China's Corporate Reform Yields a Different Kind of Profit

Aug 20, 2017 | 13:05 GMT

Fixing up China's state-owned enterprises (SOEs) has been on Beijing's to-do list for decades.

Over the past few decades, China's state-owned companies have racked up debt faster than they can pay it off.

(KEVIN FRAYER/Getty Images)


  • Chinese state-owned enterprises (SOEs) in industries that hold the bulk of the country's outstanding corporate debt, such as steel, construction and real estate, will bear the brunt of a sustained slowdown in the real estate sector.
  • A larger debt-for-equity swap program will allow SOEs to offload bad loans, but it could prove to be an expensive solution if managed improperly.
  • Politicians, particularly at the local level, will advocate mergers among China's large but heavily indebted firms as a less disruptive alternative to declaring bankruptcy.
  • China's push to reform its foundering SOEs is less about corporatization than it is about strengthening state-owned industries — and by extension, the Communist Party's hold over the country's political economy. 

Fixing up China's state-owned enterprises (SOEs) has been on Beijing's to-do list for decades. But as the companies have become increasingly buried under mountains of debt, addressing their deep structural flaws has once again moved to the top of the government's agenda. Chinese leaders are now working to speed the process of diversifying the firms' shareholders beyond the state, to expand corporate debt-for-equity swap programs and to phase out massive "zombie corporations" operating at a loss, all in hopes of keeping the nation's most important conglomerates afloat. Beijing's idea of successful reform, however, has little to do with instilling market principles and everything to do with preserving the power of the state....

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