Data hides difficult times facing China’s private firms
The development of China’s private sector in the past 40 years has been miraculous. The private sector has now become an inseparable part of the Chinese economy.
Data released by the National Bureau of Statistics (NBS) for large industrial enterprises – those with annual revenue of at least 20 million yuan ($3 million) – offers a good reference for economic research. But it seems that some sets of data deviate from each other.
For instance, in the first seven months of this year, the accumulated growth rate of revenue from the principal business of large industrial enterprises was 9.9 percent according to the NBS data. But the accumulated growth rate year-on-year was minus 13.36 percent, if calculated using the accumulated revenue from the firms’ principal business.
The reasons why some numbers may not add up is partly due to the change of sample size of the enterprises. The number of large industrial enterprises changes over time, with the number sometimes rising, sometimes falling. The number of enterprises included in the computation of the data varies over time.
This is the so-called survivorship bias in statistics, which means the selected data may not reflect the reality. So the outcomes deviate too, to some degree. This can lead to contradictions in the data.
The contradictory numbers in the last year point to a drop in the number of large industrial enterprises that have survived. This signals a downward trend in the economy, and there are macroeconomic implications based on which enterprises have survived.
In the past two years, one main line of macroeconomic policy has been supply-side reform, which has included stopping or limiting production activities in industrial areas where there is overcapacity and also for the sake of environmental protection. The large industrial enterprises that have failed to survive are concentrated in 11 industries that have been most affected by the supply-side reforms.
The data deviation regarding private industrial enterprises has gone in the same direction as the overall deviation. The companies that have survived paint a decent picture, but still offer a distorted view of the real economy. Underneath the data, some private companies have struggled to stay afloat, and some have gone belly up.
Those private enterprises that have survived face a tough situation in terms of de-leveraging. In May, the debt-to-asset ratio at private companies surged to 55.8 percent, 3.9 percentage points higher than in the same period last year. As the ratio went up, the cost of interest payments for private companies has also expanded to a large extent.
Together with tightened revenue in some cases, companies’ cash flow has come under pressure.
The growth rate of industrial value-added has also declined for private companies. State-owned enterprises have caught up and surpassed the private sector in this regard.
The private sector is now encountering the most difficult time in the 40 years since China’s reform and openingup began. The data may look good, but people should focus more on the true stories of private companies with ups and downs, instead of fancy numbers.
The private sector is now encountering the most difficult time in the last 40 years. The data may look good, but people should focus more on the true stories of private companies with ups and downs, instead of fancy numbers.