South China Morning Post - Business
Monday, August 23, 1999
SOE sell-off prospects looming larger as Jiang again takes charge
JASPER BECKER in Beijing
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The mainland is limbering up for an attempt to reform its bankrupt
state-owned enterprise (SOE) sector, which may take it a step nearer
to what some see as its inevitable closure.
Amid a flurry of ambiguously phrased proposals on privatisation put
forward by various scholars and advisers in Dalian recently, President
Jiang Zemin said SOEs would top the agenda at the party plenum next
month.
Mr Jiang is returning to the task that he had prepared to tackle in
the summer of 1997 at the 15th Party Congress.
In a bold speech to the Central Party school three months before the
congress, he gave clear warning that socialist dogma would be no
barrier in shaking up the ailing state sector.
Then at the congress a much vaguer plan emerged, involving the sale of
small and medium-sized SOEs. Little has since been heard of this and
the party has instead resorted to every kind of alternative.
There was a craze for mergers, another for conglomerates, for domestic
and overseas listings. We saw efforts to sell shares to factory
workers, state asset-trading centres and other dubious schemes
promoted as ways of raising capital and stemming the flow of red ink.
The biggest idea, much touted by Premier Zhu Rongji at last year's
National People's Congress, was to raise money by selling workers
their own housing, but this has not worked out either.
The mainland still has 80 million square metres of unsold property,
including 60 million square metres of residential property worth 16
billion yuan (about HK$14.92 billion), according to recent figures.
Even a cut in the property transaction tax, announced this month, will
not shift the surplus.
Now after a six-day tour in Liaoning province, Mr Jiang has been
talking up the prospects of another breakthrough, as long as it does
not involve the dreaded word "privatisation".
It is his fourth such tour of a depressed industrial area in recent
months. Accompanied by Vice-Premier Wu Bangguo, Mr Jiang has rolled up
his sleeves in SOE factories in Qingdao, Taiyuan and Wuhan in
preparation for the autumn meeting.
The state media has yet again promised that the SOEs were about to
turn themselves around because profits and output are up.
Even heavy industry is supposedly thriving and in the first half
output leapt 10.4 per cent.
The media have been sending a clear message, that Mr Jiang, aided by
Mr Wu, is in charge of the SOE problem again.
Premier Zhu Rongji has apparently distanced himself from all this, but
he denies he threatened to resign.
Other press reports paint a grimmer picture of the problem. The
percentage of loss-making SOEs in Shenyang, the heart of the rustbelt,
was targeted to be down to 20 per cent next year but the figure has
grown from 40 per cent to 55 per cent this year.
In 1997, Mr Zhu gave himself three years to cut the number of
loss-makers.
All the stalwarts in the economy of the northeast are doing badly -
shipbuilding, textiles, defence, coal, forestry, petroleum and power
engineering - and it now seems likely that they will all have to be
privatised, apart from the arms factories.
A third of the 66,000 SOE industrial enterprises are in the red and
they are not being turned around by new investment, technology or
management according to Guo Lihong, a researcher at the State Council.
"A pressing problem is that these enterprises can hardly pay the
interest due, not to mention matured principal," he wrote in China
Daily.
Last year, these industrial enterprises paid out 110 billion yuan in
interest and had earned profits of just 10 billion yuan.
Mr Guo calculated their assets almost cover their liabilities but that
can only be tested once the assets are in a marketplace.
Some observers feel that but for the Nato embassy bombing and the
campaign against the Falun Gong cult, Mr Jiang might have gone further
with SOE reform but lost his nerve and swung leftward.
In Liaoning province, he emphatically rejected privatisation and
insisted the state would remain in charge of all strategic sectors.
It now therefore looks like there will be one last-ditch effort to
avoid the inevitable. His advisers now propose that the state's
majority shareholdings in SOEs will become tradeable in some sort of
special market, perhaps the "S" for state market.
Banks will be able to convert their SOE debts into equity and trade
them with asset-management companies.
It sounds baffling and unworkable but economists who favour the
bankruptcy route think that, once it has been tried and failed, the
way will be clear for real reforms. Mr Jiang will have run out of
other options.
Observers are heartened too by the fact that Mr Jiang is also
signalling a further retreat from ownership of enterprises in many
sectors.
In 1997, "key enterprises" were to be excluded but it was never clear
what was meant.
Now it looks like the list is being narrowed down to
telecommunications, energy and defence. Profitable state monopolies
such as tobacco might be broken up and sold along with the duds.
A similar crab-like progress towards accepting the discipline of the
market has been seen over the past 18 months in the once "strategic"
state monopolies of grain and cotton.
Having insisted last year that private trading must be stamped out,
Beijing now finds it cannot sustain the losses of buying up these
commodities at prices double those on world markets.
This year, controls on low quality cotton and grain prices have been
lifted after they were re-imposed six years ago by then premier Li
Peng.
It will be a bitter pill to swallow.
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