China’s SOEs beat hamstrung private sector in profits

Signs of distortion emerge from Xi’s emphasis on state sector.

China’s state-owned enterprises have pulled ahead of the private sector in profitability this year, as private businesses grapple with an array of challenges including regulatory crackdowns, cash crunches and soaring material costs.

Big state industrial companies logged 1.77 trillion yuan ($275 billion) in total profits for the first eight months of 2021, up 87% on the year, compared with a 34% rise to 1.64 trillion yuan for their private counterparts, government data shows. The category covers enterprises in manufacturing, mining and similar industries with more than 20 million yuan in annual revenue from their main operations.

If this continues, the state sector could beat the private sector in full-year profits for the first time since the global financial crisis of 2008.

The trend has raised alarms about the repercussions of President Xi Jinping’s emphasis on strengthening state enterprises, dubbed guo jin min tui – “the state advances, the private sector retreats.” While Xi said in April 2020 that reform of state-owned companies was needed, he also asserted that the sector could not be “denied or diminished.”

It also underlines the hurdles to China’s bid to join the Comprehensive and Progressive Agreement on Trans-Pacific Partnership, which bars members from favoring state enterprises.

The concentration of state-owned companies on the upstream side of supply chains can put them in a stronger position than private businesses that tend to sell to consumers.

PetroChina, China Petroleum & Chemical (Sinopec) and CNOOC, the state-owned trio that dominates China’s oil sector, all enjoyed a solid first half thanks to a strong crude market, with the former two moving back into the black and CNOOC’s net profit more than tripling.

The private sector could bounce back in the final third of the year, as it did in 2018 and 2019, when state-owned enterprises led as of August but fell behind for the full year as private companies outperformed.

From September on, “year-end tax refunds and processing of full-year data could put private companies back ahead in the end,” said an economist well-versed in Chinese statistics.

But there are two major points working against the private sector.

One is a gap in funding opportunities. State-owned enterprises with high credit ratings can borrow easily at low interest rates, while private companies often find it difficult. The shadow banking system is an important source of funding for smaller businesses, but a crackdown by financial regulators has sharply curtailed access.

All this means debt is more expensive for the private sector, which saw debt costs jump nearly 20% in the eight months through August amid a 0.5% decline among state enterprises.

The other problem is the higher difficulty of passing costs on to customers.

Private companies on the downstream side of supply chains, closer to consumers, face stiffer competition that hinders their ability to raise prices when costs increase. The official producer price index for manufactured goods jumped 14.2% on the year in September, while the PPI for consumer goods rose only 0.4%.

The state sector can also reap some of the benefits of private profits through investment. State-owned companies and government-backed funds took controlling stakes in 48 listed Chinese companies last year, reports say, some of which had foundered amid the pandemic.

Pressure by the state sector on private companies can hinder innovation, as well as weigh on the job market, as small and mid-size businesses – largely in the private sector – employ about 80% of Chinese workers. And the inefficiency of many state-owned enterprises could hobble growth.


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