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Economy

China state groups gobble up struggling private companies

Growing trend of nationalisation sparks warnings of risk to economic vitality

SHANGHAI (Financial Times) -- Chinese state-owned enterprises have nationalised at least 10 privately owned groups this year, prompting warnings that the trend risks sucking the vitality out of China's economy.

While most of the country's largest companies are SOEs, the private sector is the economy's main engine, contributing 60 per cent of growth in gross domestic product, 90 per cent of new jobs, and more than half of all fiscal revenue, according to an industry association for private companies.

But private groups have suffered disproportionately under Beijing's aggressive campaign against debt and financial risk over the past 18 months. While SOEs generally enjoy easier access to loans from state-owned banks, private companies have been major recipients of credit from non-bank lenders.

The combination of a sharp contraction of shadow banking and a slowing economy has left many private groups starved of capital and seeking white knights to rescue their businesses.

"We are very cautious on offering loans right now," said Rong Ling, head of the research department at Changshu Rural Commercial Bank, citing the weak economy. "For private enterprises, at present we only recover loans rather than offer loans."

Twenty-one privately owned groups have sold large stakes to SOEs since the start of 2018, according to stock exchange filings. Of these, 10 are de facto nationalisations because the SOE will become the formerly private company's largest shareholder.

The acquisitions and stake sales range across sectors from silver smelting to holiday resort development and the manufacturing of environmental protection products.

"The efficiency of SOEs is usually lower than private enterprises'. If private groups are merged into SOEs, the SOEs will begin to dispatch leaders and party secretaries to the private group. It's very likely to stifle that private company's original vitality," said Li Yang, director of the Institute of Finance and Banking at the Chinese Financial Academy of Social Sciences, a think-tank that advises the government.

"Amid this big wave [of acquisitions], if we do not diligently implement the basic strategy of SOE reform, then when we look again in two years, the consequences will be worrying," he said.

In recent months, China's policymakers have sought ways to support private groups, including launching a nationwide survey asking about the difficulties they face.

In addition to financing difficulties, private groups reported pressure from Beijing's drive to slash excess capacity in sectors including steel, coal and aluminium. Critics say that campaign has heavily affected private groups while sparing SOEs from factory closures and production limits.

"We will deliver and step up policy measures in support of the private sector [and] remove all hidden obstacles to their investment," Premier Li Keqiang said in a speech at the "Summer Davos" conference in Tianjin last week.

A related form of pressure on private groups is the increased use of company stock as collateral to obtain bank loans. The sharp decline in China's equity markets this year has triggered automatic sales of that collateral to protect creditor banks.

In some cases, shareholders of private groups have sought buyouts to repay their debts and avoid share sales by banks.

"Whoever has money can buy [the private companies' shares], but usually that's SOEs," said Feng Lun, chairman of property developer Vantone Holdings. "Their financing is easier."

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