SOEs to face more mergers, bankruptcies

Consolidation, efficiency to increase, says official

China’s State-owned enterprises (SOEs) will face more mergers and bankruptcies as the government continues overhauling the sector, the head of the country’s State asset regulator said.

In a rare interview with a foreign news outlet, Xiao Ya qing, chairman of the Stateowned Assets Supervision and Administration Commission (SASAC), stressed the central government’s commitment to streamlining its bloated and debt-ridden State-owned sector and creating conglomerates capable of competing globally.

China embarked on a revamp of its SOEs in 2015 to tackle rising corporate debt and also to make them more profitable and responsive to market forces.

It has claimed progress in its SOE restructuring through mergers, reductions in excess capacity, the relocation of workers, closure of “zombie” firms, and implementation of a controversial scheme under which debt is converted into equity.

“Our wish is for them to be bigger, stronger and more efficient. And this is what they’re about to be in the future,” Xiao said on the sidelines of the World Economic Forum in Davos on Tuesday.

He said the focus would be to strictly separate government functions from the SOEs’ business operations, though it was vital for the government to retain control of the State sector during the process.

The number of enterprises administered by the central government has been reduced to 98 from 117 in 2012.

When asked about further SOE consolidation, Xiao said the number of central government-administered companies would continue to decrease through mergers in “a voluntary process,” though SASAC did not have a target for this reduction.

Xiao also pointed out the importance of the relocation of workers during the reforms, saying that SOEs, with help from local governments, ought to create programs to absorb laid-off workers after consultation with them.

Enterprises administered by China’s central government reported robust growth in 2017, with total profit up 15.2 percent, the fastest in five years.

Xiao attributed the rebound of SOEs’ profitability to China’s stable economic growth, rising commodity prices and ongoing State-sector reforms.

“We reduced the number of ‘zombie enterprises.’ Now the management efficiency of the companies has been significantly improved,” he said.

People’s Daily reported earlier this month that the target of shutting 1,200 zombie enterprises in the SOE sector had been achieved by the end of last year. Moreover, SOEs will target coal capacity cuts of 12.65 million tons in 2018, and will also aim to reduce excess capacity in coal-fired power, nonferrous metals, shipbuilding and construction materials.

Xiao said SOEs’ leverage is at “healthy levels,” and bankruptcies and liquidation have only happened at second-tier companies, not at the holding group level.

SASAC has pledged to further lower debt ratios at central government-administered firms by another 2 percentage points by the end of 2020.

Xiao expects market-driven SOE bankruptcies to continue.