China’s reform are not targeted at state owned enterprises

China’s reform are not targeted at state owned enterprises

China’s economic and political reforms are announced and TextileFuture reported on the topics but we would like to add a few more points on the state owned enterprises that seem not to be targeted, as well as on other aspects

Observers miss specific reforms for China’s state owned companies, because most of these report overcapacity, corruption and distortions and in a way they discriminate the private business sectors.  There China’s government seems to not exercise particular guide lines. It does not talk about breaking-up such entities, or consolidating wasteful industries such as steel and automotives. Often they are also conglomerates involved in a diversity of activities and sectors.

However there is one important fact entangling state owned enterprises, the plan is that these companies have to boost dividends in order to deliver 30 % (15 %) of after tax profit to the government treasury by 2020. In turn these means should be redistributed to households. It might lead to another situation that the national social security fund would gain cash and end up with larger equity stakes in companies. In addition state owned enterprises will not be capable of delivering the 30 % target without forcing their stock exchange listed subsidiaries to pay out ordinary dividends to the common shareholders. State owned companies make up for more than 80 % of the value of Chinese listed companies and exposure to Beijing’s policies form part of the game. For the past four years, this has not been very rewarding, because the Shanghai composite dropped 33 %.

In economic there are a few other aspects to be brought to attention. According to findings of Dr. Alessandro Bee, economist working for J. Safran-Sarasin Banking Group in Zurich, Switzerland (Macro Focus Economic & Strategy Research, November 21, 2013): “China’s imminent growth in the past was fuelled by a massive increase in investment activity, in the USA investments are responsible for a contribution of less than 20 %, however in China this figure is close to 50 %. China has a rapidly aging population and a lack of a social safety net. China’s capital markets are underdeveloped and offer savers few alternatives, thus the high savings rate also means that the investment ratio is above 40 %. Regulations in general keep interest rates artificially low, real interest rates were on average negative. By keeping capital costs artificially low, the banking system and investment profited. Despite China’s one child policy, its working age population has increased from 59 % to 73 % of total population over the last 30 years. Most important is also the fact that China shows a progressive urbanisation. In 1980, more than 80 % of the population were employed in the agricultural sector, since the number declined to 50 %. Cheap and abundant resources allowed China to expand its manufacturing industry.”  If all of these topics will be addressed, China will create a new economy. However the question remains, will the economic course follow the past path or a new avenue, for both exists pro’s and con’s. One should also not overlook, according to Bee, that China’s per capita capital stock is now at the same level Japan had in the early 1970s and Korea’s level in the 1980s, and that China’s urban population is currently at a similar level with that of Korea in the 1970s, and Korea’s urbanisation increased to 80 % in 2000.  Bee concludes: “This leaves room to think that China’s “old economic model” is still in a position to generate high growth rates in China’s economy”.

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