China-State-Enterprise-deficit

The use of western style loans sometimes raised the effective price of credit and begun the creation of a system where interest rate on loans could be used to control credit growth by indirect means. The bond market emerged very quickly, and the government used very high interest rates on bonds (6% above inflation at the peak) to soak up the excess money supply. Inflation promptly plummeted.

China State enterprise deficits

China has been administratively wise to defer widespread privatization. As a result, much of the economy remains under the sway of huge state enterprises, such as steel or coal companies that sometimes have more than a hundred thousand employees. These are run like an American post office, with no incentives for efficiency and almost no ability to dismiss lazy or incompetent workers. One State enterprise is Shanghai Petrochemicals (SPC), a large refinery that plans to seek a listing on the Hong Kong Stock Exchange. SPC, which makes ethylene, plastic and synthetic fibers, has sixty thousands employees and assets worth perhaps $1.3 billion. These numbers make it big, but not one of the real behemoths. It has been required to provide continued employment for all its workers regardless of performance. It is responsible for educating the children of SPC workers, so its facilities include a primary school, a high school and a technical college. It has responsibility for all the families' medical care, and therefore employs two thousand medical personnel, and it must pay all of its retirees' pension. SPC police guard the community, which is largely conterminous with the enterprise, and SPC counsellors are supposed to help with marital disputes. A factory Party committee gives mandatory political classes and oversees political correctness. Until recently, SPC had quotas to purchase raw materials at very cheap prices, and it faced virtually no competition. In the future, it will have to pay market prices for its inputs and will have to compete for its market. Unlike many State firms, SPC makes a profit and is believed to have sufficient potential to attract Hong Kong investors once it is listed. The social responsibility prevent the company from firing workers or drastically reorganizing. They also prevent the government from allowing large numbers of such enterprises simply to collapse.

Many Americans have vivid and bitter memories of the midwestern towns that effectively collapsed when Japanese competition bankrupted local steel mills or automobile factories. State enterprise deficits are substantial. The resolution of the problem is not at hand.

Many of the loss-making enterprises received ever-larger loans from state-controlled banks, and these loans were frequently just a disguised subsidy that will never be repaid. Moreover, the state enterprises deficits are probably larger than the statistics reveal, not because the government is seeking to mislead, but because inadequate accounting and control systems, along with excessive availability of bank credits, enable many state enterprises to hide their losses for long periods. The burden of the deficit takes two-forms: first it enlarges the government budget deficit; and second, it gradually accumulates as bad loans on the books of China's Banks.

China has been able to defer spasmodic action on the state enterprise deficit because it has one of the world's highest savings rates. Just as Japan can use its high savings rate to mobilize funds that cover a budget deficit which was once proportionately much larger than America's, so China can use its unusual savings rate to cover the state enterprise deficits. Here again the bond market plays a vital role in China's development because treasury bonds, bank bonds and enterprise bonds are the essential mechanism for mobilizing these funds.

Initially, China has done what US does when faced with large-scale bank failure: merge failing enterprises with better managed ones, giving the latter the responsibility for the debts and employees of the former. The strategy has succeeded in raising the average of productivity of state enterprises, but this has only limited the rate of increase of the problem, not solved it. Like the US with its banks, China has shied away from widespread bankruptcy as a solution; while a bankruptcy law was passed some years ago, only about three hundred enterprises have been forced into bankruptcy. Instead, there is a move to force companies which cannot sell their goods to limit further production, coupled with an unannounced cut-off of support for a wide range of money-losing industries. Many of these, will be forced by their plight, rather than by explicit government directives, into joint ventures with private or foreign enterprise.

There are in place overwhelming incentives for Chinese state enterprises to become partners with foreign firms. Loss-making state enterprises are being starved of funds, so that only a private or foreign partner can rescue them; profit making ones lose 55% of their profits to taxes, but pay only 30% and often obtain a generous tax holiday if they enter a joint venture with a foreign firm. (All this has been reviewed with new legislation after 2008). In such joint ventures, the trend has been for the private or foreign partner to become dominant. This is occurring on a very large scale. In a single deal, one indonesian company took over more than one hundred state enterprises in China. As an intermediate step, Chinese state enterprises are flocking to change themselves into stockholding companies. Having done so, they can legally sell portions of themselves to other Chinese state enterprises, financial institutions or ministries.

As with the banking sector, China's airline system was initially dominated by a single state-owned firm, CAAC, which competed even with Aeroflot in its well-deserved reputation for rickety planes, incredible delays and surly service. In 1981 one plane got into difficulty when the cabin crew got hungry and decided to build a fire in the aisle to cook some food. Well into the 1980s, passengers were frequently stranded for many days when a flight was cancelled. In the 1980s, Beijing divided CAAC into six regional separate airlines. Like the sectorial banks, these entities competed only at the margin. The government encouraged foreign joint ventures in a wide variety of related business, such as aircraft maintenance, engineering, catering, airport hotels and airport transportations. Then Chinese entities acquired major stakes (22% in 1992) in Cathay Pacific, Hong Kong's privately owned airline, which is one of the capitalist Asia's most successful and competitive airlines. In 1992 China Airlines entered into a 60:40 joint venture with Lufthansa to create Beijing's Aircraft Maintenance and Engineering corporation, a major maintenance facility. Today, the principal routes have new Boeing or Airbus or McDonnel Douglas planes, smart stewardesses, decent food and a punctuality record that is much better than it once was.

Infrastructures

China's economy faced massive infrastructures problems: insufficient telephones, inadequate transport, energy shortages and many others. Unemployment.

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