The Part of China With No Fertility Problem

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China has two problems with opposite momentums — one of seemingly irreversible shrinkage; the other of uncontrollable sprawl. The first has been written about a lot recently: The slowing population growth that threatens the country’s economy. It’s hard for the government to convince people not to choose smaller families when some men are willing to undergo surgery to maintain their family finances.

The second issue is more difficult to squeeze into a sexy headline but it’s also a risk to the economy. So I’ll try: China’s State-Owned Enterprises Need a Vasectomy.

For starters, the State Council — China’s highest executive body — oversees a vast family of companies and corporations through the State-owned Assets Supervision and Administration Commission, or SASAC; there are 97 in this elite clan, to be exact. Meanwhile, the Ministry of Finance controls dozens more, including China Huarong Asset Management Co., the bank for disposing of distressed loans that is itself distressed because of a spending spree. The Ministry of Education is the ultimate overseer of Peking University Founder Group and Tsinghua Unigroup Co., both of which have defaulted on their dollar bonds. Then there are the provincial, city and township SASACs, each engaged in empire building (and debt accumulation) on the local level.

As Beijing’s top policy makers insist on fiscal and market discipline, we’re going to see record defaults and profit warnings from these state-owned enterprises. All that drama — from lawsuits to bizarre personnel moves — will embarrass Beijing and make investors even more uneasy.   

The Part of China With No Fertility Problem

Take Shanghai Electric Group Corp., one of the 41 SOEs owned by Shanghai SASAC. It’s suing four customers who are controlled by other government-owned entities. On May 31, Shanghai Electric said a 40%-owned subsidiary, which sells non-core products such as network communication gears, had trouble collecting overdue bills. It wants 4.1 billion yuan ($642 million) from the four, or 47% of the subsidiary’s total receivables. The customers can ultimately be traced to China Electronics Corporation — an SOE owned by the State Council’s SASAC — the Beijing municipal government, the fifth office of the Shanghai municipal government, and the SASAC of the city of Harbin. 

S&P Global Ratings had expected Shanghai Electric to generate 8 billion to 8.5 billion yuan Ebitda earnings this year. The uncollected cash could wipe out the conglomerate’s entire annual profit with impairments that could run up to 8.7 billion yuan. Its Shanghai-listed shares tumbled 15% after the news broke. 

Shanghai Electric may have put too much trust in fellow state-owned clients: It only asked for a 10% down payment before delivery. Turns out the customers couldn’t cough up the rest when collection time came.

We will witness more public spats among comrades because most SOEs don’t make enough money. There are more than 1,000 of them listed on mainland bourses, and the top 5% account for over 70% of total profit, data compiled by Bloomberg Opinion show. As of 2019, the latest data available, SOEs held 126 trillion yuan of debt, or about 40% of the nation’s total, making China one of the world’s most leveraged nations. 

The so-called reform of the SOEs has been at a snail’s pace for decades. There always seemed to be time to fix things in the future. But entrenched interests encouraged company finances to distend and swell. A little snip early on might have prevented the unkind cuts that may be looming now.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

©2021 Bloomberg L.P.

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