Recent SOE profits may be unsustainable

Despite talk of a “zombie economy,” China’s state-owned enterprises have enjoyed a sharp rebound in profits this year, driven by resurgent commodity prices amid government-enforced capacity cuts. But economists worry that the revival of groups that once relied on state-directed loans and subsidies for life-support despite persistent operating losses may be unsustainable, and threatens to breed complacency about the need to reform SOEs, the Financial Times reports. A buoyant property market has fuelled China’s unexpectedly strong economic growth this year and boosted construction activity. Heavy fiscal spending on infrastructure by Chinese local governments has likewise heightened demand for basic commodities such as coal and metals – sectors dominated by state groups. Profits at industrial SOEs surged 42% year on year in the first seven months of 2017, following a meager 3% gain for all of last year and a 21% drop in 2015, according to government data. Meanwhile, among lossmaking industrial SOEs, the size of losses have declined by a quarter.