On Thursday we noted how, despite Beijing’s efforts to rebalance the economy, China’s credit boom over the past eight years has been mostly consumed by state-controlled heavy industry instead of the private sector. A day later, Beijing seems poised to once again extend this self-defeating practice. Bloomberg reports:
“China is considering providing about 10 of its state-owned enterprises with an aid package, people familiar with the matter said. Sinosteel Corp. is among those that may receive help, one of the people said. […]Among the measures being considered, state-asset management firms such as China Chengtong Holdings Group Ltd. and China Reform Holdings Corp. could take over struggling SOEs, according to the people. In another option, weaker SOEs would receive assets or equity from healthier SOEs, the people said.”
The news is one more sign that Beijing cannot free short-term economic growth from the inefficient public sector. President Xi has continually voiced a commitment to reform, but his actions have been out-of-step with his words. Recently, we’ve seen more party control of SOE operations and more channeling of low-return, state stimulus projects through state-owned enterprises. Now, we’re looking at financial transfusions that will reward fiscal failure on the part of China’s most troubled state assets.If there is a silver lining in this latest news, it’s that it in theory could lead to faster reforms. Indeed, Beijing says that’s the plan:
“Provincial governments must set capacity reduction targets by July 15 and submit detailed phase-out plans by the end of this month, the official Xinhua News Agency reported, citing Xu Shaoshi, chairman of the nation’s top economic planner. Failure to stick to capacity cut plans or missing targets will be “seriously punished,” Xu was cited as saying.”
Those are stern words, but will Beijing follow through? At the end of this month, it will be worth keeping an eye on whether the mandated overcapacity reductions have in fact taken place. This is about as clear a test as we’ll get of the central government’s commitment and ability to reform.