What's keeping China's real economy down

Lending practices, real estate speculation sap strength of manufacturers

Since China has become the world's second-largest economy, Chinese enterprises have been put in the global spotlight as their scale continues to expand.

Scale, however, does not mean strength.

In the latest China 500 list released by the China Enterprise Confederation, the registered revenues of those firms increased by 13.3 percent over the last year. Their net profits, however, rose by 10.6 percent.

In global enterprise rankings, Chinese enterprises have also registered lower profit levels.

China has become the country with the second-largest number of enterprises included in the Fortune Global 500 list released in July. The number of listed Chinese firms is larger than that of France, Germany and the United Kingdom combined.

However, the net profits of the listed Chinese enterprises increased by less than 8 percent compared with the last rankings in 2013, while the 500 biggest global enterprises achieved an average 27 percent net profit growth.

Both lists revealed the relative weakness of the Chinese enterprises in profit generation. It could be the most serious challenge facing China as it tries to upgrade its economic structure and improve the prowess of its enterprises.

Its manufacturing enterprises, in particular, are in development doldrums. In the 2014 top 500 Chinese enterprises list, there are 260 manufacturers and 17 banks. The total revenues of those manufacturing firms reached 23 trillion yuan ($3.7 trillion), compared with 5.5 trillion yuan revenues of the 17 listed banks. However, the registered total net profits of those manufacturing firms amounted to only 462.3 billion yuan, compared with 1.23 trillion yuan made by the banks.

The financial comparisons between manufacturing and banking firms in the list shows China has a long way to go as it upgrades the technological levels of its corporate sector.

Manufacturing is the backbone of a country's economy. China has been dubbed the world's factory, churning out large numbers of various products every day. Technically, however, those manufacturers have largely remained weak since they produce mainly low-end products with small value added.

The manufacturing predicament can be attributed to at least two factors.

One is China's lending policies and high interest rates. The dominant Chinese banks are state-owned and they are still more willing to lend to state enterprises, not private ones. The manufacturing sector, however, is composed of mainly private companies, leaving them with inadequate access to bank loans.

Meanwhile, many companies have complained about the high interest rates of bank loans, claiming that given their low profit margins, the interest payments have become heavy financial burdens for them. Many economists and experts have supported them, citing the colossal amounts of profit made by the banking sector.

Another factor leading to the manufacturing companies' difficulties is the macroeconomic environment, in which it is easier to profit from virtual investment, such as that in the real estate market, than making money from investing in the real economy, primarily the manufacturing sector.

In the past decade, China's home prices have risen fast and quite a lot of real estate business owners have made the China top billionaire lists compiled by various institutions. The so-called "wealth effect" has driven many investors to shift their focus from manufacturing to properties to make quick money.

The real estate boom, in a sense, is behind the woes of the manufacturing sector. The policymakers need to revise policies to discourage speculative investment in the property market and help channel social capital into the manufacturing and other real-economy sectors.

Only when that happens will Chinese enterprises become real global powers that not only expand fast in scale but also improve in their profit-making abilities.

The author is a senior writer with China Daily. Contact the writer at xinzhiming@chinadaily.com.cn

(China Daily Africa Weekly 09/19/2014 page12)