Consequences of the Reform of State Enterprises in China

In the same years in which prices were lowering, the reform of large state-owned enterprises proceeded in forced stages, which in practical terms meant the expulsion of nearly 20 million people from their traditional jobs. State owned enterprises (SOEs)) were microcosms, equipped within them with every type of service, from hospital to school, to shops. The largest, such as the Shougang Steel Company’s Special Steel Plant in Beijing, were cities that employed over half a million people. They performed two tasks, one productive and one social, they produced and gave employment, as the state somehow delegated its social welfare functions to a decentralized body: the enterprise. This model was already incompatible with the globalized economy from a structural point of view. Furthermore, he rigged all the accounts making them illegible in a world where finance requires standard printouts and figures that can be approved under every horizon. In other words, the State financed businesses through its banks and these loans had both the real sense of support for production, in the case of strategic industries, and the role of social subsidies in the field of health and education or against unemployment, all managed directly by businesses.

According to CARSWERS, the result was to generate a mountain of non-performing debt, which in fact was a drag on commercial banks. It therefore seemed necessary to try to separate the social functions from the productive ones of a company and in this light to evaluate which company still had productive potential and which one remained outside the market. In this way, it was also possible to initiate a process through which to clarify which part of the non-performing debts of the banks was to be consolidated as public debt, as actually a social subsidy, and which one could be recovered. However, this vast operation immediately freed up immense productive resources and made many state-owned enterprises more efficient, with a positive effect on the entire production cycle, thus lowering the production costs of many consumer goods. On the other hand, a series of services that were previously free, or almost such, such as education and health care, were derecognised from the state coffers and all became almost fully paid. Thus, the school, which until a few years ago was free, costs today, depending on the institution, from 1000 to 5000 dollars a year per child for elementary school, while hospitals, up to four to five years ago free, are financed for about 80% with the proceeds from specialist visits and the sale of medicines. Chinese families, therefore, found themselves overnight having to pay for their children’s schooling and health care, and to save money for retirement or to face a possible dismissal. The increase in these costs was not matched by an increase in the contribution of social security or social insurance, which elsewhere deal with this type of service. Pension or health or education funds – which on the one hand collect private savings and on the other invest them prudently in the stock market, thus also financing the production cycle – have not grown in tandem with the destruction of the old social system. This has practically left the whole burden of managing savings to the family, which was then placed in the bank to be used when necessary. On the one hand, then, the prices of consumer goods have fallen, on the other hand the cost of all services, including housing, gas, electricity, etc. has increased exponentially. and savings in the bank have increased, but somehow already predestined to pay for services, such as pensions and school for the children. In recent years, there has in fact been a surge in savings and a decline in loans. In 2000, total bank deposits amounted to 12.380 billion yuan, while total credit was just 9937 billion yuan. The difference between deposits and credits increased and became huge in mid-2002, when deposits became about a third more than credits. On the one hand, in fact, people have saved more thinking that they have to face many more expenses than expected (health, school, unemployment); on the other hand, the new rigor against non-performing debts has imposed greater caution on banks that do not grant loans if they are not totally sure that these will not turn into new non-performing debts. This difference between deposits and credits has a twofold implication. The large surplus of credit deposits gives a new solidity to the banks, threatened until a few months ago by an amount of non-performing or insoluble debt that could have been greater than assets and thus effectively put the banks themselves in a state of virtual bankruptcy. It is now clear that the amount of assets is such that, even if bad loans were much more than the officially declared 3-4%, this would not lead to bankruptcy of the bank. On the other hand, the difference is a sign of great inefficiency in banking management, which manifests itself in the spread between passive and active interest. Banks pay just over 1% on deposits but demand over 5% on loans.

This means an extra cost, potentially enormous, imposed on the economy and a cost of money in fact much higher than that of international markets. If these are the official costs, the real costs of money are even higher. Access to credit is limited to those who can offer real estate guarantees and, in fact, stops at state-owned enterprises with strong national or local political support. In fact, with the new rules, drawn up to avoid creating new bad debts, bankers grant loans only to companies in some way with political coverage (ie the individual bank tries to protect himself from any accusations of having made a mistake and increasingly responds only to orders that are essentially political), or in the face of strong real estate guarantees. For private companies, small and medium-sized, which have no large real estate properties or political support, the cost of money is in fact higher than 10% and often passes through unofficial channels, in the face of almost zero inflation. In other words, in fact, large companies lend at higher rates what they have taken from banks at lower rates, and with interest they earn time and money for their own restructuring. This would not be very serious were it not that state-owned enterprises now only create about 20% of GDP, while the non-state sector creates everything else. However, the credit is distributed in the opposite direction, more than 60% going to state-owned enterprises. Considering even briefly these numbers, it emerges with evidence that non-state enterprises are much more efficient in the use of money than state ones and that, if the placement of credit were rebalanced based on efficiency, China could have growth rates. much higher, with no other injections of money. The crux therefore remains that of money management, which involves three aspects: on the one hand, banks must be managed in an increasingly private manner; on the other hand, bankers must learn modern management techniques; in addition, investment funds that carry the savings of individuals on the stock exchange must come into operation. But even these funds need a great management capacity and a risk calculation, which is not there today. According to the World Bank, this process will take approximately 10-15 years to complete.

Reform of State Enterprises in China