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Asia

Sieren's China: Restructuring on the installment plan

The restructuring of China's powerful state owned enterprises is a difficult task. Nevertheless, DW columnist Frank Sieren says that is exactly the work Beijing quickly needs to accomplish.

The 600 workers at Baoding Tianwei's transformer factory in northern China have some turbulent days behind them. Two weeks ago, it looked like the company would go bankrupt. The company had announced that it would be unable to repay about 13 million euros worth of loans to creditors, and the state said it would not step in. A novelty to be sure. In the past, Beijing has clearly stated that it would allow companies that missed market opportunities to go bankrupt, but state leaders hardly ever followed through. With Baoding it seemed that the government seemed to be changing tack.

Companies regularly go bankrupt in China. It happened to the Cloud Live Technology Group in mid-April, and the real estate giant Kaisa followed a week later. However, Baoding Tianwei would have been the first state owned entity (SOE) that Beijing refused to help. Beijing's message to the other SOEs appeared to be unmistakable: start working efficiently or we'll let more of you go bankrupt. During the final days of the National People's Congress this spring, China's head of government, Premiere Li Keqiang announced his desire to allow the Chinese economy to be transformed and stabilized by "the powers of the market" - and he didn't mention anything about state owned entities being responsible for social stability.

Giving in at the last minute

Several days after Chinese media had announced that Baoding would not be rescued, Beijing gave in. At the last minute, they instructed the China Construction Bank to save Tianwei, thus, once again, squandering the chance to send a clear signal of discipline to other companies. Yet, that in itself apparently wasn't enough. The wavering SOE policy continues, and just days ago the state news agency Xinhua announced that Beijing intends to consolidate China's 100 largest SOEs into 40.

Frank Sieren Kolumnist Handelsblatt Bestseller Autor China

DW columnist Frank Sieren

After the announcement, the Shanghai stock exchange celebrated the impending wave of mergers. Once again, Beijing backpedaled as SASAC, the regulatory authority responsible for overseeing state owned entities played down the move saying such information could not be verified. A number of the affected companies, such as the oil company Sinopec, also issued denials. What is really going on here only becomes clear upon second glance: part of the Beijing leadership wants to discipline SOEs that have mismanaged state funds, but another part apparently doesn't.

Not the first attempt

Former Chinese Premier Zhu Rongji found out that the whole process wasn't easy 15 years ago. He too wanted to expose powerful state companies to more market competition. That was one of the reasons he pushed for China's membership in the World Trade Organization. Then, as now, it was commonly accepted that in regard to the gargantuan task of restructuring the SOEs there would be no quick route to consensus within the Communist Party. No wonder then that the test balloons floated by one group were shot down by another at the first opportunity.

However, with each new initiative the SOEs lose a little more wiggle room. At the rate that the state is building up mid-sized companies, it can afford to give the SOEs an ultimatum. There is more pressure from other sides as well. China has the highest rates of corporate debt in the world. That seems like reason enough to use a few controlled bankruptcies to let some hot air out of the bubble. A few companies going under would quickly serve to show the others that Socialism with Chinese characteristics doesn't mean that companies don't have to make money.

DW columnist Frank Sieren has lived in Beijing for 20 years.

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