In a file photo, miners push carts containing coal at a mine in Qianwei county, Sichuan. (Liu Jin/AFP/Getty Images)In a file photo, miners push carts containing coal at a mine in Qianwei county, Sichuan. (Liu Jin/AFP/Getty Images)

A rebound in global coal prices became one of the biggest stories in commodities during the second half of 2016. A more than 90 percent increase since mid-year in the benchmark Australian thermal coal prices has lifted stocks of international coal producers.

But don’t tell that to Chinese coal producers. The recent rally in coal prices hasn’t reversed the fortunes of many Chinese coal producers still wallowing in overleveraged balance sheets, high debt burden, and weak demand.

Recent bond market travails of these companies signal more defaults may lie ahead for Chinese onshore issuers as trillions of yuan in bonds become due in 2017.

Sichuan Coal Default

State-owned Sichuan Coal Industry Group missed a bond payment on Dec. 25. A total of 1 billion yuan ($150 million) in principal plus interest were due.

It was the second default for the coal company this year. Sichuan Coal also missed an interest payment in June but that default was ultimately resolved after the Sichuan government stepped in. Bond investors were paid at the end of July with loans from state-owned Sichuan Provincial Investment Group and a consortium of local and national banks.

ATC_Coal

Australian thermal coal prices during last twelve months (Indexmundi.com)

Other Chinese state-owned enterprises (SOEs) are experiencing similar liquidity issues. China’s biggest lender—the Industrial and Commercial Bank of China—on Dec. 30 agreed to invest in Taiyuan Iron & Steel Group, Datong Coal Mine Group, and Yangquan Coal Industry Group via debt-to-equity swaps. Such swaps have been a key tool of Beijing to reduce leverage amongst SOEs by exchanging debt for equity. The swaps instantly eliminate debt and reduce leverage ratios at the cash-strapped firms.

Steel, coal, and other heavy industries have languished on weak global and domestic demand. Beijing also launched a program to shut underperforming mines and plants and reduce its coal producing capacity. China’s Shanxi Province in the northeast is its biggest coal-producing area, accounting for more than 25 percent of the country’s coal production last year.

Trillions of Yuan Becoming Due

Historically, bond defaults have been unheard of in China. But in 2016, 55 corporate defaults were recorded, more than double the number for 2015. And 2017 will likely see even more defaults.

More than 5.5 trillion yuan ($800 billion) in bonds will mature in 2017, or 1.8 trillion yuan more than 2016, according to China Chengxin International Credit Rating Group. That’s a significant amount of cash Chinese companies must come up with during the next year.

Sichuan Coal’s default—assuming the local government declines to extend another bailout—could signal that Chinese Communist authorities are willing to allow more bond defaults going forward. In truth, analysts have expected massive bond defaults for years, while Beijing has been selective in choosing which SOEs to bail out. Regardless, the number of such bailouts has decreased, underscoring authorities’ increasing comfort level with letting companies fail. With the significant amount of bonds due in 2017, a spike in bond defaults will likely result.

Furthering the challenge facing Chinese companies is the economic backdrop, which doesn’t look friendly for the Chinese bond market.

China’s rickety financial system is built entirely on overleveraging with cheap debt.

Like the rest of the global bond market, Chinese bonds have already been under pressure from the U.S. Federal Reserve’s plans of raising short-term interest rates. This has raised yields across the globe. China’s 10-year government bond yield settled at 3.07 percent on Dec. 30, slightly lower than mid-month but far higher than the 2.8 percent range at the beginning of 2016 (bond yields and prices move in opposite directions).

Faced with increased risk of capital flight, China may elect to guide its own rates higher. But in such a scenario, raising new debt would become prohibitively more expensive during a time when many Chinese companies are facing liquidity problems amidst slowing economic growth. The central bank’s actions would further squeeze Chinese borrowers in need of new debt to roll over existing debt.

China’s rickety financial system is built entirely on overleveraging with cheap debt. It is especially susceptible to rate hikes and without the type of economic growth required to withstand such rate increases.

With so much debt becoming due and armed with few options to raise new capital, 2017 could spell disaster for cash-strapped Chinese companies.

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A couple walks on a street at an abandoned industrial area of Houjie town in Donggyuan on Jan. 27, 2016. (Lam Yik Fei/Getty Images)A couple walks on a street at an abandoned industrial area of Houjie town in Donggyuan on Jan. 27, 2016. (Lam Yik Fei/Getty Images)

The privatization process of China’s state-owned enterprises (SOE) has been a process of building a capitalist economic system. Different methods of privatization lead to different forms of capitalism. At the end of 1997, Zhu Rongji launched SOE reforms. This policy was called “Seizing the Big and Letting Go of the Small.”

“Seizing the Big” meant maintaining control over SOEs that owned large-scale assets and those related to national interests in finance, energy, electricity, telecommunications, transportation, etc. After restructuring, these enterprises were allowed to list on stock exchanges, and they could sell part of their shares to Chinese citizens and foreign investment. However, the state still owned the majority shares — meaning that the government continues to “seize” these companies.

“Letting Go of the Small” meant allowing privatization of small SOEs and those with serious losses, so as to rid the government of the burden. The consideration for privatization of small and medium-sized SOEs was who would buy them and in what way. In those days, the average monthly salaries of SOE directors and managers were only a few hundred yuan. Even the red elite and their relatives did not have significant financial assets.

The approach the Chinese Communist Party (CCP) came up with was to order SOE managers to get bank loans, and use the SOEs as collateral for “buying” state property. It then allowed the managers to re-register the SOEs in their names or in the name of a family member. Then, as business owners, they would use business funds to repay the private loans.

Another approach used was for SOE managers to force employees to purchase a part of the business. Employees had to use their family savings to buy into the company in order to keep their jobs. But employees were not allowed to get involved with the transfer of business assets. They were forced to supply funds so that the managers could get ownership of the business.

At the same time, the authorities allowed families of those in power to acquire shares in large listed enterprises through their personal networks. They received free shares and made huge profits when stock prices went up.

Two Privatization Phases

China’s privatization began in the second half of 1997 and was basically completed in 2009. In 1996 China had 110,000 SOEs, and at the end of 2008 there were  9,700 left, including partially privatized large SOEs with the government owning the majority of shares. Privatization was divided into two phases.

The first phase, from 1997 to 2001, was the privatization of small and medium-sized SOEs. Most of these enterprises were privatized by SOE directors and managers.

I analyzed 130 cases of privatization from 29 provinces and summed up several typical tricks and the darkness of the process as part of the research for my dissertation. Their approach was usually to deliberately understate the net assets of the enterprise. Managers then bought the business, using business funds or loans from banks or private borrowers and registered the company in their own name or a relative’s name. Finally, with the new business owner’s identity, they would pay back the borrowed funds with income from the enterprise. They basically paid little to nothing for these SOEs.

A general view of buildings in the abandoned Qingquan Steel plant which closed in 2014 and became one of several so-called ‘zombie factories’ in Tanghsan on Jan. 26, 2016. (Kevin Frayer/Getty Images)

The second phase, from 2002 to 2009, was partial privatization of medium and large-sized SOEs. The approach included listing SOEs after restructuring, managerial ownership transfer, demutualization of workers, foreign joint ventures, and joint ventures with private enterprises. Because these enterprises owned large-scale assets, management could not afford to take on ownership all by themselves. They usually used business funds to buy shares and distributed shares to management cadres, as well as to officials and families who helped approve the listing, forming a common interest group. These SOE cadres and government officials became owners, general managers or board members of medium and large-sized listed companies without any cost to themselves, and they became wealthy.

According to data from two nationwide sample surveys, about 50-60 percent of China’s privatized or semi-privatized enterprises are owned by enterprise management teams. Approximately 25 percent of the buyers were investors from outside of the enterprises; less than 2 percent of shares are held by foreign investment; and less than 10 percent of enterprises are co-owned by management and workers. The management does not allow employee shareholders to be involved in asset managements and transfers.

This type of privatization is equivalent to workers paying management to own the enterprises. This “SOE reform” could be called public robbery and distribution of assets among corporate management, local government officials and the children of officials. In any case, the authorities can not legitimately justify this predatory behavior. Open disclosure would lead to public outrage. Therefore, the government does not allow domestic media to discuss privatization, and Chinese scholars are not allowed to research the privatization process.

Workers’ Social Benefits Dropped

From 1998 to 2003, when the red elite misappropriated SMEs on a large scale through privatization, the authorities deliberately closed the Administrative Bureau of State-Owned Property for six years during the crucial climax of privatization, to provide convenience to the red elite. Although in 2003 the bureau was restored, it rarely investigated state-owned asset misappropriation.

Between 1997 and 2005, large-scale labor conflicts took place across China sparked by misappropriation of public assets related to privatization. The government basically stood with management because officials also benefited from privatization. During China’s privatization, the original welfare system based on SOE collapsed. Many companies gave workers very little money and drove them away. At the time, the CCP used propaganda that laying off SOE workers was a necessary sacrifice of the reform. The government did not want to build a unified unemployment benefits system for those workers and tossed the problem to the management teams. If the head of the company did not want to pay, the government did not intervene. Thus the CCP shamelessly shirked its responsibility to provide social welfare to the workers.

Demolition workers take a rest after cleaning up an abandoned building at the Shougang Capital Iron and Steel Plant in Beijing on May 28, 2015. (Greg Baker/AFP/Getty Images)

By contrast, during Russia’s privatization process, the social welfare system still functioned, and some unemployed workers were able to receive a minimal amount of social welfare. The Russian government never implemented the forced layoff policy and used tax incentives to encourage companies to retain workers. Employees owned about 40 percent of the privatized enterprises.

Compared to the privatization of Central European countries and Russia, the privatization in China was the most unjust and the most ruthless. Clearly, the economic restructuring under an autocracy can disregard social justice without fear of electoral pressure. To the elite, this model is naturally more desirable, but the sentiment among the general public is probably the opposite.

Some western scholars are of the opinion that the authoritarian communist regimes were good for economic restructuring and economic development, because they were able to overcome resistance from the people, and China was often cited as their best example. However, the privatization process in China demonstrates that a totalitarian government tends to ignore social justice, deprives people of their rights and interests, and make arrangements in favor of the ruling elite.

Dr. Cheng Xiaonong is a scholar of China’s politics and economy based in New Jersey. He is a graduate of Renmin University, where he obtained his Masters degree in economics, and Princeton University, where he obtained his doctorate in sociology. In China, Cheng was a policy researcher and aide to the former Party leader Zhao Ziyang, when Zhao was premier. Cheng has been a visiting scholar at the University of Gottingen and Princeton, and he served as chief editor of the journal Modern China Studies. His commentary and columns regularly appear in overseas Chinese media.

To read parts 1 and 2 in this series.

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NEWS ANALYSIS
It’s no hyperbole to call managing China’s economic policy a high-wire balancing act.
After dabbling with letting companies fail last year, Beijing recently announced that the official policy to reform state-owned enterprises (SOEs) going forward will be mergers and acquisitions. China will rule out drastic changes and a “wave of layoffs” to focus on reorganization and consolidation instead, said Xiao Yaqing, head of China’s State-owned Assets Supervision and Administration Commission (SASAC) at a conference on March 12.
Last year, the SASAC presided over consolidation of several large state firms in the strategically important telecommunications, energy, and transportation sectors. Xiao claimed that as a “success” and more of the same will come in 2016.
While preserving jobs is a noble goal, such perfunctory reform likely doesn’t go far enough to solve fundamental problems plaguing the state sector.
Competing Agendas
The Chinese economy—with its reliance on manufacturing and traditional industry—is sputtering. Reforming the dominant state sector is a key first step in Beijing’s plan to diversify into a services and consumption-driven economy.
JPMorgan estimates that China’s 150,000 SOEs employ 17 percent of urban residents, and account for 22 percent of its industrial income and 38 percent of industrial assets. They also make up a vast majority of China’s ballooning corporate debt.
The economic backdrop calls for intervention. The country’s manufacturing sector weakened sharply in January and February due to overcapacity and anemic global demand. Both the official state and Caixin/Markit private manufacturing purchasing managers index (PMI) fell in February. The Caixin/Markit reading of 48 shows the country’s manufacturing sector is squarely in contraction territory, where it has remained in the last twelve months.
MORE:China Bets on Entrepreneurship to Boost Jobs
But for China, economic policy is always intertwined with politics. The No. 1 mandate for Chinese Communist Party is self-preservation, and massive layoffs and deep structural changes are bad politics. The social and political fallout from the type of SOE restructuring required is something the Party cannot stomach.
Head-Scratcher
Former premier Zhu Rongji enacted the first round of SOE reform in the 1990s. Bloomberg estimated that Zhu shut 60,000 companies and eliminated around 40 million jobs. The reform was deep, painful, but ultimately successful in helping to launch China’s subsequent economy growth.
Today, China has ambitious plans for its SOEs. State companies must transfer 30 percent of their profits to the central government by 2020—up from the 15 percent or less requirement today. By 2025, China hopes these SOEs will be profitable enough to go public.
Officially, Beijing is earmarking much of the cash to fund retirement and healthcare costs for an aging population, but most likely, the funds will go to defense spending, espionage, and security/monitoring of its residents.
Against this backdrop, SASAC’s plan of SOE reform is a head-scratcher.
Consolidating SOEs into bigger ones will minimize job losses in the short term. But in the long term, it will worsen the structural problems inherent in a dominant state sector.
In fact, merging and consolidating the state sector could prevent Beijing from achieving its lofty goals. Slow, lumbering SOEs will become even slower and more lumbering. Bureaucracy and red tape will increase, and decision making process will suffer. Also, the size, scale, and bias of large government owned companies could dwarf and decimate smaller, private rivals and put them out of business—hampering the private sector growth that Beijing wishes to cultivate.
More importantly, consolidation doesn’t solve the fundamental issue of inefficiency and overcapacity.
The Hebei Experiment
For proof, China needs to look no further than Heibei Province, which is right outside the walls of Beijing.
In 2008, the government of Hebei province merged two major state-owned steelmakers to form Hebei Iron and Steel Group. It acquired more companies since, to become China’s biggest steel producer.
For the third quarter 2015, operating income at Hebei Iron and Steel fell 24.9 percent from the year prior and 19 percent from the previous quarter. Such losses have been trending over the last several quarters. It’s also mired in debt—as of Sept. 30, 2015, the company’s short and long-term debts are 55 percent of its gross assets.
MORE:China to Accelerate Steel Dumping in 2016
Simply put, Hebei Iron and Steel, a behemoth formed after rounds of mergers, is performing even worse than before.
And there’s little relief in sight. Crude-steel production for the first two months of 2016 dropped 5.7 percent from a year earlier, according to official data from China’s statistics bureau released March 12. Total steel-related production output fell 2.1 percent to 162.28 million metric tons.
One can argue that Hebei Iron and Steel offers anecdotal evidence, as the steel industry has been mired in a global slump for years. But many of China’s SOEs in the banking, shipping, and consumer-goods manufacturing sectors face similarly distressed outlooks. It’s hard to envision that after consolidation, such companies can compete with nimbler rivals on the international stage.
The province couldn’t consolidate its way into the future. Hebei, which lies in China’s northern rust belt and produces about a quarter of China’s steel output, has decided its only recourse is to trim capacity and close plants. Chinese business journal Caixin reported March 9 that Hebei plans to shut down more than half of its steel plants—240 out of 400—within the province by 2020.
The final toll? One million workers will be laid off in the next two years.

Read the full article here

NEWS ANALYSIS
It’s no hyperbole to call managing China’s economic policy a high-wire balancing act.
After dabbling with letting companies fail last year, Beijing recently announced that the official policy to reform state-owned enterprises (SOEs) going forward will be mergers and acquisitions. China will rule out drastic changes and a “wave of layoffs” to focus on reorganization and consolidation instead, said Xiao Yaqing, head of China’s State-owned Assets Supervision and Administration Commission (SASAC) at a conference on March 12.
Last year, the SASAC presided over consolidation of several large state firms in the strategically important telecommunications, energy, and transportation sectors. Xiao claimed that as a “success” and more of the same will come in 2016.
While preserving jobs is a noble goal, such perfunctory reform likely doesn’t go far enough to solve fundamental problems plaguing the state sector.
Competing Agendas
The Chinese economy—with its reliance on manufacturing and traditional industry—is sputtering. Reforming the dominant state sector is a key first step in Beijing’s plan to diversify into a services and consumption-driven economy.
JPMorgan estimates that China’s 150,000 SOEs employ 17 percent of urban residents, and account for 22 percent of its industrial income and 38 percent of industrial assets. They also make up a vast majority of China’s ballooning corporate debt.
The economic backdrop calls for intervention. The country’s manufacturing sector weakened sharply in January and February due to overcapacity and anemic global demand. Both the official state and Caixin/Markit private manufacturing purchasing managers index (PMI) fell in February. The Caixin/Markit reading of 48 shows the country’s manufacturing sector is squarely in contraction territory, where it has remained in the last twelve months.
MORE:China Bets on Entrepreneurship to Boost Jobs
But for China, economic policy is always intertwined with politics. The No. 1 mandate for Chinese Communist Party is self-preservation, and massive layoffs and deep structural changes are bad politics. The social and political fallout from the type of SOE restructuring required is something the Party cannot stomach.
Head-Scratcher
Former premier Zhu Rongji enacted the first round of SOE reform in the 1990s. Bloomberg estimated that Zhu shut 60,000 companies and eliminated around 40 million jobs. The reform was deep, painful, but ultimately successful in helping to launch China’s subsequent economy growth.
Today, China has ambitious plans for its SOEs. State companies must transfer 30 percent of their profits to the central government by 2020—up from the 15 percent or less requirement today. By 2025, China hopes these SOEs will be profitable enough to go public.
Officially, Beijing is earmarking much of the cash to fund retirement and healthcare costs for an aging population, but most likely, the funds will go to defense spending, espionage, and security/monitoring of its residents.
Against this backdrop, SASAC’s plan of SOE reform is a head-scratcher.
Consolidating SOEs into bigger ones will minimize job losses in the short term. But in the long term, it will worsen the structural problems inherent in a dominant state sector.
In fact, merging and consolidating the state sector could prevent Beijing from achieving its lofty goals. Slow, lumbering SOEs will become even slower and more lumbering. Bureaucracy and red tape will increase, and decision making process will suffer. Also, the size, scale, and bias of large government owned companies could dwarf and decimate smaller, private rivals and put them out of business—hampering the private sector growth that Beijing wishes to cultivate.
More importantly, consolidation doesn’t solve the fundamental issue of inefficiency and overcapacity.
The Hebei Experiment
For proof, China needs to look no further than Heibei Province, which is right outside the walls of Beijing.
In 2008, the government of Hebei province merged two major state-owned steelmakers to form Hebei Iron and Steel Group. It acquired more companies since, to become China’s biggest steel producer.
For the third quarter 2015, operating income at Hebei Iron and Steel fell 24.9 percent from the year prior and 19 percent from the previous quarter. Such losses have been trending over the last several quarters. It’s also mired in debt—as of Sept. 30, 2015, the company’s short and long-term debts are 55 percent of its gross assets.
MORE:China to Accelerate Steel Dumping in 2016
Simply put, Hebei Iron and Steel, a behemoth formed after rounds of mergers, is performing even worse than before.
And there’s little relief in sight. Crude-steel production for the first two months of 2016 dropped 5.7 percent from a year earlier, according to official data from China’s statistics bureau released March 12. Total steel-related production output fell 2.1 percent to 162.28 million metric tons.
One can argue that Hebei Iron and Steel offers anecdotal evidence, as the steel industry has been mired in a global slump for years. But many of China’s SOEs in the banking, shipping, and consumer-goods manufacturing sectors face similarly distressed outlooks. It’s hard to envision that after consolidation, such companies can compete with nimbler rivals on the international stage.
The province couldn’t consolidate its way into the future. Hebei, which lies in China’s northern rust belt and produces about a quarter of China’s steel output, has decided its only recourse is to trim capacity and close plants. Chinese business journal Caixin reported March 9 that Hebei plans to shut down more than half of its steel plants—240 out of 400—within the province by 2020.
The final toll? One million workers will be laid off in the next two years.

Read the full article here

Chinese economics professor Zhang Weiying at the World Economic Forum in Davos, Switzerland, Jan. 26, 2011. Zhang believes Chinese state companies have many obstacles to innovation. (AP Photo/Virginia Mayo)Chinese economics professor Zhang Weiying at the World Economic Forum in Davos, Switzerland, Jan. 26, 2011. Zhang believes Chinese state companies have many obstacles to innovation. (AP Photo/Virginia Mayo)

China’s economy is stalling. Its decades-old business model, driven by cheap exports and imitation, and dominated by state-owned enterprises (SOEs), has run its course. Many business leaders realize that they must become more innovative to become globally competitive. A recent reform plan, issued by the Central Committee of the Chinese Communist Party and the State Council, also proposes changes in SOE operations. But according to the following essay by Chinese economist Zhang Weiying, all these plans are not feasible in China’s present-day, deeply entrenched political climate.

Many Chinese people have the belief that once SOEs are traded on the stock market and have established holding companies with cross-shareholdership, China will have implemented the same market economy as Western capitalism. They also believe that with the separation of management and ownership, we will have entrepreneurs. Here are five reasons why I say this is impossible.

1. Official Influence

Under the present Chinese system, it is impossible to separate government influence from enterprise management. Do not believe that real separation of government and business can be achieved at the level of SOEs.

Back in the 1980s, the direction of SOE reform was to detach government from business. But at present, we still have not achieved this goal. Not only that, we cannot even separate the Chinese Communist Party (CCP) from enterprises, which would be relatively easier to do. There is no way for SOE executives to make decisions in accordance with the market.

2. Lack of Motivation

In China’s SOEs there is no ownership authority or constraint, and therefore no pressure to innovate. In a market economy, members of a business must be innovative and strive to make the business a success because they are held accountable by the business owner.

But when you have government officials functioning as representatives of ownership, it is not possible to constrain or motivate those who are running the enterprise in the same way that capitalism does.

3. Myopic Management

Management shortsightedness is another problem in China that is impossible to solve. All SOEs have the issue of being shortsighted. SOE leaders only think about short-term matters. They do not care about anything beyond three years.

We cannot have a successful, innovative business without a long-term strategy. Innovation is an ongoing process. It might take three to five years, or even a decade or two, for a product to develop from inception to market acceptance, or for an important technology breakthrough to happen. If an entrepreneur does not consider the long term, he is not running an innovative business in the real market economy.

Why don’t SOE leaders consider the long-term? Because they are appointed to their positions by government officials, based on standards that are unrelated to innovation and entrepreneurship or to long-term performance as business owners. Those who appoint the leaders do not appoint them for good performance, nor do they punish them for poor performance. SOE leaders’ positions are more dependent upon political factors and connections. The swapping of SOE leaders is one example of this.

I have said that in order for an SOE leader to stabilize his position, it is best for him to have a mediocre enterprise. Why? If you make the business great, people with better network channels will grab the position. Of course if it is very bad, with years of losses, that’s also a problem.

Here is an example: There is a very large state-owned company with five different branches. The leader of one branch was very capable. When this branch was at the bottom economically, he turned it into the No. 1 branch. Later, the company’s leader replace this branch leader with his secretary, who then turned this branch from the first position back down to the last. There are many such examples. So I say, it is not possible for SOE leaders to really make long-term goals.

4. No Budget Discipline

Implementing hard budget constraints is also impossible to do in China’s SOE enterprises. Under private ownership, budget constraints are hard. If income does not cover costs for the long run, the business goes bankrupt.

What is a soft budget constraint? It means if income is less than the cost, the SOE enterprise still survives because it continues to get financial support from the government.

Since the 1980s, the Chinese government has been trying to implement hard budgets for SOEs, but it still has not happened. When an SOE has problems, the government must save it. The larger the enterprise, the greater the effort by the government. At present, SOE subsidies are still part of the government’s expense budget. Even some very profitable SOEs are getting tens of billions of yuan each year in so-called policy subsidies.

5. Inflated Wages

Another thing that is impossible to implement in China’s SOEs are checks and bounds between management and labor. In the 1980s, a lot of managers and employees worked in cahoots to continuously raise their wages and bonuses, dividing up SOE assets among themselves. This issue remains unresolved. Workers in SOEs, relying on monopoly conditions, are being paid higher salaries and wages than the market. In fact, part of their wages should be counted as capital gains, rather than income from labor.

In addition to these five points, the system of state-owned asset supervision also hinders SOEs from becoming innovative. After all, innovation is an unpredictable force; it can produce success and failure. What would happen if the innovation plan carried out by an SOE leader ended in failure?

If the government chooses to forgive you, the SOE leader will go through a lot of pointless activities, including purchasing patents from individuals, just to use up state money.

However, if anyone were to be held personally accountable if the innovation project failed, would any entrepreneurs get involved in that project? They would not. Even if they had 100 successes, one failure might result not only a disciplinary action, but even a jail term. There are such examples now.

Therefore, SOE leaders with a mind for innovation will not actually engage in innovation. Maintaining the status quo, rather than pushing innovation, is the most rational choice for China’s SOE leaders.

Zhang Weiying is a prominent Chinese economist and former head of the Guanghua School of Management at Beijing University. This article is an abridged and edited translation of a lecture Zhang presented at a forum titled The Era of Starting New Business: Capital and Entrepreneur. The full lecture manuscript was first posted on Sept. 23, 2015, on Sohu’s Business website.

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