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Not good news...
Not good news...
By Feng Xingyuan and Xia Huihan

In the latest edition of Fortune Magazine"s "Global 500," exactly 85 Chinese corporations have made the list. That’s an increase of 16 companies compared with last year.

But let's take a closer look at the numbers. Of the companies listed, 90% are stated-owned enterprises (SOEs), and just two of the new batch on the list are private businesses. Among the 85 Chinese firms, 45 of them are central enterprises, 33 are state holdings, and only seven are private.

Furthermore, Caixin"s investigation on the companies listed confirms that Chinese SOEs tend to be big rather than strong. Their overall profitability is lower than the top 500's average -- and the very fact that these enterprises keep growing is actually not good news for China's overall economy.

Feng Xingyuan, researcher at the Rural Development Institute of the Chinese Academy of Social Sciences, argues that to safeguard China's "economic security," most SOEs should aim to stop growing, since they are often structurally inefficient and post continual losses.

Market mechanism

Although SOEs show substantial book profits, this includes many deductions such as rents, taxes and preferential funding that should have been included in the costs originally, Feng Xingyuan says.

The balance sheets are also skewed by the fact that these firms are often administrative monopolies that can benefit from state subsidies. Without all these advantages, SOEs' performance are far below the average level of Chinese companies as a whole.

Moreover, the state-owned firms are often at the head of the industrial supply chain, allowing them to "pinch private enterprises and consumers' necks" to sell them products and services at a high price, Feng argues.

China's state-owned firms started growing bigger with the beginning of the SOE reform in 2006 in which the government promoted the "advance and retreat" merger strategy to achieve scale, with the private companies forced to "go backwards."

The harm for the Chinese economy includes inefficiencies and a lack motivation to control costs, with their workers’ salary and non-monetary income generally higher than the national average. The complex system of nepotism and recruiting standards of these firms -- sometimes even stipulated in writing -- are at odds with the requirements of the market economy.

Feng Xingyuan argues that SOEs shouldn't set foot in the sectors where a private company can perform well by competing within the free market. As Li Keqiang, China's Premier put it recently, the government should abide by the principle of decentralization -- or subsidiarity -- and resolve to leave day-to-day business to the market and society.

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