China Cracks Down On Debts To Workers And Private Firms – Analysis


By Michael Lelyveld

China’s government has renewed pressure on state-owned enterprises to pay their debts to private businesses and migrant workers, shining a light on what amounts to a hidden subsidy.

On Jan. 8, the cabinet-level State Council under Premier Li Keqiang claimed significant progress in reducing the arrears of state-owned enterprises (SOEs) in 2019, while urging them to pay all overdue debts by the end of this year.

In a series of vaguely-worded reports, the official Xinhua news agency said that government departments and SOEs had “resolved” more than 890 billion yuan (U.S. $129.1 billion) of arrears owed to private companies and small-and-medium-sized enterprises (SMEs) in 2019.

Seventy-five percent of the total had been “cleared” by the end of the year, beating the government’s target of clearing more than half during period, the reports said.

But aside from the self-congratulatory message, Premier Li had stronger words for the SOEs and departments that had not paid their bills to private firms and overdue wages to migrant workers before the start of the Spring Festival holidays.

“A major part of overdue payments are owed by government authorities and state-owned enterprises to private, small businesses,” said Li, according to one Xinhua report.

“This has made ill impact to government credit, to our business environment and market confidence, as well as to people’s lives,” he said.

In a translation carried by the official English-language China Daily, Li was quoted as saying that the arrears problem “has directly affected the government’s credibility.”

There are several ways of reading these reports and comments on the arrears.

One is that the combined social pressures and financial strains on SOEs, the government and the economy have grown so great that officials have been unable to avoid a public tongue-lashing carried by state media.

A comparison with numbers published by Xinhua nearly a year earlier suggests this may be the case.

On Feb. 25, the State-owned Assets Supervision and Administration Commission (SASAC) said that in late 2018 it had found 111.6 billion yuan (U.S. $16.1 billion) in unpaid debts owed by centrally-administered SOEs to private companies.

SASAC said the central SOEs had paid all of the 820 million yuan (U.S. $119 million) in overdue wages to migrant workers and, as with the most recent report, 75 percent of the arrears to private firms, amounting to 83.9 billion yuan (U.S. $12.1 billion).

The figures cited in the most recent reports are some eight times higher, referring to the debts of thousands of SOEs at the provincial and local levels, not just the 96 giant centrally-administered SOEs.

The most recent reports suggest that the arrears problem has been much greater than last year’s success story claimed.

“Provincial governments shall shoulder chief responsibility for the repayment work in their provinces,” Xinhua reported the State Council as saying in January.

‘A hidden subsidy’

The power of SOEs to withhold payments to private enterprises and migrant workers has been, in effect, a hidden source of financing and a subsidy for inefficient operations that has remained largely off the radar screen.

“I suppose it’s a hidden subsidy, but their visible subsidies are much larger,” said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington.

Unlike bank lending, the non-payment option turns private businesses into involuntary sources of funding.

“State-backed companies’ advantages aren’t limited to bank finance. Their dominant market position helps them squeeze private sector suppliers by refusing to make timely payments for goods,” said The Wall Street Journal’s Heard on the Street column last February.

“The problem tends to worsen when overall industrial SOE growth slows — like now,” it said.

“Rising payables at SOEs could effectively extract an additional 1 trillion yuan (U.S. $148 billion) from private companies in 2019,” the paper said, citing an estimate by Hong Kong-based Gavekal Dragonomics.

The magnitude of the arrears problem as reported in January suggests that the estimate was not far off the mark.

SOE profit growth appears to be slowing sharply, creating the conditions for non-payment to private companies and migrant labor.

In the first 11 months of 2019, overall SOE profits rose 5.3 percent from a year earlier, compared with 12.9 percent for the full year of 2018 and 23.5 percent in 2017, according to official figures reported by Xinhua and China Global Television Network (CGTN).

Profits of the centrally-administered SOEs alone were up 10.8 percent last year, SASAC said, but it is unclear whether the earnings reflected the overdue debts.

China’s 240 million migrant workers are particularly vulnerable to victimization by non-payment.

A photo posted online with the China Daily report depicted two workers receiving stacks of recovered yuan from a policeman in Liaoning province in 2017.

Wage recovery uncertain

The real extent of wage recoveries is uncertain. On Jan. 2, the Ministry of Justice said it had helped workers recover over 27 million yuan (U.S. $3.9 million) in lost wages through a legal services website last year.

Over the past year, the government has mounted a major push to improve conditions for private businesses following complaints about limited access to financing and preferential treatment for less productive SOEs.

In December, the Communist Party of China (CPC) Central Committee and the State Council renewed promises to improve the business environment for private companies, citing a frequently-repeated formula.

The private sector contributes “more than 50 percent of tax revenue, 60 percent of GDP, 70 percent of technological innovation, 80 percent of urban employment and 90 percent of total firms,” Xinhua said.

Despite the proportions, China’s state banks have continued to view lending to the private sector as a higher risk than financing SOEs.

While the arrears problem has helped to prop up the state sector, it has contributed to lower rates of private investment, creating a drag on the economy.

Although Li’s statement may be a sign that the government has taken a tougher stand on non-payment, the state media reports suggest there are still significant loopholes for the SOEs.

One Xinhua headline directs government departments and SOEs to make overdue payments to smaller firms “as much as possible before the end of 2020.”

According to another report, the State Council has ordered that “undisputed arrears” should be paid by the end of the year.

But the government used stronger language on the subject of wage payments.

“In particular, no government departments, SOEs or public institutions should, for whatever reason, owe migrant workers’ wages,” the State Council was quoted as saying.

The delayed payments are one form of support for SOEs that have received little notice as the government struggles to keep economic growth on track.

The government has also cut electricity costs for commercial and industrial users for the third year in a row, most recently with a reform plan that ends the linkage between coal and power prices while barring rate increases for any reason this year.

China also exceeded its target for lowering taxes and fees with breaks reaching 2.36 trillion yuan (U.S. $342.1 billion) last year. Reductions for manufacturing accounted for nearly 70 percent of the value-added tax cuts, the Ministry of Industry and Information Technology (MIIT) said, according to Xinhua.


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