MNI ANALYSIS: China SOE Shopping Spree Troubles Reformists

     BEIJING (MNI) - State-owned enterprises (SOEs) have stepped up purchases of

troubled private companies as their share prices have tumbled, prompting fears

among pro-reform economists and officials that the government is responding to

hard times by returning to a publicly-backed industrial policy

     This year, 24 companies have sold controlling stakes to SOEs, according to

data from Wind Information. The private sector has struggled for financing as

the authorities' deleveraging campaign and supply-side reforms eat into profits,

sending Chinese stock markets to the lowest levels in four years. SOEs, on the

other hand, have been backed and financed by state lenders.

     Profits by large industrial SOEs increased almost 27% in the first eight

months of the year, compared with growth of just 10% for their private-sector

counterparts, official data showed.

     The official Securities Daily wrote Wednesday that SOE takeovers are

win-win deals, with cash-rich state enterprises helping private businesses

facing financing difficulties.

     "SOEs may be the last hope for private businesses suffering a cash crunch,

as they enjoy preferential treatment from lenders given their state guarantees,"

a banking source told MNI.

     --RISK TO INNOVATION

     But hustling private companies into state hands risks stifling innovation,

said Fan Gang, director of the National Economic Research Institute and an

ex-member of the People's Bank of China's Monetary Policy Committee.

     "The authorities should know that they should not hurry private companies

into becoming SOEs. Private firms will lose their development impulse, because

their assets become state-owned and under strict control," Fan said in a speech

on Wednesday.

     Another sign of possible concern about a fresh bout of SOE growth came

during the G30 International Banking Seminar last Sunday, when Yi Gang, governor

of People's Bank of China, said that lenders might be required to treat state

enterprises according to the principle of "competitive neutrality." This could

erode the preferential treatment on loans they currently receive in comparison

to private companies.

     --FRUSTRATION

     It is unusual for the head of PBOC to publicly comment on SOE reform, and

his comments may have signalled frustration at perceived policy discrimination

against small private businesses, which has hindered efforts by the bank to

stimulate the economy with additional credit.

     Prominent scholars have also publicly expressed concern that SOEs are

advancing, not reforming, under President Xi Jinping's leadership.

     Xi reiterated his endorsement of the state-led economic model during a

recent trip to Northeast China. "SOEs have important status with pivotal and

irreplaceable purposes: they are an important force for the Party and the

country to depend on," he said, according to Xinhua.

     Peng Huagang, spokesman for the State-owned Assets Supervision and

Administration Commission recently denied any "ideological motives" behind the

SOE's purchases of private firms, saying the transactions are purely

market-driven.

     Defaults on bonds have reached CNY83 billion by Oct 12, topping a record

set in 2016, Wind data show. The number of defaulting companies rose to 28,

three times that seen in 2017. Among 16 defaulters in the third quarter, 12 were

private companies.

     "Cases of loan defaults are still increasing, so we don't dare to lend to

private small businesses," said a loan manager at a large bank, who said he had

provided only two loans so far this year, totalling less than CNY1 billion.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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