Massive Concentration of State-Owned Enterprises Seen as a Way Out of Pressures for Chinese Policymakers

Experts say the gigantic central enterprise policy is a regression for China

Workers at a Chinese state-owned factory in Shenyang, Liaoning Province, on May 31, 2000, produce shoes for a U.S. company. Goh Chai Hin/AFP via Getty Images

News Analysis

Beijing’s consolidation of state-owned enterprises is picking up speed in its final stages. Experts say that this is a step backward and that the inefficient mega-state enterprises will only add to China’s economic decline.

On Oct. 31, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) held a restructuring contract signing ceremony with 20 large enterprises, including China National Cereals, Oils and Foodstuffs Corporation and China Baowu Steel Group. Those central enterprises will eventually be integrated into 11 groups, according to the Party’s official media outlet, Xinhua.

A similar move took place on July 12, when 23 central enterprises were merged into 13 groups of integration projects spanning digital technology, energy equipment, supply chain services, and other fields, accounting for about a quarter of the enterprises supervised by the SASAC.

Li Yanming, a U.S.-based China expert and current affairs commentator, told The Epoch Times that the Chinese Communist Party’s (CCP’s) efforts will do nothing but ramp up the process of self-destruction, citing its monopoly status as tantamount to going back to the way it was, because such mega-state enterprises are often rampant with corruption and drawbacks.

Central enterprises, or enterprises directly under the Central Committee, are state-owned enterprises in which the State Council or the SASAC performs the role of a financier and in which the capital is wholly owned or controlled. Currently, there are about 98 central enterprises managed by the SASAC, covering almost all economic sectors.

A health worker wears protective gear as she takes a throat swab for nucleic acid testing to detect COVID-19 at a mass testing site after new cases were found in the area on April 6, 2022, in Beijing, China. Kevin Frayer/Getty Images

CCP’s Internal and External Woes

According to Li, the CCP accelerating the integration of central enterprises is a reaction to the internal economic crisis and the external international pressure to remain viable.

China has been crippled by serious economic problems because of its lengthy “dynamic zero-COVID” anti-virus policy.

The real estate market has been one of the hardest hit. A large number of real estate developers underwent tremendous pressures from debt default following the bankruptcy of the sector’s pioneer, Evergrande Group. Moreover, millions of presold buildings, left unfinished by developers, have homebuyers withholding mortgage payments, exacerbating financial and banking risks.

The real estate sector and its associated industries once made up about one-third of China’s gross domestic product.

Chinese tech giants are also facing an exodus of foreign investors because of regulatory clampdowns. For example, Japan’s SoftBank sold one-third of its stake in e-commerce company Alibaba this year, and tech giant Tencent’s major shareholder Naspers, a South African multimedia group, has been dramatically cutting its stake in Tencent.

In western countries, U.S. attitudes toward the CCP took the biggest turnaround in nearly half a century under the Trump presidency. The free world, led by the United States, has begun to disassociate itself from China and hound the country’s increasingly authoritarian Communist regime.

On Oct. 12, a new U.S. chip ban went into effect, stipulating that high-end chips below 14 nanometers in size are completely unavailable to Chinese companies, and U.S. experts in the field are no longer allowed to assist Chinese companies in developing or producing high-end chips—a nearly desperate prospect for Chinese semiconductor companies.

However, the CCP won’t stop hastening its rapid development plans in a bid to alleviate its economic and political woes and even reach its global expanding ambitions, Li said.

The purpose of promoting the consolidation of central enterprises is to concentrate resources on enterprises with advantages and main industries, enhance core competitiveness in the whole industrial chain, and benchmark against top international enterprises, as claimed by mouthpiece Xinhua on July 18.

On the other hand, Li believes that the consolidation of central enterprises can be seen as Xi’s reshuffling of interests and a vital purge in the economic and financial spheres, as state-owned enterprises and some large so-called private enterprises have long been dominated by family interests of former leaders Jiang Zemin and Zeng Qinghong.

Since Xi took control as the top power of the CCP in 2012, he carried out a raft of purges using the “barrel of a gun” (military system), “barrel of a pen” (propaganda system), and “barrel of a blade” (political and legal system) but didn’t make any move on the “bag of money” (financial system) until the stock market collapsed in Shanghai and Shenzhen from June to July 2015. Xi then looked to tighten his grip on the financial system and central enterprises, Li said.

Smoke billows from steel slags at a Chongqing Iron and Steel plant on March 1, 2007, in Chongqing, China. China Photos/Getty Images

Restructuring History of Central Enterprises

In addition to the consolidations, at least 26 groups of 47 central enterprises have undergone the so-called strategic reorganization and formed multiple supergiant enterprises, such as Ansteel Group, China Sinochem Holdings, China State Shipbuilding Group, Baowu Steel Group, and China Ocean Shipping Group according to Xinhua on July 18.

The Chinese government reported that these projects may be horizontal mergers of similar businesses, vertical integrations of upstream and downstream industrial chains between central enterprises, adjustments of similar businesses within central enterprises, or mergers of large central enterprises with local enterprises. Specific integration methods are an amalgam using any of reorganization, asset exchange, free transfer or equity cooperation, and strategic alliance.

Meanwhile, the authorities have also established 10 new central enterprises including Sinomine Resource Group, China Satellite Network Group, China Electrical Equipment Group, China Logistics Group, and China Rare Earth Group.

The size of the reorganized central enterprises is appallingly gigantic. In 2016, for example, the restructuring of China Ocean Shipping Group and China Overseas Holdings contained eight listed companies, 118,000 employees, and total assets of 610 billion yuan (about $84.4 billion), a deal that was described as the most complex in the history of the capital market and for which both sides had been planning for at least six months. This is just one case among 50 groups of central enterprises to be integrated, according to a report by Chinese financial media outlet Yicai on Feb. 18, 2016.

Weng Jieming, deputy director of the SASAC, said in a Sept. 1 meeting that more enterprises would form a new pattern of “one enterprise for one industry and one industry for one enterprise,” which means that each industry should be monopolized by one CCP-controlled central enterprise and each such central enterprise should focus on only one industry.

Inefficiency of Central Enterprises

The CCP has been imposing a planned economy since it seized power in 1949 and carried out a “reform and opening up” policy in the late 1970s to renew itself.

Zhang Weiying, a professor of economics at Peking University, pointed out in an article published in Hong Kong-based media outlet Ifeng Financial on Feb.14, 2014, that the problems with the Communist Party’s state-owned enterprises (SOE) affected the Chinese economy.

Zhang said that if the government grants SOEs more franchises, such as taxation, credit, land, licensing, and other preferential treatment, than it does private enterprises; if SOEs can receive government subsidies in the event of operation losses; and if SOE leaders have party official posts, there won’t be a level competitive environment. If the competitive environment isn’t fair, SOEs can outweigh private enterprises in all ways despite their poor performance—then the market isn’t workable.

He further said the practice in China proves that SOEs can only survive under the protection of the communist government because they’re so inefficient that the privileges aren’t enough to offset their inefficiency. Therefore, many local governments had to privatize their own state-owned enterprises in the 1990s.

But those lucrative state-owned industries are largely inaccessible to the private sector, Zhang said.

Even if private enterprises are eliminated in China, there still can be no fair competition in an economy with only state-owned enterprises.

“The reason is that different SOEs are owned by different levels and local governments, and it is impossible for any level of government to treat its own SOEs and other SOEs equally. The result is that each SOE enjoys privileges in its own administrative area and is discriminated against elsewhere,” Zhang said.

“No matter how strong the central authority is, it would be no way to solve this problem.”

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.