China's state firms are bigger than Germany and that's a problem


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China's state firms are bigger than Germany and that's a problem
If China's bloated and inefficient state owned enterprises were a nation, they'd make up the world's fourth-biggest economy.
And with private investment retreating, they may be growing still, according to fresh research from Bloomberg Intelligence economists Fielding Chen and Tom Orlik. That makes reforming a sector that accounts for about 40 percent of China's industrial assets and 18 percent of total employment key to the nation's economic future. And tough to do.
In 2014, the latest year for which there's solid data, return on assets for state firms was just 4 percent versus 11 percent for nimbler private firms.
"That’s bad news for growth, as a high proportion of capital is allocated to a relatively unproductive set of firms," Chen and Orlik wrote.
It's also bad for financial stability as capital still flows to these less-efficient firms.
SOE's are most dominant in industries that require the most capital, like electricity generation or chemicals.
And when it comes to private versus public, it's the non-state firms that are almost always the more efficient.
So why does this all matter? Because the performance of SOEs continues to get worse, and stress from high debt is rising, Bloomberg Intelligence research finds.
There is a bright spot: while SOEs stack up poorly against local and global peers, they look OK when compared with other emerging market firms.
"The outlook for China’s medium-term growth depends on the government’s capacity to reform a sprawling, inefficient state sector," according to BI's Chen. "Increasing efficiency doesn’t require wholesale privatization of major firms. It does require state giants in strategic sectors to slim down and focus on their core competence, opening more space for private firms to compete."

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