China SOE profits stabilising

Official data point to an improvement in Chinese SOE earnings in recent weeks but long promised reform of the sector is still awaited.

China's state-owned enterprises appear to be benefiting from the government's efforts to arrest a sharp slowdown in the Chinese economy but long-promised reform of the sector is still awaited

Official data on Tuesday showed the earnings of Chinese SOEs (excluding financial institutions) fell by 0.1% to Rmb1.2 trillion ($193 billion) in the first six months of the year compared with a year earlier. But that compares with year-on-year declines of 3.3% for the January-May period and 21.5% for the first two months of the year, indicating that the situation is stabilising in response to the government's policy stimulus.

“Since June, the measures issued by the central leadership to boost the economy have further taken effect, SOEs across the country [therefore] have been steadily improving the performance,” the Ministry of Finance said on its website.

Benchmark Chinese interest rates have been cut three times so far this year. A longstanding requirement that capped lending by commercial banks at 75% of their deposits has also been scrapped. In addition, the Chinese government has approved 300 infrastructure projects worth Rmb7 trillion, according to a Bloomberg report.

“Big infrastructure projects, such as railways and airports, they are all being built by SOEs,” Huang Weiping, an economics professor at Renmin University of China, told FinanceAsia. “SOEs are usually the biggest beneficiaries of the government policy.”

SOEs governed by provincial or local governments outperformed, with first-half profits up 8.2% year-on-year at Rmb360 billion. In contrast, SOEs owned and controlled by the central government saw their profits dip by 3.1% year-on-year to Rmb872 billion.

In a note last month, HSBC analysts said local government SOE reform had “gathered more traction” compared with central government SOEs where "progress is slower than expected due to the complexity and the large scale involved with the changes.” Central government SOEs have also not received any fresh guidance since September 2014, they added.

China currently has about 155,000 SOEs. But only 113, ranging from well-known behemoths such as China Mobile and PetroChina, are directly managed by the State-owned Assets Supervision and Administration Commission due to their strategic significance. Most local government SOEs operate in non-strategic sectors. 

Significant but inefficient

SOEs have become less important for the overall Chinese economy but still contribute about half of all the profits generated by Chinese companies (including 25% from state-owned financial institutions), according to Citi economists.

So their improved performance in recent months is positive for the broader economy, which has now posted two consecutive quarters of 7% annual growth -- well below the breakneck speed of recent years.

However, the profitability of the SOE sector remains a concern for the Chinese authorities as they strive to put the economy on a more efficient footing. 

SOEs account for 32% of fixed-asset investment in China, Citi estimates. “So you can see that they consumed a lot of capital and used a lot of loans, but didn’t deliver a very good result,” Jason Sun, chief China strategist at Citi said at a briefing in mid July. “That’s why we need to do SOE reform to improve their efficiency to make them closer to the best quality, profitable companies.”

For industrial enterprises with an annual revenue above Rmb20 million, SOE profits fell by 29.3% year-on-year from January to March, unlike in the private sector where they increased by 6.8%, data from the State Statistic Bureau shows.

China has long vowed to reform and clean up its sacrosanct but inefficient SOEs, which have also become a breeding ground for clientelism, corruption and vested interests.

As of May, over 100 senior executives from some of the country’s largest SOEs have been investigated for graft amid President Xi Jing’s ferocious anti-corruption campaign, according to official statistics.

During a tour of the northeastern province of Jilin last week, President Xi reiterated his determination to tackle the matter.

“SOE are the backbone of the nation’s economy… We must have confidence in the SOE system,” Xi was quoted saying by the official Xinhua News Agency, adding that this year will be the “key year” to fully deepen reforms, including SOE reform.

The lack of progress to date, though, suggests only cautious optimism is warranted, at best.

“SOEs are being kept in suspense,” Professor Huang said. “We only know Beijing is going to reform SOEs but no one seems to know what to do exactly next.”

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