China continues to create ever larger and more powerful state enterprises

China this month finalised the merger of two country’s large state-owned chemical producers. Both SinoChem and ChemChina will now be held under the newly created SinoChem Holdings. The new firm will employ 220,000 people and operate in 150 countries. The combined revenue of SinoChem and ChemChina in 2019 amounted to roughly USD 150 billion, which would put the new company among China’s ten largest firms and making the Fortune top 40 list of the world’s largest corporations.

The merger, which had been discussed for a few years, was given the green light in March. The successor firm will have the same administrator as the previous two firms: the State-owned Assets Supervision and Administration Corporation (SASAC). Analysts see SinoChem as a financially solid firm, while ChemChina is struggling with debt from its 2017 acquisition of Swiss Syngenta for over USD 40 billion, which is still the record for a foreign acquisition by Chinese company.

The merger of the chemical companies reflects China’s thinking on reform of state firms. For years, “reform” has implied improving the profitability of state-owned enterprises (SOEs) through merging companies into ever larger agglomerations combined with various programmes to improve their administration. Privatisation of state firms beyond through the sale of minority stakes to investors has not been on the agenda. The urge to merge is evidenced e.g. by the fact that SASAC still administers 97 firms, down from over 150 a decade ago. Many of these firms have a myriad of subsidiaries, not to mention that local governments have their own asset supervision and administration commissions managing a vast number of firms. Taken together, the OECD estimates that China has a total of about 150,000 SOEs.

The creation of ever larger and more powerful SOEs is further seen in SASAC’s portfolio of firms under its administration. SASAC reports that the total assets of its central and local government administered SOEs was about 120 trillion yuan (174 % of GDP) at the end of 2015. By the end of 2020, the value of SASAC assets had risen to 220 trillion yuan (215 % of GDP). Researchers note that state-owned and local-government-owned firms in China are less efficient than their counterparts in the private sector, and that their increased role in the economy generally erodes productivity.