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Why China's $1 Trillion Merger Makeover Could Fail

  • State-led mergers haven’t improved profits or asset returns
  • Chinese labor productivity less than one-tenth of Japan, U.S.
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Photographer: Johannes Eisele/AFP via Getty Images

To grasp the scale of the challenges facing Chinese leaders in revamping their sprawling and inefficient state-owned enterprises, consider this: The combined revenue of 100-plus government-owned firms, spanning from train makers to banks and power companies, rivals Japan’s entire $4.1 trillion economy

China’s SOE sector, traditionally a source of political patronage and economic power for the Communist Party, accounts for about 40 percent of China’s industrial assets and 18 percent of total employment, according to Bloomberg Intelligence economists Fielding Chen and Tom Orlik. These government creations are also dragging down growth, with their return on assets in 2015 estimated to be at 2.8 percent, versus 10.6 percent for private sector-firms.