FOCUS: Economists say it's time for reform at China's SOEs

BEIJING, Jan. 10 Kyodo

There is no better time than now for China to push through painful economic reforms to ensure future economic health, foreign and domestic economists suggest.

Government officials and private analysts agree the country's state-owned enterprises (SOEs) are now more profitable than ever, but they have very different perceptions on what the improvements mean.

Government spokesmen rattle off lists of targets met and robust performance indicated ahead, while the private economists see gross inefficiencies and threats that must be addressed now.

SOE profits jumped 240% between 1999 and 2000 to reach 230 billion yuan ($27.8 billion), Minister Sheng Huaren of the State Economic and Trade Commission (SETC), told a conference Tuesday titled ''Three-Year Targets for SOE Reform and Overcoming Difficulty Basically Realized.''

Led by government reform, he said, the number of loss-making SOEs has been cut by two-thirds since Premier Zhu Rongji announced targets three years ago.

The commission noted 66.5% of SOEs have been brought back into profitability, but only last week China's auditor general, Li Jinhua, told a national accounting conference that 68.5% of audited SOE accounts for 1999 failed to ''truly reflect their financial situation or operational results,'' according to the China Business Times.

And, according to one Beijing-based economist who spoke on condition of anonymity, ''This is not surprising. Because of the distorted incentive structure, there really is no accountability.''

There is, however, truth in the SETC report.

''In China, nothing is precise, but there are always ballpark figures...and there are clear, tangible improvements,'' said Andy Xie, chief China economist at Morgan Stanley.

But the renewed health of the state-owned sector may have less do with reform than with improvements in China's macroeconomy. Rising oil prices and a cyclical jump in demand domestically and abroad as Asian economies return to health have created a very forgiving economic environment, the private economists noted.

As well, the transfer of 1.1 trillion yuan in nonperforming debt off SOE books in the past year and heavy stimulus spending have given the state sector what some call a very artificial boost.

Regarding the higher profits, ''very, very little comes from enhanced efficiency,'' the Beijing economist said. He estimates at least 75% of the actual increase in profits comes from the rise in oil prices that lifted profits at China's state-owned oil industry and from the massive reduction in debts that have to be serviced.

But there have been real improvements.

''There is a greater emphasis on corporate governance,'' the economist said, highlighting the formation of independent boards of directors at larger SOEs and the increasing separation of day-to-day management from government regulators.

And there are more incentives for better management as China's stock markets attract listings and state-owned banks are given autonomy to screen borrowers and resist policy-directed loans.

''The wave of SOE listings is most encouraging,'' Xie said, because listing brings corporatization and structural reform, which, he added, ''is the only way to achieve long-term efficiency.''

The selling of state-owned property began in 1998, but has only recently won official endorsement. Private ownership, enshrined in the Constitution in 1999, is now seen as key to economic efficiency.

''State-owned capital is spread across too many areas and should be withdrawn from some,'' Li Zibin of China's State Development and Planning Commission told a conference earlier this week.

But obstacles still stand in the way of the government selling off its holdings.

''The issue now is how due process can be established,'' Morgan Stanley's Xie said. The $139 billion in SOE debt that was transferred to specialized asset management companies was to be repackaged and sold to investors as equity, but the value and ownership of the assets are difficult to pin down.

The only consistently reliable accounts in China are those of companies listed abroad, partly because until only recently domestic companies had not been required to retain independent accountants.

''Enforcement is inadequate,'' Fred Hu, chief economist for Asia-Pacific at Goldman Sachs, said. ''They need to focus on regulatory infrastructure...improve transparency, better protect minority shareholder rights.''

China's new regulators understand this, he added, but the domestic stock market still ''has a lot of reforms ahead.''

One problem holding up reform is potential social unrest. Already, more than five million SOE jobs have been slashed in each of the past three years and that scale of layoffs is likely to continue.

And failing SOEs are rarely allowed to go bankrupt.

Officials, charged with overseeing welfare as well as business, usually prefer to merge SOEs or hive off parts to keep them alive.

''With bankruptcy closures, we still have to relocate the affected workers,'' SETC Minister Sheng said. ''We must prudently consider which companies should go bankrupt and which not.''

''The obstacles to reform are really social-political,'' Goldman's Hu agreed because private owners will want to maximize efficiency and lay off workers. The government, he suggested, must become more prepared to accept a high level of unemployment.

''Reforms are risky, (but) they should not be deterred,'' Hu warned because if fundamental problems are ignored the SOEs could have losses piling up again as soon as in two years.

But with an economic environment conducive to reform now, China ''should not squander this opportunity,'' Hu said.

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