Tuesday, September 15, 2009

Re-nationalization?

Today ChinaStakes posted an article warning of difficulties to come related to China's mis-spent stimulus funds.
During the economic crisis, the government has issued stimulus policies to avoid in the short term business closures and layoffs, but the side effects of this "medicine" are becoming apparent as market mechanisms have not been allowed to play a role and resources have flowed into inefficient sectors.

Both the government's 4 trillion yuan stimulus package and the banks' first half 7.4 trillion yuan lending splurge have been feasts for SOEs in the economic winter.
...

Flush SOEs are turning their attention to high profit areas where the private economy is relatively active, such as real estate and mining and steel, and getting involved. Central firms bid for "Land Kings," private coal mines in Shanxi Province are being snatched up by SOEs, reconstruction in the private steel sector has stopped while loss-making, laggard, and inefficient state-owned steel firms are helping themselves to private iron and steel companies with government assistance.
Unable to expand capacity in their own industries, many SOEs took government stimulus funds anyway, apparently hoping to think of how to spend them later. And now it looks as if the SOEs have discovered what economists have been saying for years, that the private sector is better suited to creating value than the public sector.

And since stimulus funds have basically been off-limits to private firms, they may find offers of cash from big SOEs to be irresistible, choosing to accept the embrace of the state over inevitable bankruptcy. (While it would be interesting to see some statistics on how many private sector firms have been swallowed up, it may be awhile before they are available.)

The SOEs, on the other hand, may be hoping to cash in on private sector innovation and efficiency. While the learning opportunity certainly exists, once the SOEs control these private firms, who will be learning from whom?