China Sets 2017 Deadline for State Firms to Limit Losses

  • Firms may be closed if they post three straight annual losses
  • China is overhauling bloated state sector to boost growth

China has set a two-year deadline for loss-making enterprises owned by the central government to improve their performance, with firms that suffer losses for three straight years liable to be shut down, while sending a signal to firms controlled by provincial governments to step up its act.

QuickTake China’s Managed Markets

"By the end of 2017, a significant drop in losses is to be expected for enterprises whose losses are incurred from operations," the State Council’s State-owned Assets Supervision and Administration Commission, also known as SASAC, said in a statement Friday. SASAC pledged to "close, suspend, combine, divert, peel off and reorganize" loss-making enterprises in industries suffering from overcapacity and which can’t meet state standards for energy consumption, environmental protection, quality and safety.

Enterprises should leave the market through asset reorganization, transfer of property rights, closure or bankruptcy if they suffer three consecutive years of losses "and their business is not in line with the direction of structural adjustment," the statement added.

China is overhauling inefficient state-run companies to bolster an economy headed for its slowest growth in 25 years. The plan aims to cut out sectors plagued by overcapacity while creating globally competitive firms in high-value sectors such as aerospace and advanced rail technology. In June, China completed the merger of two of its largest train-equipment companies to form CRRC Corp., seeking greater economies of scale to compete for contracts globally.

"That’s a very explicit statement, but the real big issue lies with local-level state enterprises, not necessarily the national ones supervised by SASAC," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. "SASAC might take the lead here and it’s a welcome move, but we need to see much more action at the provincial level to close down excess capacity."

SASAC supervises and manages state-owned assets that are under the supervision of China’s central government, while the various provinces and cities in the world’s second-largest economy manage companies through their own, similar agencies.

More Mergers

Bloomberg News reported in August that China was considering merging China Cosco Holdings Co. and China Shipping Container Lines Co., its two major shipping companies, to form Asia’s largest container shipping line. On Thursday, Caixin reported that the State Council had approved the plan to combine the two into a new Shanghai-based entity called China Cosco Shipping Group. The companies’ listed units, whose shares have been suspended since early August, will announce the merger Friday, the magazine said, citing unidentified sources.

Zhang Xiwu, SASAC’s vice chairman, said at a press briefing Friday morning that the shipping groups would release merger details "in the near term." He added that 10 documents with further guidance on reform also would be released soon.

Earlier this week, China Minmetals Corp., the country’s biggest metals trader, agreed to buy China Metallurgical Group Corp., a government-owned engineering and mining group. SASAC is setting upa state-owned fund to absorb bad debt in the mining sector, people familiar with the issue said Wednesday.

In response, Zhang said SASAC is still studying the issue of "zombie companies," including how to help them and related industries overcome their difficulties.

"Everybody knows there are two problems associated with resolving zombie companies: One is ’Where’s the money coming from?’ and two, ’Where do people go?’" Zhang said at the press briefing. "If we cannot solve these two things, it’s very difficult to help the industry and companies exit."

— With assistance by Sarah Chen, and Clement Tan

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