New Expansion and Recession

In only half a year, things seemed to make a turnaround. The private enterprises, which used to be the leaders in some industries in China, lost their places to the state-owned enterprises (SOEs).

At the beginning of September, Shandong Steel Group finally finished the deal with Rizhao Steel, which has lasted for one more year. Shandong Steel Group bought 67% shares of Rizhao Steel with cashes, completing the acquisition of this private company.

Before that, the state-owned China National Cereals, Oils and Foodstuffs Corporation (COFCO), together with Hopu Fund, bought 20% shares of the milk producer Mengniu and became its largest shareholder. COFCO’s president Yu Xubo, also took the place of Niu Gensheng, becoming the new president of Mengniu.

In Shanxi, the large-sized coal SOEs, with the help of the government, are busy integrating the small coal mines to which the mining accidents happened too frequently.

Similar things happened in the industries of energy, aviation and property which can reflect the development trend of China’s national economy.

Actually, the SOEs’ expansion with private companies’ recession or reverse appeared in turn in the 30 years’ reform and opening up of China. Every time disputes and discomposure can be heard and seen during the process.

De-privatization

After acquiring Rizhao Steel, Shandong Steel’s annual operating revenue reached 167.69 billion yuan (USD 24.57 billion), second to Baosteel based in Shanghai. Its annual steel output exceeds 30 million tons. According to its plan, Shandong Steel will put limitations over the production of Rizhao Steel, Jinan Steel, Laiwu Steel, leaving production capacity of 20 million tons to build an elite steel base in Rizhao, Shandong.

What was strange was that Shandong Steel had a worse business performance than Rizhao Steel. In the first half of 2009, Rizhao Steel’s net profit was 1.8 billion yuan (USD 236.69 million). Shandong Steel, however, lost 1.285 billion yuan (USD 188.17 million) in the same period. Shandong Steel planned to realize the profit of 500 million yuan (USD 73.25 million) in the second half of 2009.

A source attributed the acquisition to the Reviving Plan of the Chinese Steel Industry issued in March by the State Council (Cabinet), which emphasized on the state-owned enterprises’ dominant place in the steel industry. After the issuance of the revving plan, the restructurings of the steel industry were conducted in the different provinces of China.

The steel industry was not the only industry where the SOEs began to take a dominant place. The aviation industry was the first monopolized industry open to the individuals. In 2005 the State Council issued the document encouraging the private enterprises to join in the aviation industry. Then, OK Air, Spring Airlines, East Star Airlines and so on emerged like the bamboo shoots in the spring. However, due to the lack of capital and technology, many of those private airline companies faded away, going bankrupt or waiting for restructurings.

The private enterprises in the real estate enterprises shared the same fate. In 1998, the SOEs only took 8% of the market share. In the past ten years, the market share of the SOEs gradually increased to 20%. Especially in the first half of this year, the state-owned property companies frequently acquired the land with extremely high prices. The SOEs began to play an important role in promoting the house price.

Who is Whose Savior?

Since the reform and opening up, the non-state-owned economy, including the private companies and foreign-funded companies, gradually increased their market shares.

But the SOEs didn’t always recede in these 30 years. Actually, the expansion of private companies and the expansion of the SOEs or the reverse has been accompanying China in the past thirty years.

From 1978-1989, the private economy, encouraged by the government policies, developed at a fast pace. In the following two years, the SOEs regained their terrain in the national economy. From 1992-2004, the government adjusted the policies. The private enterprises welcomed their “golden age”. Encouraged by the policies, some private companies became the saviors of some depressed SOEs.

However, after 2004, the private companies were trapped in trouble. The SOEs, instead, became the saviors of these private companies. The SOEs in the industries of investment, metallurgy, banking and home appliances, all acquired their “private competitors” at that time.

Different Treatments

The financial crisis made the private enterprises in China face the danger of capital chain ruptures. Though huge increase happened to the credit amount in the first several months in China, the private companies benefited quite little from this.

The data showed that in the first quarter of 2009 the credit amount in China increased by 4.8 trillion yuan (USD 702.99 billion). Less than 5% of these credit loans came to the small- and middle-sized private companies. Actually, nearly 80% of the small and middle companies in China never got loans from the banks.

The SOEs, however, received great support from the government in both capital and policies. The SOEs took the dominant places in the reviving plans of ten industries including the steel industry. It can be forecasted that the SOEs will take an expansion trend for a while. The private companies have to struggle at least till the end of the financial crisis.