Over recent decades, it has become clear that China’s State Owned Enterprises (SOEs) are becoming less efficient and not driving the high levels of profit expected. However, privatising such companies is not an option according to the country’s leaders. In a recent article by The New York Times (2014), Chinese economist Wu Jinglan claimed that the high majority of SOEs have high debts and are too dependent of government subsidies for survival. In addition, the article claimed that China’s annual debt is predicted to exceed $13 trillion and overtake the USA, with much of this debt being put down to state owned enterprises, as these make up 80% of China’s top corporations.
As China’s SOEs are not performing as well as they perhaps should, can they be reformed without privatisation, which the government is so against? The Economist (2013) has suggested that China should look to Singapore for inspiration, in a move from SOE to becoming a government-linked Company (GLCs). GLCs in Singapore include Singapore Airlines and SingTel, of which the government owns 56% and 52% respectively. GLCs have the simple aim of long-term increases in value of it’s holdings, whereas Chinese SOEs have much more complex aims including technological advances. Within GLCs, companies are free to hire professional managers at market rates, allowing the state to distance itself from the management of these companies.
But will this approach work in China? Critics assess GLCs by stating that there are very few companies that have managed to establish themselves within the international market. However, Singapore’s GLCs have shown to receive a higher average return on assets and higher market values than similar privatised firms, They are not necessarily the infamous brand names associated with private companies but they are more successful than the majority of Chinese SOEs. Currently, SOEs are not producing the returns they could be capable of, and are simply accumulating debt, so perhaps it is time for the Chinese government to reassess, and government-linked companies look like a viable alternative to SOEs.
Forsythe, M. (2014). A Leading Chinese Economist Warns of a Difficult Year and ‘Dead’ Companies. Available: http://sinosphere.blogs.nytimes.com/2014/02/11/a-leading-chinese-economist-warns-of-a-difficult-year-and-dead-companies/?_php=true&_type=blogs&_r=0. Last accessed 13/02/2014
The Economist (2013). Reforming China’s state-owned firms From SOE to GLC. Available: http://www.economist.com/news/finance-and-economics/21590562-chinas-rulers-look-singapore-tips-portfolio-management-soe-glc. Last accessed 13/02/2014