China’s attempts to launch a fresh round of privatization of state-owned enterprises (SOEs) are being driven by local governments’ efforts to squeeze cash out the debt-strapped champions.
Two decades ago, thousands of poorly performing national and regional SOEs were privatized or liquidated while stronger companies were restructured or partially listed on the stock market, raising hundreds of billions of dollars, the Financial Times reported Monday.
Things changed in 2003 when Beijing refused to ditch struggling SOEs.
In addition, loose monetary policy during the 2008 economic stimulus, along with directives for SOEs to support the economy with new investment, bloated balance sheets and dented return on assets, the report said.
Today, local government debt is driving a new push for privatization to help pay down the massive loans, estimated at US$2.9 trillion, about 58 percent of gross domestic product.
“Local government debt problems will be an important driving force of SOE privatisation,” David Dollar, former World Bank country director for China, was quoted as saying.
“Some local governments have over-borrowed and will have trouble servicing their debts, especially as interest rates rise in the wake of financial liberalisation.”
In addition to whittling debt piles, policy makers hope that reducing the role of the state in non-strategic sectors will improve economic efficiency.
Since the financial crisis, the productivity gap between state-owned and private groups has widened, with average return on assets for state companies at about 4.6 per cent compared with 9.1 per cent for private businesses, according to estimates by Gavekal Dragonomics, a Beijing-based economic research firm.
Those depressed returns are particularly problematic because SOEs controlled 30 per cent of total assets in non-agricultural sectors as of 2008, the year of China’s last economic census, although they account for just 3 per cent of total enterprises.
While debt problems will be the key driver of privatisation at the local level, when it comes to national state champions the focus is on improving competitiveness, the report said.
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