China economy

Private players feeling squeezed out by Beijing’s support for state companies

Private and foreign players say Beijing’s official support for state and domestic competitors leaves them struggling to survive out in the cold

PUBLISHED : Wednesday, 04 October, 2017, 10:03am
UPDATED : Wednesday, 04 October, 2017, 10:26pm

Zhou Seng calls himself lucky. After weathering an onslaught of government orders to cut excess industrial capacity over the past year, his cement plant in Wuxi in the eastern province of Jiangsu is still up and running.

Zhou said the mid-sized facility his father set up more than a decade ago was unlikely to be shut down by the city government, given the tens of millions of yuan he had spent on equipment upgrades to meet China’s ever-stricter environmental requirements.

But the business’s prospects were still gloomy because the plant risked being gobbled up by a big company as Beijing encouraged large, usually state-owned, enterprises to merge into world-class competitors, he said.

“These past two years have been really hard for me,” Zhou said. “The government has pushed for the cement industry to become more concentrated and all the market resources are tilted towards SOEs.”

The preference for state-owned enterprises is the latest in a long line of industry policies introduced three decades ago, a concept borrowed from Japan.

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The policies set out the national direction for various industries, with favoured sectors and types of players supported through subsidies, low-interest bank loans, export tax rebates and other official help.

But the approach is attracting criticism that the government’s heavy hand in the economy is creating an unequal playing field for SOEs, private companies and foreign firms.

Smaller players like Zhou feel the inequity keenly. For example, Zhou has to pay for coal for his plant in full and upfront. If his business were an SOE, he would have several months to pay for his fuel.

“This is unfair,” he said. “Private companies are not treated the same as SOEs. How can the government just decide we are the losers who should disappear from the market?”

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Leading Chinese economist Wu Jinglian agrees that it is time for a policy overhaul in the interests of fair competition for all players.

Wu, a researcher from the State Council’s Development Research Centre and an adviser to China’s policymakers, said in Beijing last week that a shift in direction was essential.

“It’s life or death [for China’s economy]. Policymakers must choose the kind of industry policies needed to guide China’s development,” Wu, 87, said.

For the past two years, the main economic focus has been on cutting excess industrial capacity, property inventory and financial leverage, with the authorities deciding which sectors and players make it through to the next round.

In the cement sector, China plans to expand the combined market share of the 10 biggest producers from the nearly 42 per cent last year to 60 per cent by 2020 through mergers and acquisitions, according to an action plan drafted by the China Cement Association, a semi-official industry federation. The biggest cement producer by assets, the state-owned China National Building Material Group, was formed last year by merging with China National Materials Corp (Sinoma), an SOE.

But Wu said picking winners was an outdated approach.

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What China needed were policies that could ensure information was shared and various players competed fairly, leaving business decisions to entrepreneurs, he said.

“Since China introduced industry policies in 1987, the government has been inclined to blame ‘market dysfunction’ too often,” he said. “They like to see market dysfunction as an inherent defect of the market system, thus opening the door to boundless government intervention.”

China’s market economy emerged from the shackles of the planned economy in the late 1980s but it has never really been free of government intervention. The 2008-09 global financial crisis reinforced the idea among Chinese officials that government control was essential to market order.

Nevertheless, in 2013, China’s leaders led by President Xi Jinping publicly said they would let markets play a “decisive” role in allocating resources, vowing that the government would “play its functions better”. At the same time, state-owned enterprises would continue to play a leading role in the economy, they said.

The message may have been mixed but the results are self-evident. As of the end of last year, the assets of SOEs controlled by the central government had expanded by 80 per cent from 2013 to 50.5 trillion yuan (US$7.59 trillion).

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Although they have about 40 per cent of China’s industrial assets, the average SOE return on asset was 2.8 per cent in 2015, versus 10.6 per cent for private firms, official data showed.

But China’s industrial ambitions go way beyond its own borders, raising fears abroad that competitors will have to go up against heavily subsidised Chinese rivals.

In 2015, Beijing announced “Made in China 2025, a strategy modelled on Germany’s “Industry 4.0” programme of smart manufacturing. The plan identified 10 sectors for China to dominate locally but in which it should be competitive globally. These included advanced medical technology, robotics, semiconductors and new energy vehicles.

Fearing the world would be dominated by an economy that does not play fair, the European Union Chamber of Commerce in China said in a report in March that the policy was a waste, a challenge and highly problematic.

The chamber argued that Chinese firms would be given an unfair advantage through government support and their foreign competitors will be given limited or no access to Chinese markets.

For instance, foreign makers of electric cars were being pressed to turn over their battery technology to Chinese partners in exchange for being able to manufacture and sell in China, the chamber said.

European business is facing intense pressure to turn over advanced technology in exchange for near-term market access,” it said in a report.

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Larry Hu, chief China economist with Macquarie Capital, said some of China’s industry policies, such as the development of high-speed rail, had been successful.

The central government has spent an estimated 2.4 trillion yuan building 22,000km of high-speed lines over the last decade to have a bigger network than the rest of the world combined. Relying on its value for money, China has beaten out industry leaders such as Japan and Germany to win a range of high-speed rail construction contracts overseas.

On a trip to China in September, Singaporean Prime Minister Lee Hsien Loong said China’s “national level transformation” had touched many aspects of Chinese society, from motorways to telecommunications networks, and had also changed people’s lives and outlook.

Hu said government spending was needed in highly risky sectors involving a large amount of initial investment.

“However, the government should always be cautious not to cross the line,” he said.

State sector investment continues to grow, expanding by 11.2 per cent in the first eight months of this year from a year earlier, according to the National Bureau of Statistics. But the rate of investment by private players slowed to 6.4 per cent, down from 6.9 per cent in the January-July period.

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The Communist Party said late last month that it would support and protect private entrepreneurs but

Zhou, the cement plant owner, is not convinced.

“A neighbour had a pig farm. He used to receive agricultural subsidies every year but when China decided pig farms were polluters two years ago, all farms in our neighbourhood were forced to shut down,” he said.

“The neighbour asked for compensation, and some local government department thought the amount he required was unreasonably high.

“I was there when the neighbour was told by an official that hundreds of inspections, fines and penalties awaited him if he continued to ask for compensation.

“This is how our interests are protected.”