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Economy

China's state-run zombies alive, not well, in the northeast

Local resistance thwarts efforts to introduce private shareholder vigor

Dongbei Special Steel, a state-owned company that collapsed in 2016, was rescued when Jiangsu Shagang took a 43% stake the following year.   © Reuters

DALIAN, China -- Reforms to state-owned companies in northeastern China have stalled, along with the region's economic growth.

Compared with other regions in China, the government's "mixed-ownership reforms," which seek to bring private shareholders into state-owned companies, have been slow to take root, causing the region to underperform compared with other parts of the country.

State-owned companies' share of corporate earnings in the northeast are twice the national average. A provincial official blames the slow progress on a lack of urgency on the part of managers who are "content with the status quo."

In early August, a Shanghai court ordered a subsidiary of Shenyang Machine Tools to pay about 200 million yuan ($28.3 million) in arrears to its creditors.

Shares in the company known as SMTCL are largely held by the Shenyang municipal government. The company suffered a net loss of about 800 million yuan in 2018, and it forecasts another loss in the six months ended June. With its business slumping, SMTCL has been unable to service its debts. It is seen as an uncompetitive zombie that is kept in business with government support.

According to a local news report, SMTCL was established in 1935. After computer-controlled machine tools from overseas began arriving in China the 1960s, the company's manually operated products became obsolete.

Government subsidies kept SMTCL out of financial trouble for three years, starting in 2012, but it posted losses in 2015 and 2016. It returned to profit the following year, after selling four group companies for just 1 yuan, but its products remained uncompetitive. It again fell into the red in 2018.

In 2017, state-owned enterprises accounted for about 46% of the combined revenue of all large companies in China's three northeastern provinces, compared with the national average of 23%. Data for 2018 has not been published, but a senior provincial official in Liaoning told Nikkei in April that the delay in introducing mixed ownership was a big challenge.

President Xi Jinping last September visited the northeast to push for more economic openness, but there appears to be local resistance.

An employee at a private company in Liaoning complains that state-owned companies receive unfair advantages that let them underbid for contracts. Even high-level officials have trouble pushing for change at state-owned companies, said one such official in a northeastern province. Many stakeholders, including officials from economic departments of the central government, are making reforms even harder.

In 2017, a unit of steelmaker Jiangsu Shagang took a 43% stake in Liaoning-based Dongbei Special Steel Group, a state-owned company that went under the previous year. The investment helped Dongbei Special Steel strengthen its product development and lifted it back into the black. But such cases are rare.

Last year, economic growth in China's three northeastern provinces came in below the national average of 6.6%. Liaoning's gross domestic product rose 5.7% on the year, while Jilin logged 4.5% growth and Heilongjiang saw a 4.7% expansion.

The fate of reforms at state-owned companies in the region remains murky.

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