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Posted by on Mar 31, 2018 in China, Economy & Trade, Featured | 1 comment

Chinese Industry At The Dawn Of A New Era

Chinese Industry At The Dawn Of A New Era

China stands at an important juncture. Despite fears about its slowing growth, the government’s economic target for 2018 has remained the same as last year’s. Anti-graft campaigns under President Xi Jinping have made sweeping changes to the makeup of company boards and local governments. New ambitions within China’s government, seeking to strengthen its position on the world stage, have led to far-reaching reforms and strategic initiatives. These changes are felt at all levels of Chinese society, not least among the main drivers of its economic success: the firms that make modern China’s economy so dynamic. The political and economic landscape these firms face—and the risks they must contend with—is changing, meaning they must rapidly adapt to this new reality.

Take China Railway Construction Corporation (CRCC) for example, a large state-owned enterprise (SOE). Formed in 2000 as a spinoff of the now-defunct Ministry of Railways, the firm has established itself as the world’s second-largest construction and engineering firm by revenue in 2014. CRCC mainly engages in the construction of infrastructure projects, in China and internationally. How might this firm be affected by these sweeping changes, and how might it capitalize on them?

The CRCC has signed $17.5bn worth of railway projects in Africa under President Xi’s Belt and Road Initiative and is likely to keep profiting from this key opportunity for growth in the coming decade.

Towards deleveraging and performance

The Chinese government has launched several campaigns and initiatives aiming at drastically reforming the way its SOEs operate. Shen Jianguang, Chief Asia economist at Mizuho Securities Asia, explains how, while private firms that operate inefficiently inevitably shut down after “several years of losses,” large SOEs “can keep getting bank loans or government support” even after years of underperformance. For years, Chinese economists have clamoured that “dealing with unwieldy state-owned enterprises is the single most important step to restructuring the economy.”

These “zombie companies,” or large SOEs kept alive largely thanks to government subsidies and loans, have led to corporate debt ballooning to unsustainable levels. This prompted an aggressive push towards deleveraging, a term which describes China’s campaign to reduce its overall debt, over the past few years. This initiative has since led to significant improvements, with key debt and solvency metrics being at their best in years. For a firm like CRCC, these policies would have the effect of reducing its overall debt levels and eliminating any excess output, which would constitute a boon to its performance and profitability.

Beyond these government-led changes, a firm like CRCC could implement internal governance reforms and achieve greater performance in a relatively short timeframe. According to McKinsey & Company research, key initiatives that could bring Chinese SOEs’ performance up to that of private firms’, such as a “clear mandate, an intense focus, and a workable talent strategy,” are easily attainable and do not necessarily require government support. A multi-faceted push towards greater efficiency in SOEs could result in firms like CRCC independently adopting these performance-maximizing initiatives, further improving its performance.

Capitalizing on China’s ambitions

Beyond internal initiatives at reviving the performance of its sluggish state-owned giants, China has been implementing new strategic development and industrial policies over the past years. These strategies aim to strengthen China’s position as a world power and to extend its regional and global influence. SOEs like CRCC can be expected to act on the opportunities these strategic policies present.

Perhaps the best known and most discussed initiative of this sort is the One Belt One Road Initiative (OBOR), also known as the Belt and Road Initiative. This ambitious $900 billion investment plan seeks to build massive infrastructure projects across more than 80 countries, in order to consolidate China’s influence over the Eurasian continent. A firm like CRCC has much to gain from this sweeping initiative, as it is in a uniquely advantageous position to help China deliver on its infrastructure vision. Indeed, CRCC has already signed $17.5bn worth of railway projects in Nigeria and Zimbabwe organized under the aegis of OBOR, and is likely to further profit from this key opportunity for growth in the coming decade.

Another key initiative recently launched by the Chinese government that firms like CRCC could benefit from is China’s renewed industrial policy. Made in China 2025, launched in 2015 by Premier Li Keqiang, seeks to move Chinese manufacturing towards innovation-driven “high valued-added industries,” notably modern rail transport equipment, through mechanisms like subsidies and increasing government loans to key sectors. By profiting from these incentives, the CRCC can more easily invest in high-tech and high-speed rail, facilitating rapid growth in important innovative markets and ensuring its long-term competitiveness.

New threats

Alongside these new opportunities for profit come new, complex risks that firms must face and manage. One such threat to China’s prosperity is a creeping increase in authoritarianism.

The quasi-unanimous decision to eliminate presidential term limits in March 2018 signalled the beginning of a “new era,” as per President Xi’s speech at the parliamentary meeting. The mounting risk of a return to “personalistic rule” in China have since been raised by analysts like Susan Shirk, director of the 21st Century China Center at the University of California, San Diego. While this does not necessarily signal the end of the free market in China, such a risk cannot be entirely discounted, especially in the wake of recent events like the government’s seizure of the large conglomerate Anbang Insurance due to corruption and solvency issues.

Many argue that China would not eliminate what made its economy so dynamic in the first place: that is, a great openness to foreign trade and freer markets. Rolling back market reforms in China would be a grave mistake, and a firm like CRCC would greatly suffer from it. The CRCC and other construction firms rely on the free market in order to thrive, both domestically and internationally.

No matter how exactly China behaves in the coming few years, we are guaranteed to witness substantial changes in its policies towards SOEs, its industrial policy, and its foreign policy initiatives. At the dawn of this new era, in which President Xi claims “high-quality growth, reducing pollution, and risk control” are new priorities, the many firms that drive China’s economy are bound to be greatly affected—hopefully, in a way that benefits us all.

Edited by Jason Li

1 Comment

  1. The China Rail entry to the U.S. market will be seen as too great of a political risk with virtually no sales in the United States. High speed rail will unfortunately stall in the U.S. due to lack of political will, excessive costs, snd more efficient newer technologies.

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