Attendees walk past a PA01 6x6 automatic high-maneuverability tactical missile system, manufactured by Poly Technologies, a unit of China Poly Group, as it stands on display during the China International Aviation & Aerospace Exhibition in Zhuhai, Guangdong province, China, on Wednesday, Nov. 12, 2014.
Photograph by Brent Lewin – Getty Images
By Scott Cendrowski
September 7, 2016

Eight of China’s large state-owned enterprises (SOEs) will be restructured in the country’s latest incremental reform.

The companies include aerospace and defense manufacturer Aviation Industry Corp (AVIC), which is involved in China’s bid to create a commercial plane challenging Boeing, as well as others involved in heavy industry, the state-run China Securities Daily said today.

As part of the deal, the Ministry in charge of SOEs, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), will establish a venture capital fund to encourage the companies to develop new technology and industries, SASAC director Xiao Yaqing said.

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When China’s Xi Jinping-led government released a 60-point plan for reform in 2013, watchers were optimistic about reform in China’s large state sector. SOEs account for more than a third of China’s non-agriculture GDP, according to estimates, and they have long been proven to be inefficient businesses supported by state largesse.

Sweeping reform in the 1990s resulted in SOEs cutting 30 million jobs, but there hasn’t been a followup. And it doesn’t appear that will soon change.

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The latest eight restructurings look like they may amount to simple reshufflings. The aviation firm AVIC is transferring its real estate holdings to another SOE, China Poly Group, in the first wave of reform, the China Securities Journal reported, while other companies have agreed to cooperate on industrial machine production.

“Given that these mergers will be politically driven, efficiency gains will be hard to achieve, if not the contrary as the companies will be much harder to manage,” Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis in Hong Kong, wrote in a note. “As SOEs become even larger, the risk of crowding out the private sector only increases.”

 

Without more dramatic announcements, China risks running out of time. State-owned enterprise debt now accounts for 115% of Chinese GDP, Moody’s said earlier this year, the most state-backed company debt of any country by a wide margin.

If SOE reform remains tepid as profitability slides, Moody’s has estimated that their debt might require a state bailout of up to 20% or 25% of GDP.

Reuters contributed to this report.

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