China’s economic slump is a result of favouring SOEs over private enterprise, writes Kabelo Khumalo |
South Africa would do well to take heed and not keep cash-burning entities in operation
THE UNIMAGINABLE has happened. The Chinese economy in 2018 slowed to its lowest level in nearly three decades, leaving pundits to try to figure out how deep the slump is.
This means Beijing entered this week’s trade talks with the US in an unfamiliar position: that of vulnerability.
US President Donald Trump would have us believe that China’s downturn was largely due to the barrage of tariffs he unleashed on the US’s economic rival.
This is not necessarily true. China is now a middle-income country and it was impossible for it to maintain double-digit growth indefinitely.
It is not just the pace, but the nature of the Chinese economy that has changed, meaning that the country has to traverse a difficult political avenue: to reform and open up the economy to make it more productive.
Herein are lessons for the South African economy and the palpable paranoia over the liberalisation of our state-owned entities (SOEs).
South Africa’s SOEs have metamorphosed into state-owned problems, with taxpayers left to foot the companies’ growing bills.
SOEs have time and time again proved not to be a sound investment.
Deng Xiaoping’s 1978 reforms gave China economic might, building from scratch a profitable private sector that saw millions of people lifted out of poverty.
However, President Xi Jinping has refocused his administration on building up state-owned companies.
For example, in 2016, private firms held 11 percent of new loans, while state-owned companies got 83 percent in new loans.
This is in stark contrast to the 2010 picture where private sector companies got 43 percent of loans and state companies had a 36 percent share of new loans that year.
China’s debt is public, not private, which means that the risks are largely borne by the state.
What is clear is that while Chinese leaders have called for a reform of its SOEs, the reforms have largely meant the strengthening of the companies and not breaking their stranglehold on the economy.
The SOEs touch every sector of the Chinese economy, ranging from telecommunication to finance.
When China joined the World Trade Organisation, it gave an undertaking to open itself up to foreigners in lucrative businesses like banking, telecoms and electronic-payment processing.
However, nearly two decades later, China’s telecoms industry is still firmly under government control.
Because Chinese state companies enjoy unfiltered easy access to state assistance and loans, they amassed assets that make the private sector find it harder to compete.
However, with data indicating that China’s private sector is contributing 60 percent of the gross domestic product (GDP) and 80 percent of employment, Beijing is increasingly aware it can no longer favour state companies over the private sector.
Xi last year admitted as much: “We will reinforce the development of the state economy while guiding the development of the non-state economy,” he said.
Political parties like the Economic Freedom Fighters and formations like Cosatu, Numsa and the South African Communist Party frown on the word “privatisation”.
The movements believe the future is red and that the market economy should be reined in as it has led to inequality.
But how does it profit the South African economy and its people to keep cash-burning entities like Eskom, South African Airways and PetroSA in operation?
The insistence that we own assets like Eskom and SAA is akin to a man who stubbornly refuses to let go of a run-down BMW he has owned for 30 years, hoping to pass it on intact to his beloved son.
It would appear our SOEs are in a dogfight to show which one will be the biggest burden and embarrassment to the country.
The numbers speak for themselves. The government’s exposure to SOE debt has risen from R160 billion in 2011 to R308bn in 2017, while Eskom’s debt reached 8.5 percent of GDP late last year.
Numbers from S&P Global Ratings are even more frightening. S&P, see government guarantees for SOEs’ debt rising to R500bn by 2020, or 10 percent of GDP.
It has become near impossible for the National Treasury to keep to its fiscal consolidation path while bailing out our ailing SOEs.
The stubborn insistence that we stay in abusive relationships with our underperforming SOEs means that, in the end, the poor and working class, whom anti-privatisation crusaders want to protect, will themselves be state-owned; forever beholden to the state to eke out a living.