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| Victor Shih |
The China Economic Review:
"It’s just consolidation—there’s not too many signs of genuine reforms," said Victor Shih, associate professor at the University of California in San Diego and longtime observer of China’s financial system. Even after the changes made and mooted to date, Shih said, many of the structural problems inherent to state companies will remain: "They’re still SOEs."...
The merger of China’s two state-owned rail companies – China CNR and CSR Corp – wasframed as an exception: Officials have stated these firms had been undercutting each other in bids abroad, undermining one another’s profitability and harming the state in a cycle economists call ruinous competition. Not everyone agrees.
"The whole argument is ridiculous," Shih said. "The reason there was ruinous competition between those two companies is because they had a soft budget constraint, and they could borrow as much money as they wanted at very low interest rates from the banks."...
Late last year The Wall Street Journal reported that the Communist Party planned to slash top executives' salaries at the biggest SOEs to ensure those in power valued politics more than their own pay. In early March it was said to follow through on that threat when Bloomberg reported that total annual compensation for senior managers at the country's five largest lenders (all government-run) had been cut to no more than RMB600,000 (about US$95,800).
This isn’t the first time attempts have been made to pare down SOE numbers in one form or another. An April report (pdf) published by the Brookings Institution found that SOE numbers had actually dropped from 2004 to 2010, even as the number of their subsidiaries skyrocketed during the same period. But ending overseas competition considered needless by the government won't solve the problem of profligate borrowing by state firms. Shih, at UC San Diego, said that conglomeration might help avert ruinous competition in some cases, but "the tendency to borrow money and expand as much as possible will still be there."
For example, he said, now that the two state rail firms have merged, the new entity can go to banks and point to directives prioritizing rail development both in China and abroad to justify more loans without worrying about another firm trying to undercut it. Central government-owned SOEs operating in areas designated as priority industries in particular are privileged with access to cheap financing and, potentially, the ability to sell products at a loss.
"As long as the Chinese banking system can give them limitless money, and because they don’t care about the bottom line, they're going to be very competitive because they can undercut competitors who do," Shih said.More in the China Economic Review.
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