REFILE-UPDATE 1-Chinese state-owned enterprises defend further growth

Fri Nov 9, 2012 3:21am EST

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By Charlie Zhu and Lucy Hornby

BEIJING Nov 9 (Reuters) - Bosses of Chinese state-owned enterprises (SOE) argued for continued expansion on Friday, defending themselves against charges that their firms are in urgent need of reform and saying they are vital to economic security while struggling with the legacy of the planned economy.

Chinese reformers and Western governments have taken aim at the state sector in recent years, saying it gets the lion's share of preferential loans and policies. The calls for reform had built up as factions manoeuvred ahead of a once-in-a-decade leadership transition.

Critics say that without further reform of the state sector, China's growth will stagnate. They call for further privatisation of the sector and equal opportunity for private firms, which provide most new jobs in China.

In his address to a Communist Party Congress on Thursday, outgoing President Hu Jintao called for increased state investment in industries crucial to national and economic security, as well as further development and reform of the state sector that should be the mainstay of the economy.

"The direction of the SOE reform should be: SOEs must be more market oriented and they must keep strengthening their vitality and influence," Wang Yong, director and communist party secretary of the State-owned Assets Supervision and Administration Commission (SASAC), which oversees the country's largest state enterprises, told reporters on Friday.

"Scholars may have different view, but that's the development need of the enterprises and the state."

Indeed, state bosses emphasized their importance to what they called "national economic security" in their gathering on Friday, laying out plans for further investment and overseas expansion.

Many leftists in China believe the survival of the party and the state lies in continued control of strategic sectors, particularly natural resources, banking and telecommunications.

"SOEs - especially central government-owned enterprises - have not only aided the administration of the Party's policies to establish a strong economic foundation and guarantee the country's economic security, but also pushed forward industrial transformation, upgrading, and revitalization," said Ren Hongbing, head of China National Machinery Industry Corp.

RAPID ASCENT

The state-owned enterprises have gone from controlling nearly 100 percent of the economy in the 1970s, to less than half the economy as market reforms and widespread bankruptcies in the 1990s knocked out many underperforming firms. Their share has stabilized under Hu's administration, which saw a consolidation of state power.

In a major push to boost the state sector in 2003, Beijing set up SASAC as a watchdog to expand and strengthen large industrial SOEs.

Their combined assets ballooned to 28 trillion yuan in 2011 from 7.13 trillion yuan in 2002, while their revenue soared to 20.2 trillion yuan from 3.36 trillion yuan. After-tax profits tripled to 917 billion yuan.

SOEs have grown so dominant that economists accuse them of stifling innovation and restricting opportunities for private companies, which now account for almost all employment growth, according to government figures.

The oligopoly of major SOEs and state banks also threatens the interests of foreign companies, critics say.

With SOEs dominating China's foreign investment, they are attracting increasingly scrutiny from foreign governments concerned that preferential funding and subsidies give these companies unfair advantages.

A recent analysis by Unirule, a think-tank run by liberal economist Mao Yushi, a sharp critic of the state sector, stung its backers and emboldened those who believe vested interests benefit from the cozy relationship between industry and the state.

The state-owned sector absorbed 7.5 trillion yuan in subsidies including preferential land and interest rates from 2001 to 2009, according to the Unirule study.

Once those subsidies are considered, the reported profits of 5.8 billion yuan over those years actually results in a negative average return on equity of 6.3 percent, Unirule found.

Now, competing visions for the direction of the economy include a joint report from China's state council and the World Bank that calls for the state to cut its presence in many industrial sectors.

State backing allowed the SOEs to invest in power, rail and telecoms at a rate that matched China's breakneck development of the past two decades, avoiding the crippling blackouts and bottlenecks common to most developing countries, Mao conceded.

"They have been very useful in supporting economic development ... This has been their greatest contribution, not so much the employment they generate or their support of pensioners."

SOCIAL RESPONSIBILITY

SASAC's Wang countered on Friday that subsidies to the state sector, and charges of low return on investment, reflected the legacy of the planned economy, when state-owned enterprises ran schools, hospitals and other services normally undertaken by the government.

"The cost structure of state-owned enterprises is totally different from that of private or foreign-invested firms," Wang said, estimating the costs of supporting these "social enterprises" at 200 billion yuan ($32.04 billion) a year.

"If you only look at the operational returns of SOEs, not at the economic plus social returns, they are not at all below other types of firms, and in some cases are better."

Although some of those functions have been taken over by local governments, 8,300 such institutions have yet to be spun off. There are plans to streamline SOEs as part of a policy of reforming quasi-public "social enterprises," announced this year.

Despite radical reductions in workers as part of 1990s reforms to the near-bankrupt state sectors - some of the biggest firms carved off more than 100,000 people each - SOE employees still number 30 million people, Wang said, including 16 million pensioners. ($1 = 6.2429 yuan) (Additional reporting by Gabriel Wildau; Editing by Robert Birsel)

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