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President Obama’s announcement of progress and support for the Trans-Pacific Partnership (TPP) during the recent Asia-Pacific Economic Cooperation (APEC) summit has led to new scrutiny of the role of SOEs in Asia. Many business groups, including the Chamber of Commerce and the Coalition of Service Industries, have argued that any agreement must include provisions that ensure that state-owned enterprises (SOEs) do not receive special advantages from governments when competing with private-sector firms. As a result, the United States has put forward a proposal that seeks to reduce the scope of support and preferences governments can provide to their SOEs.
Much of the concern expressed about SOEs can be traced to China, which is expected to eventually participate in the TPP process. As such, it’s worth examining the sources of data the US government relies upon assessing the role of SOEs in China. One of the most important government reports on China, The US-China Economic and Security Review Commission Report to Congress, was recently released and included a large section on SOEs. Unfortunately, the report includes several statements that are of questionable accuracy.
1. “In 2009 alone, of the 9.59 trillion renminbi (RMB) ($1.4 trillion) in bank loans, 85 percent were granted to SOEs.”
When you follow the footnote for this assertion you see that it cites a China Daily article. A good rule of thumb is to take everything China Daily says with a grain of salt. The article in question is quite short and attributes fact to a statement during a speech by Li Yongzhong, a National People’s Congress Deputy. Coverage of the speech by the media indicates that Mr. Li provided no source for this figure.
If you actually crunch the numbers on loans during 2009, it’s impossible that anywhere near that many loans were given to SOEs. First, households received 35 percent of loans in 2009, so SOEs by definition could not have received 85 percent. Second, if you assume Deputy Li was only referring to business loans the numbers still don’t add up. Even a high estimate of the amount of loans that might have gone to SOEs is only 36 percent.
2. “The June 2010 China Quarterly Update from the World Bank shows SOEs crowding out private enterprises, following the introduction of the economic stimulus, which was heavily weighted toward the construction and infrastructure sectors already dominated by SOEs.”
If you read the World Bank report cited you will find a much more nuanced picture of the role of state-owned enterprises. Below is an excerpt from the report:
SOEs’ weight in production has not risen recently and the long term trend is for it to decline
Private enterprises were substantially outgrowing SOEs before the crisis. Industrial production growth fell sharply across the board since end-2008 and then showed a V-shaped recovery in 2009. The SOE sector and private enterprises now grow at broadly similar rates (yoy). Taking a longer term perspective, the weight of SOEs has declined steadily in terms of both production and assets. The data used here covers large industrial companies. Other statistics suggest that these downward trends also hold for the overall economy. However, the decline has bottomed out in recent years.
3. “In its annual review of China’s compliance with its obligations, the WTO reported in 2010 that SOEs have been “benefitting disproportionately from the government’s recent measures to boost the economy, particularly the economic stimulus. At the same time, domestic private enterprises are finding it more difficult to access credits from banks”
Again, if you actually read the WTO report it presents a much more nuanced view. Below is an excerpt from the report:
China's liberalization of trade and FDI has stimulated competition in the economy and contributed to the improved competitiveness of domestic producers. Starting from the mid 1990s, the Government began to privatize and restructure state-owned enterprises (SOEs) and to facilitate the development of private enterprise. FDI has encouraged both the emergence of the private sector and the scaling-back and restructuring of the SOEs. Although the Government is still "guiding" the allocation of resources in the economy, the market is playing an increasingly important role and the private sector now accounts for more than 60 percent of GDP.
4. “Regardless of the total number of private enterprises, the state-owned or -controlled sector still dwarfs the private sector in size, with the average listed private company generating only 25 percent of the total net profit of an average listed state-owned firm.”
It’s true that on average SOEs tend to be bigger than private sector firms. Monopolies granted to many SOEs also gives them a boost in profitability. But one need only take a look at two key areas of the Chinese economy, exports and industry, to see that in no way does the state sector “dwarf” the private sector in size.
Below are exports broken down by state-owned firms, private firms, and foreign companies (including joint ventures) invested in China:
And here is the data for industrial output:
Chinese state-owned enterprises still play an important role in the economy and they are often at an advantage relative to private firms because of their government connections. That said, Chinese private firms have continually gained ground on their state competitors despite these challenges.