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Sunday, September 13, 2015 1:00 PM

China Announces SOE Shakeup: Too Little Too Late to Matter

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What are SOEs? Who Benefited From Them?

SOEs are State Owned Enterprises. The SOEs made millions for the people who controlled them, largely corrupt local politicians along with the politicos friends and associates.

The SOEs also created jobs, but did so at huge expense: By taking productive land from farmers, by massive pollution, vacant cities and malls, forced migration, and an untenable reliance on fixed investment growth.

Overcapacity is rampant. We now see the effects in steel and cement production, crashing commodity prices, capital flight, and a plunging stock market.

China Announces SOE Shakeup

As a proposed remedy to this mess, China Plans Shake-Up of State-Owned Enterprises to Boost Growth.

China has unveiled the much-awaited guidelines for reform of its bloated state-owned enterprise sector as the latest official data show its economy continuing to slow.

The guidance from the State Council, China’s cabinet, calls for a shake-up of SOEs with share sales and management changes planned to reduce losses and improve efficiency, reported Xinhua, the official news agency, on Sunday.

“The guidelines suggest that by 2020, the goals in all the main reform areas should be accomplished, constituting a system that is more suitable to the nation’s socialist-market economy,” said Xinhua. “The SOE system should be more modernised and market-oriented. It should make for higher economic vitality, higher control, greater influence and SOEs will be more risk-resistant.”

China has more than 155,000 SOEs, employing tens of millions of people in all sectors from banks to hotels and airlines to oil refiners. But while the vast majority are managed by local governments, there is a core of more than 100 large nationally strategic groups, including ICBC, the world’s biggest bank by assets, and China Mobile, the world’s biggest network by subscribers, controlled by Beijing.

The State Council said that SOEs would be classified as either playing a social or commercial function, to better integrate them with the market economy.

The government will then “actively introduce different investors” and push SOEs for public share sales, although most analysts believe that wholesale privatisations are highly unlikely.

Analysts at ANZ argued last week that this round of SOE reform could be a “game-changer” in China’s economic development.

But they warned that “SOE reform will still be a gradual process” and it is “unlikely that the government will relinquish its tight control and involvement over the SOEs, especially those in strategically important sectors”.
Game-Changer Not

Color me totally unimpressed. This is not a game changer, it is an effort to hide the fact the SOEs are for the most part bankrupt.

China would not need to “actively introduce different investors” if the SOEs were solvent corporations. Instead, it's pretty clear China hopes to transfer massive malinvestment losses to the public. China need fools to bail out the system.

Classification Shell Game

One has to laugh at the notion "SOEs would be classified as either playing a social or commercial function, to better integrate them with the market economy".

Really? How the hell is reclassifying businesses as to social or business function going to do anything?

Instead, I propose classifying SOEs as viable or nonviable. Next, nonviable businesses should close and viable businesses privatized.

My proposal might actually be a game-changer, but it's not going to happen because it would result in an immediate slowdown at expense of the local politicians who do not want to give up the gravy train.

Michael Pettis Chimes In

I mentally penned the above while reading the article. Towards the end of the article, Michael Pettis at China Financial Markets offered a few similar thoughts.

"What China needs to do is transfer wealth from the state to the household sector, for example by lending more to private enterprises and less to SOEs and local governments. But it’s tough to do so because it means taking away resources from those that have benefited over the last two or three decades," said Pettis

Pettis added "Xi’s administration has inherited a country with deep imbalances and enormous amounts of debt. There’s no precedent in history for a country resolving those issues without a significant slowdown."

China's "Socialist-Market" Goals

  1. Hide SOE losses
  2. Reform SOEs without privatizing them
  3. Prop up the stock market
  4. Reduce fixed investment
  5. Float the Yuan
  6. Manage the range of the Yuan
  7. Stop capital flight
  8. Not have a slowdown

Conflicting Goals

China's goals are incompatible with reality. Huge writeoffs are coming on SOE assets, as is a huge slowdown in GDP, if not an outright contraction in growth.

The sooner that happens, the better off China will be. China seeks a miracle, but a miracle isn't coming.

Instead, expect a strongly renewed witch hunt for scapegoats when growth slows.

Mike "Mish" Shedlock

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