SOE reforms in China would boost growth: BBVA

BEIJING - China’s RMB 4 trillion (US$570 billion) stimulus plan announced on November 2008 helped China weather the global financial crisis relatively unscathed, but it has also created inefficiencies such as indebtedness and overcapacity, especially amongst SOEs and these have started to weigh on economic growth, says BBVA Bank.

“SOE reforms are not only indispensable for China’s economic rebalancing away from investment and towards domestic consumption; they could also be the antidote to growth headwinds like protracted PPI deflation and overcapacity,” says BBVA. “However, effective implementation of SOE reforms could cause short-term pain, particularly in the form of higher unemployment.”
BBVA says SOEs now account for 30% of China’s total corporate assets and receive 80% of total bank loans (equivalent to US$16 trillion or roughly 150% of China’s GDP), BBVA says. However, SOEs contribute to a much smaller proportion of profits (22%) and employment (17%), and they posted an 8.2% decline in profits in the first three quarters of this year - meaning that SOEs’ operational efficiency may have significantly decreased despite their rising levels of debt.
“Rising debt levels among SOEs are prevalent and worrisome. Debt levels of SOEs appear to be less sustainable than that of private enterprises due to their subpar profitability,” BVA says
“The return-on-assets of state firms is 33% that of private firms and 50% that of foreign enterprises. Returns on equity (ROEs) are also lower for SOEs compared to non-SOEs. ROEs in the SOE sector are currently around 6%, reflecting bloated investments.
“The overcapacity problem among SOEs is acute too. Average capacity utilisation rate for industry in China was 72%, lower than the average in Europe (81%). Overcapacity concerns are most obvious amongst sectors with large shares of public capital.”  www.bbvaresearch.com (ATI).