Breakingviews - Beijing-backed businesses riding to the rescue

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HONG KONG (Reuters Breakingviews) - Get ready for Beijing-backed businesses to expand anew. They account for about a quarter of China’s GDP, according to one new estimate, but there are signs the proportion may grow. Cushioning a weakening economy is a big burden.

State-owned enterprises are expected to perform “national service,” especially to pitch in during times of trouble. That means extending underpriced loans to small borrowers and propping up the yuan, selling natural gas at a loss or buying expensive 5G kit without a clear path to recoup costs. It also means local government-linked companies investing in their cash-strapped private counterparts.

Just how big a role these state-owned enterprises play is hard to ascertain. Some 23% to 28% of the country’s economic output and as many as one in every six jobs can be attributed to government-run companies, a World Bank study concluded last month. Yet the issue is slippery: one previous study estimated that nearly half of SOEs could be legally registered as private companies.

Either way, they are being enlisted more frequently. Since the start of 2018, there have been more than 100 instances of publicly traded Chinese companies selling equity to state-backed enterprises, according to credit rating agency Fitch. And the SOE share of total bank lending has surged in recent years.

It is not the first time for such increased involvement. During the stock market rout in 2015, a so-called “national team” intervened to prop up equities. That made Beijing the dominant shareholder in many privately held outfits. The resulting 17% increase in state-owned assets was so large that it prompted the finance ministry to issue an explanation.

This phenomenon underscores the blurry boundaries of China’s state sector. Private firms can, almost by accident, become government-owned overnight, and vice versa. Their role as economic stabilizers also comes at a cost.

The stock prices of Bank of China, PetroChina and China Mobile, for example, are far lower than where they were a decade ago, even as the benchmark CSI300 and Hang Seng indexes have gained about 25%. State-backed companies may be called on to pitch in some more amid a cooling economy. Public shareholders, however, are not obligated to perform national service.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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