Chinese SOEs Major Losers in 2012

The Economist highlights a new book on the scale and effects of subsidies to China’s state-owned enterprises, which its authors estimate amounted to more than $300 billion between 1985 and 2005:

The Chinese government does not report all subsidies made to domestic industrial firms, so the Haleys plugged the holes with information from industry analysts, policy documents, non-governmental outfits and companies themselves. By looking at the gaps between end-user prices and benchmark prices, they have cobbled together numbers on many of the subsidies enjoyed by the biggest industrial state-owned enterprises (SOEs).

[…] The harm done by these subsidies to foreign competitors is ably chronicled by the Haleys. Rivals are forced to go up against national champions that enjoy subsidised inputs and seemingly free money in markets that are protected. Worse yet, the bosses of Chinese SOEs are not in business principally to make a profit: they are often encouraged by the government to pursue other goals, such as resource acquisition, foreign policies and technology transfer, regardless of cost.

Less obvious is the fact that these policies harm China as well, by nurturing unproductive and unaccountable behemoths. A recent study by Sea-Jin Chang of the National University of Singapore and Brian Wu of the University of Michigan found that new firms in China are more productive than incumbents but they are also more likely to fail. The authors blame “institutional barriers”.

Despite this uneven playing field, Xinhua has identified state-owned enterprises as “major losers” in 2012:

The top 1- market losers last year were SOEs with a combined loss of about 50 billion yuan (8 billion U.S. dollars), their financial statements revealed.

[…] Even though the bad performance of such SOEs was “understandable” amid the lingering European debt crisis and a slowing Chinese economy, experts said they believed that the companies should do more than just pointing fingers at others.

Zhang Zhaowei, an analyst with Hua’an Securities, said the iron and steel industry should not simply attribute their huge losses to the slowdown in the general economy.

He said the steel makers were too aggressive in increasing their size during the good times but still lack the capabilities of negotiating iron ore prices, leading to a worsening overcapacity in producing low-end products.

See more on state-owned enterprises via CDT.

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