISHED : Friday, 15 December, 2017, 6:45am
UPDATED : Friday, 15 December, 2017, 6:45am

Vast debt reduction in China must go hand in hand with state-owned enterprise (SOE) reform, according to a renowned US economist, but he has serious reservations over Beijing’s current “Japan-like approach with Chinese characteristics”.

Stephen Roach, a former Asia chairman of US investment bank Morgan Stanley, now a Yale University management studies professor, said SOE reform is key since corporate debt is the main driver of China’s rising debt burden, of which SOEs are the biggest contributors.

“[As the] focus on deleveraging intensifies, this will require more progress with respect to SOE reform than China has seen [for many years],” he said.

China’s non-financial corporate sector saw its debt surge from 96 per cent of the nation’s gross domestic product (GDP) in 2008 to over 250 per cent last year, accounting for 60 per cent of the rise in the nation’s total debt burden, he noted.

Speaking at a round-table discussion moderated by property tycoon Walter Kwok Ping-sheung – whose foundation supports graduate students at Yale’s Jackson Institute of Global Affairs – Roach said the so-called “mixed ownership” reform, where a string of companies were invited to become SOEs’ substantial shareholders to drive reform, worries him.

To me, this is a worrisome repetition of a Japan-type keiretsu approach to addressing SOE reform, I do worry this will introduce new risk into the Chinese system
Stephen Roach, former Asia chairman of US investment bank Morgan Stanley, speaking in Hong Kong

He cited the case of telecoms major China United Network Communications, which was billed as a “model” for other SOEs to follow, with the sale of a 35 per cent stake July this year through shares issuance to 14 private and state firms, including some of the nation’s largest internet and e-commerce firms.

“This is considered the model for SOE reform going forward, but I’m not so sure of that at all,” Roach said. “To me, this is a worrisome repetition of a Japan-type keiretsu approach to addressing SOE reform, I do worry this will introduce new risk into the Chinese system.”

Keiretsu refers a group of Japanese companies with interlocking business relationships and shareholdings, which made them inflexible and difficult for outsiders to push for reform and restructuring.

Although SOE reform is a “very important challenge”, Roach saw no risk of any imminent crisis if no major progress is made in the short term, adding potential lay-offs from this round of SOE reform is likely to be limited.

He estimates SOE reform will result in less than two million job losses in the five years to 2020, compared to over six million annual jobs lost between 1998 and 2000 at the height of the previous round of aggressive SOE reform led by former Premier Zhu Rongji.

With major changes expected in a few months for top positions in charge of China’s economy, he said while “China has got solid talent who will move into those key positions, [whether] they have the vision and determination to address the SOE problem the way Zhu did, that remains to be seen.”

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