2009-05-25

Are Chinese State Owned Enterprises Profitable?

Not according to Giovanni Ferri and Li-Gang Liu. Due to preferential credit access, the two economists estimate that the profits of SOEs would disappear if they "were to pay a market interest rate." Some key portions of the paper, Honor Thy Creditors Beforan Thy Shareholders: Are the Profits of Chinese State-Owned Enterprises Real?
Public ownership in the banking and industrial sectors appears to be one of the key factors behind the fragility of Chinese banking. Two statistics are revealing. Although SOEs’ contribution to the Chinese GDP was around 25%, they received about 65% of total loans (Pitsilis et al., 2004). In addition, the ROA and ROE of private companies are higher than those of public enterprises (Table 1A).
In section 4, they note the difference in the interest rates:
With respect to intrate, on the average of 2001-2005, SOEs pay 133 basis points less than the total sample average. The SOE gap amounts to 265 basis points with respect to cooperative enterprises and to 198 basis points vis-à-vis private enterprises. However, intrate for SOEs does not seem to differ significantly from two other special classes of enterprises, those with ownership located in Hong Kong, Macau and Taiwan, and those with ownership located out of greater China. It is worth pointing out that the difference favorable to SOEs decreases somewhat comparing the sub-period of 2001-03 and that of 2004-05. In the former sub-period the gap vis-à-vis private enterprises is 223 basis points, while SOEs pay 31 and 16 basis points less than, respectively, the Hong Kong-Macau-Taiwan firms and the foreign ones. In the sub-period of 2004-05, the gap shrinks to 159 basis points vis-à-vis private enterprises, while SOEs pay 47 and 50 basis points more than, respectively, the Hong Kong-Macau-Taiwan firms and the foreign ones. It is also worth remarking that, though somewhat decreasing as time passes, the lower costs of debt for SOEs – especially with respect to private firms – is systematic across the years.

We reach similar results after examining intrate1. With respect to the entire period, SOEs pay 157 basis points less than the average company, 225 basis points less than private enterprises, 4 basis points less than Hong Kong-Macau-Taiwan companies, and 75 basis points less than foreign capital firms. Note that the gap in favor of SOEs does not reduce visibly over time. In the sub-period 2001-03 it amounts to 159 basis points vis-à-vis the sample average, 234 basis points compared to private firms, 5 basis points visà-vis Hong Kong-Macau-Taiwan companies and 70 basis points compared to foreign capital firms. In the sub-period 2004-05 the gap amounts to 152 basis points against the sample average, 211 vis-à-vis private firms, 29 basis points compared to Hong Kong-Macau-Taiwan companies, and 83 basis points vis-à-vis foreign capital firms.
The paper deals with the economic implications of the favorable credit environment for state-owned enterprises. From an investment standpoint, SOEs face the risk that their favorable situation could end. As China reforms, it's increasingly likely that the playing field will eventually be leveled in the favor of private industry. Here's an article from today's South China Morning Post (subscription required): Beijing boosts the private sector
"The global financial crisis might have sped up, instead of stalling, the market-oriented reform as the way to promote economic efficiency," said Yang Yiyong , deputy director of the Economic Research Institute under the Macro Economic Academy, an affiliate of the planning agency. On Friday, state councillor Ma Kai highlighted the need for further reforms, saying this would help guarantee the country's development and be an active response to the global financial crisis.

The guideline, posted on the central government's website yesterday, said: "The severe international and domestic economic situation requires us to continue reform and openness policy unswervingly."

The government reaffirmed the central bank's policy of pushing ahead with interest rate reform and improving the way the yuan exchange rate is determined.

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