Reforms Buttressed by SOE Profits
In 2016, profits of China’s state-owned enterprises (SOEs) grew by 6.7 percent following two years of negative growth. The growth is the highest since 2012, and profit sources have also changed significantly. Revenue from the electronic device, electrical equipment and pharmaceutical industries are rising at a remarkable pace, and a better profit structure is being formed.
According to figures from the National Bureau of Statistics (NBS), SOEs’ monthly profits had been dropping since October 2014. After two years of stagnation, 2016’s success has become an important indicator of SOEs’ ability to withstand economic difficulties and reforms.
There are three main aspects to consider regarding the recovery of profitability.
To start with, it bolsters motives for accelerating SOE reforms. In recent years SOEs have been facing more challenges due to sluggish economic conditions at home and abroad, and the advancement of SOE reforms has also intensified pressure on their businesses. As a result, profits earned by SOEs kept declining.
After weathering two years of economic difficulties, SOEs and their employees have now become more adaptable to and supportive of structural changes, stimulating further reforms.
Second, the recovery has become a case study on China’s economic growth and encourages government at all levels to be more confident in overcoming difficulties in developing the real economy.
Government at all levels must recognize that SOE recoveries can only be achieved by undergoing economic transformation and industrial upgrading, improving quality and efficiency, and intensifying institutional and supply-side structural reform.
Finally, it creates conditions for improving the industrial structure and boosts the transformation and upgrading of the Chinese economy.
In 2016, out of total SOE profits, the proportion derived from the three most profitable industries dropped to 65.2 percent from 75.8 percent in 2015.
Changes in the structure of these profits reflect the higher quality and efficiency of the Chinese economy. The recovery was achieved while the country was cutting surplus industrial capacity and shutting down unprofitable “zombie companies.” Structures in traditional, heavy industries such as oil, power and coal have been effectively adjusted, and the economy is now focusing on the advanced manufacturing and modern services industries.
New growth drivers are cropping up for SOEs: electronic device, electrical equipment and pharmaceutical industries have ranked among the top 10 profitable industries for three years in a row. Electronic engineering, intelligent manufacturing, smart city development and other new industries are being formed. This indicates an optimized industrial structure with new growth drivers being cultivated, laying a solid foundation for the continued recovery of profitability and sound economic growth.
However, we shouldn’t be overly optimistic. More reform measures are needed to reinvigorate SOEs in order to deal with domestic downward pressure and an increasingly uncertain world economic environment characterized by sluggish international trade, intensified trade protectionism and increasing geopolitical risks.