A Leading Chinese Economist Warns of a Difficult Year and ‘Dead’ Companies

Sounding warnings that could have been made 20 or even 30 years ago, one of China’s most renowned economists said the country’s economy faces a “very difficult” year as it continues confronting a host of problems that have intensified over the past decade.

Wu Jinglian, an 84-year-old scholar whose views often clash with those of the country’s leaders, told fellow economists at a forum in Beijing on Monday that the government had to deal with the rise of “dead companies’’ – state-owned enterprises with high debt levelsthat depended on subsidies to survive.

Mr. Wu made a career helping Chinese reformers deal with that very problem, as the country in the late 1970s opened to foreign investment and began to dismantle the Maoist-era government controls on prices and restrictions on private enterprise. His comments, summarized in the China Securities Journal, as Prime Minister Li Keqiang prepares to make his first annual address on China’s economy at the March meeting of China’s parliament, the National People’s Congress.

Last year Mr. Wu made headlines by warning the country’s leadership before a major meeting on the economy that market overhauls would not be effective unless accompanied by political reform, including more democratization and greater rule of law.

“If we depart from this cardinal principle, national economic development will return to its old ways, continuing to use massive investment to spur economic growth, reeling between blind expansion and abrupt readjustments, and culminating in a systemic crisis,” Mr. Wu said in a speech on the eve of November’s Communist Party Plenum, which focused on the economy.

Mr. Wu laments what he views as a lost decade for reform under former President Hu Jintao and former Prime Minister Wen Jiabao, both of whom stepped down from their government posts in March.

In the 1990s China’s leaders overhauled the country’s state-owned enterprises, with the aim of making them more efficient and able to compete with foreign rivals. They laid off millions of workers from moribund factories, overhauled management at state-run companies and moved decades of accumulated debt into asset management companies.

Under Mr. Hu and Mr. Wen, state-owned companies in the telecommunications, aviation, mining, auto, energy and other so-called “pillar’’ industries were given quasi-monopoly status and touted as national champions. Many of them began to acquire private rivals in a process that spawned a phrase: “The state advances and the private sector retreats.” State-owned companies, viewed as a safer bet than private companies, also got preferential lending from banks.

And they borrowed. Thousands of new state-owned companies were set up under the auspices of local governments, financing a building boom that had racked up 17.89 trillion renminbi, or $2.95 trillion, in debt obligations by last June, according to a Chinese government audit. That was almost 70 percent more than three years earlier.

Standard and Poor’s estimates Chinese corporate debt, expected to exceed more than $13 trillion this year, will surpass the United States level by next year. The ratings agency said in a report last May that a “substantial portion” of that debt was in state-owned enterprises, which make up about 80 percent of the top corporations in China. The United States economy is more than 70 percent larger than China’s as measured by nominal gross domestic product.

In the speech on Monday, Mr. Wu said that private companies and state enterprises had to receive “equal treatment’’ in a system that promoted “fair competition.’’

via:http://sinosphere.blogs.nytimes.com/2014/02/11/a-leading-chinese-economist-warns-of-a-difficult-year-and-dead-companies/?partner=rss&emc=rss