China’s SOEs

China’s SOEs

China opted for democracy– with Chinese characteristics – and its SOEs are an example of financial democracy. China’s amazing SOEs have drawn lots of attention but few Westerners have a complete grasp of the various roles played by SOEs. Their utility is obvious from the point of view of a neutral government shaping national consensus – but not to anyone without experience in governance or  who believes that individual gain and enterprise efficiency are goods in themselves.

A sympathetic treatment of China’s SOEs has yet to be published in English – hardly surprising since the West’s theories and practice of governance are at a low point. And it has – deliberately, for how could it be otherwise – escaped the notice of Western media that the most profitable, most valuable companies on earth are Chinese SOEs. What possible good could it do to allow such treasures to fall into private hands – the very hands that have proven so incompetent, dishonest and destructive to our own economies – Western financial institutions?

Spouting ostensible free market ideology, the pro-creditor mainstream rejects what the classical economic reformers actually wrote. One is left to choose between central planning by a public bureaucracy, or even more centralized planning by Wall Street’s financial bureaucracy. The middle ground of a mixed public/private economy has been all but forgotten, denounced as “socialism.” Yet every successful economy in history has been a mixed economy. Killing the Host. Michael Hudson’s new book

The world’s four largest banks are from China, while the United States has only two in the top 20, according to the CNBC citing recent rankings from S&P Global Market Intelligence. Read more..

SOE hedge funds are also the most profitable in the world. CIC, which had assets worth $746.7 billion in 2014, has achieved a yearly averageinvestment return of 5.66 percent since being established in 2007. Its total assets rose by14.3 percent in 2014 from a year earlier, according to its annual report last year. Read more..

Chinese government’s share of gross domestic product (consumption for public goods such as defense and civil services and investment in assets like highways and bridges) at around 14 percent of GDP in 2013, versus 20–40 percent in the advanced economies. So reform and marketization in our terms does not mean withdrawal of government from the economy but rather redeployment in public goods and an enlargement in participation. And too, China is just coming around to believe that intervention in the economy as a pro-competitive regulator is necessary and good. Read more.. 

St Louis Fed: “Is Government Spending a Free Lunch? — Evidence from China – Federal Reserve Bank of St. Louis”. Read more..

Contrary to Western propaganda, the Chinese people live in a communist country, which means they own the means of production. Thus, there is no private real estate in China, not one square millimeter. All of the banks are owned by the people and China’s treasury prints its own money. The entire media and press industry is people-owned. All the phone companies, airlines, railroads and utilities are people-owned. Every key industrial sector is dominated by people-owned businesses. More and more of them are joining the Fortune 500 Biggest Corporation List and they are some of world’s most profitable concerns. China still very astutely and slowly changes tariffs, so that Chinese businesses can get established, with many of them, public and private, establishing themselves as national and international champions. President Xi and the CPC know that Western, neoliberal reforms are a gigantic Trojan horse to wreck and then exploit China’s economy and people, as well as to destroy communist rule. Thus, Xi Jinping, by invoking the deepening of reforms, bluntly means they will be implemented fully within the framework of China’s communist economic system, on their terms and for the benefit of the vast majority of the people – not Wall Street, Western banks and corporations. Since becoming president, Xi has come out full force against the West’s phony “universal values”, “human rights” and “pluralistic democracy”. He and the CPC know that these have been and continue to be battering rams to destroy national governments and install stooge leaders, who open the floodgates to Western colonialism. One only has to look at places like the Ukraine, Georgia, Yugoslavia, Honduras, Guatemala, Hong Kong and too many others to list, to see why the Chinese people are not only fighting for their freedom, but for their livelihood and lives. Xi’s administration openly scorns the West’s well-worn, but sadly successful color revolution playbook, and like Russia and India, has passed strict laws against foreign “non-governmental” organizations (NGOs). These countries have called this evil for what it is. They are nothing more than CIA/MI6/DGSE/BND fronts, to overthrow countries that are not prostituted, Western client states. Read more..

Size of SOE Sectors in Selected Countries: Assets and Revenues Held by SOEs as Percentage of GDP (2011). Source: OECD. 

China 145 / 26
India 75 / 16
Russia Brazil  64 / 16
South Korea  51 / 12
France 48 / 7
Indonesia  23 / 8

From 2010 to 2014, the growth pace of the public sector’s net assets averaged 8.6 percent, according to the finance research institute under the People’s Bank of China, the central bank. Total net assets of China’s public sector, including government executive departments and state-owned enterprises, was 113.8 trillion yuan (US$17.2 trillion) by the end of 2014. The research also showed that the debt risk of the public sector is under control, with debt growth dropping from 26.6 percent in 2011 to 13.2 percent in 2014. Read more..

SOEs. The share of state-owned enterprises in industrial output continues to drop steadily, from 78% in 1978 to 25% in 2015. Private industry far outstrips the value added in the state sector, and lending to private players is growing rapidly. In a recent paper, Chang-Tai Hsieh and Zheng Song focus on aggregate growth in the industrial sector between 1998 and 2007 and show it was the reform of the surviving state-owned enterprises that accounted for the greatest growth boost (over 13 per cent), while the release of labor and other resources into the more productive private sector made the lowest contribution to growth (3.2 per cent). Read more..

China’s institutional environment blurs the boundary between SOEs and privately owned firms, which permits the state to exercise significant influence over firms irrespective of its equity ownership stakes and where firms of all ownership types compete for state-generated rents. …Private ownership in China does not necessarily mean autonomy from the state. Indeed, many private firms in China bear a striking resemblance to SOEs along the dimensions typically thought to distinguish SOEs from POEs, including ready access to the instruments of state power and state largesse, proximity to the regulatory process, and little autonomy from discretionary state intervention in business judgment. Read more…

Here’s a table from The Economist that article summarizing some of the many varieties of Chinese state capitalism:

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China’s fixed investment is over 40 percent of GDP, more than double the U.S., while statistics confirm China’s efficiency of investment in generating growth is higher than that of the U.S. The St Louis Federal Reserve estimates that the multiplier on Chinese government spending is two. In other words, the economy is creating surplus capital to replace that which is destroyed. Read more.. 

Government-backed venture funds raised RMB1.5tn – US$231 billion – in 2015, bringing the total under management to RMB2.2 trillion, Bloomberg reported, citing data compiled by consultancy Zero2IPO Group. Consultancy firm Preqin said the pool of money – housed in 780 government-guided funds whose capital comes from tax revenue or state-backed loans – was five times the sum raised by other venture capital firms last year and represented the world’s largest pot of money for startups. Read more..

Here’s a typical Chinese SOE: China Electronics Corporation (CEC), the largest state-owned IT company in China, has become an important pillar of national information security. Rui Xiaowu, chairman and secretary of the CEC’s party leadership group, said the company had been operating the “network security systems project” since 2011. It is based on national strategic needs, in order to service key industries and guarantee the nation’s important information systems and critical basic networks are secure.

The state-owned conglomerate has constituted an independent and controllable information security protection system, which can find, prevent and replace potential risks and attacks. Rui says it has also made a breakthrough in core technologies which cover computer, internet, industrial control and security service, reaching the international advanced level. Established in 1989, CEC administrates a constellation of IT companies in China. It controls 61 second-level subsidiaries, including 13 listed holding companies. It also has more than 70,000 employees. The company provides design, development, manufacturing, sales and services in semiconductor and electronics components, computer and core computer parts, software and system integration, telecommunication and consumer electronics.It also engages in e-commerce, logistics and information service, electronic engineering design and contracts. More..

SOE Reform Progress Updates

July 1, 2016: Industries such as nuclear power, aerospace, shipping, defense and high speed rail areexpected to become the main targets of strategic restructuring in the second half of this year, the report said. June alone saw major progress in multiple merger cases among State companies. BaoshanIron and Steel Co and Wuhan Iron and Steel, two of the country’s largest steelmakers, announced on Sunday to suspend share trading on the Shanghai Stock Exchange amidongoing reshuffling.China Minmetals and China Metallurgical Group, both ranked in the Fortune Global 500 list, held a restructuring meeting earlier this month, a key step forward in what would be thelargest merger in the country’s metals sector. Meanwhile, several other listed SOEs, including CEC CoreCast Corp, Ningxia OrientTantalum Industry Co. and CNPC Jichai Power Equipment Co, have announced plans torestructure in the near future. More..

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