China Plans to Merge State Companies While Avoiding Job Cuts

  • Panic about economic downturn has surpassed expectations
  • Regulator wants companies to be ``bigger and better''

China will combine more of its biggest state-owned enterprises as part of a sweeping plan to cut overcapacity in the $18 trillion sector but won’t see the widespread layoffs that accompanied a similar overhaul in the 1990s, a senior regulator said.

Reform of China’s state-owned enterprises must balance many interests, especially those of employees, Xiao Yaqing, the chairman of the State-Owned Assets Supervision and Administration Commission, told a briefing in Beijing. Big state-owned enterprises will be made stronger while duplication will be eliminated, he said.

“We are in the business of growing bigger and better,” Xiao said at the briefing, held on the sidelines of China’s annual legislative session. He said that reform is split into two tracks: cut overcapacity in some industries while capturing growth others like aerospace, nuclear power, high speed rail, smart grid technology and renewable energy.

Xiao’s remarks highlighted the thin line that Chinese regulators must walk as they seek to implement President Xi Jinping’s plan to slim down bloated state-owned companies as economic growth slows in China. State-owned companies have become plagued by overcapacity and inefficiency, but also provide jobs to millions of people and power a huge portion of the economy -- from energy to commodities to shipping.

More Consolidation

Last year the number of enterprises administered by Xiao’s regulator drop from 112 to 106, with high-profile mergers by China Ocean Shipping Group and China Shipping Group, as well as two trainmakers. Xiao said the consolidation that occurred last year was going “not too bad,” and more can be expected this year.

Xiao said China won’t see the sort of layoffs recorded in the last major round of state-owned enterprises reform in the 1990s under then-Prime Minister Zhu Rongji. Under Zhu, some 60,000 firms were closed and 40 million workers lost their jobs, according to government data. This time, China has announced plans for 1.8 million job losses in the coal and steel sectors.

Even so, not all workers in “old economy” industries such as coal and steel have skills that are transferable elsewhere. China’s economy slowdown has fanned jitters and broader panic as the growth sinks to its lowest in two decades.

“The economic slowdown is within expectations, but what has exceeded our expectations is the panic,” Xiao said. “Panic is more frightful than the downturn -- it may worsen the downturn.”

In December, China set a two-year deadline for money-losing enterprises owned by the central government to improve their performance, with firms that suffer losses for three straight years liable to be shut down. The sector is now being divided into companies that are considered commercial or public-service entities.

Among those companies targeted for mergers could be the airline sector. In October, people familiar with the matter said China is considering combining some operations of the nation’s three biggest airlines.

— With assistance by Clement Tan

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