China to let 2,000 SOEs die on the vine; that leaves 157,000 to go

It’s probably a good thing that China is going to let 2,000 money-losing state-owned enterprises die of natural causes over the next five years. 8,000 others were shed over the past seven or so years. It’s a good start, but once these are out of the way, there are about 157,000 others.

I am no economist, but it appears to me that this is the conundrum of China’s economy:

”The policy of allowing these loss makers to go bankrupt will make China’s employment situation much tougher,” the official was quoted as saying.

State-sector reforms have led to the shedding of tens of millions of workers every year, many of whom cannot find new jobs.

The Ministry of Labour and Social Security said that China needed an additional 24 million jobs for its unemployed urban residents.

That’s 24 million jobs for urban residents alone. I don’t even want to think of how many in the countryside are out of work. On top of this, the government is always borrowing more and more to support the non-productive, cash-bleeding SOEs, so the banking system is under perpetual strain.

And that’s where the “maintain social stability at all costs” mentality steps in. Once you have any sort of panic, any run on the banks, the entire system is threatened. I realize the situation is more complex than that, but I was always aware when I lived there of just how fragile things really were.

A common myth, I believe, is that multinationals in China are thriving, and that the Chinese are lining up to buy foreign goods. I’ll take that back — it’s half myth. There is no doubt a sliver of the vast population is indeed buying Mercedes sedans and Louis Vuitton bags. And the middle class is certainly growing, though I believe most readers would be amazed at what would constitute the “middle class” wages of, say, an accountant or marketing manager in Beijing.

I would guess that most of the Louis Vuitton, Ermenegilda Zegna and Hermes boutique shops that seem to be everywhere in Shanghai and Beijing are breaking even (maybe), thanks to that high-spending sliver at the top, as well as the expats. But I can’t imagine anyone getting rich from them.

Most companies seem to feel they must establish a presence in China now and take advantage of the great marketplace of the future. I can state for a fact that nearly all the multinational communications companies there are operating at either a loss or with profits that are razor-thin. But still, they all feel they need to be there. And I think it’s that way in other sectors as well.

Time will tell if this is an ingenious strategy or a doomed goldrush. I honestly can’t say. Some are definitely doing very well, especially certain auto manufacturers like Volkswagen and Buick, which made shrewd deals to assemble their cars on Chinese soil. Others are operating at a painful loss.

One thing’s for certain: the new pheomenon of the Chinese millionaire and of that small sliver at the top that can afford Prada bags and trips to Paris is a mixed blessing when it comes to holding the society together. Their money is certainly trickling down, but it also exacerbates the already shocking discrepancy between the nouveau riche and the dirt-poor peasant/migrant worker. The government appears to be truly concerned (justifiably, IMHO), about a possible “Let them eat cake” gulf between the rich and poor.

This is why each year, in keeping with a tradition started by the Great Helmsman Mao in the early 1960’s, they resurrect the mythological figure of Lei Feng and milk it shamelessly. The message is similar to “blessed are the poor, blessed are the meek” — Lei Feng led a happy life by aspiring to be “a screw” in the Chinese Communist machinery, and you should feel that way, too! This theme is repeated ad nauseum on the Party’s networks, especially around Lei Feng’s birthday.

And yet, how can the poor laborer, being told how glorious it is to be poor and subservient — how can he not feel frustration, envy and a sense of being duped when he sees the proud owner of a spanking new Mercedes drive by? Can he really take great joy and pride in his poverty?

Tough situations. I’d have to say that holding it all together — the tangled mess of SOE’s, the exhausted banking system, the new social imbalances, the unbelievably huge legions of unemployed (not to mention those in the countryside working for literally slave wages) — is a task I wouldn’t wish on my worst enemy. It’s been done so far by a sort of juggling act, aided to a huge extent by the draw of big MNCs that set up their manufacturing facilities in China. But at some point there’s going to have to be a lot more pain felt somewhere. That day won’t be a pretty one.

Once more, I started off with the intention of writing a few paragraphs and found myself wandering off in every conceivable direction. Sorry.

The Discussion: One Comment

Richard, an excellent post. These are the hard facts that challenge every person in China, even for those who deny the madness of the Communist Party and accept the lies about their history. These are the real factors that may ignite any real change in China over the next 20-50 years, not the illusions of progressive change by the CCP (as you’ve noted in other posts).

September 4, 2003 @ 3:54 pm | Comment

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