Big state, big profits. If you take out the “zombies” feeding off a diet of subsidies to survive, state-owned enterprises appear to be walking tall across China’s industrial landscape.

Last week, buried beneath a mountain of depressing data, was at first glance a set of stellar statistics with revenue and profits from about 90 major SOEs hitting a record high in 2018.

“[Net income from] SOEs directly controlled by the central government jumped 15.7% to 1.2 trillion yuan (US$177.6 billion) last year,” a statement from the State-owned Assets Supervision and Administration Commission, said.

“The combined revenue of these SOEs reached 29.1 trillion [yuan], up 10.1% from 2017,” it added.

Cutting capacity and streamlining the supply side of their operations, as well as major infrastructure projects, such as the Belt and Road Initiative, have helped drive growth.

Indeed, leading state-owned conglomerates are still considered the backbone of the economy by President Xi Jinping’s government.

They dominate crucial industrials, such as energy, telecommunications, transport and banking, with total assets hovering around the 76 trillion-yuan mark.

Hogging investment, SOEs have also feasted on funding and starved small- and medium-sized private companies, or SMEs, of credit as Beijing’s continues to wage a war on debt.

During the past year, this has filtered into the real economy with a raft of depressing numbers, illustrating the depth and scale of the downturn.

“The problem facing the Chinese economy is not deleveraging, but rather more funds flowing into SOEs, leaving less money for private enterprises,” Jiang Chao, the chief economist at Haitong Securities in Shanghai, wrote in a research note.

Fourth quarter

On Monday, the National Bureau of Statistics reported that GDP growth for 2018 slowed to 6.6%, a level not seen since 1990.

More importantly, last year’s fourth quarter figure was just 6.4% compared to the same period in 2017 and down from the third-quarter figure of 6.5%.

Industrial output appeared to buck the trend, rising by 5.7% in December from the same period in 2017 and outpacing November’s 5.4% growth. But this mini-revival was probably down to infrastructure spending.

“Beijing’s apparent favoritism for the state sector has contributed to the strain on the country’s private sector, which is already suffering from a slowing economy,” Stratfor, a geopolitical intelligence consultancy in the United States, stated.

Still, the obsession with state-owned enterprises is in danger of derailing SMEs, which have already been hit by the trade war with the United States.

A report compiled last year by the All-China Federation of Industry and Commerce confirmed that more than 90% of new jobs in 2017 were created by private enterprises, generating 60% of GDP growth.

“At the end of 2017, there were 65.79 million individually-owned businesses and 27.26 million private enterprises in China, which employed some 340 million people,” Gao Yunlong, the head of the ACFIC, told the official state-run Xinhua news agency.

But despite this trend, SOEs are soaking up liquidity earmarked for massive domestic infrastructure projects and the grandiose Belt and Road Initiative.

These ‘New Silk Road’ superhighways will connect China with 68 nations and 4.4 billion people across Asia, Africa, the Middle East and Europe in a maze of multi-trillion-dollar infrastructure projects, including a web of digital links.

Construction projects

“The BRI has been primarily about construction rather than investment,” the American Enterprise Institute, a think tank based in Washington, revealed in a report last year. “State-owned enterprises account for more than 95% of the $208 billion in construction projects since 2014.

“With the BRI focused on developing countries, there is a considerable commercial risk. Private Chinese firms have thus been hesitant to take on BRI projects, including investments,” it added.

As for the next 12 months, “technology and innovation” will be pushed by the State-owned Assets Supervision and Administration Commission.

Moreover, this is in line with Xi’s core “Made in China 2025” program, which aims to turn the world’s second-largest economy into a technological superpower.

For wired-up SOEs, this will electrify growth under Beijing’s ‘big is beautiful’ policy. But finding the right balance will be imperative.

Earlier this week, Xi told senior Communist Party officials that it was important to avoid risks which could jeopardize economic stability.

“[We are] confronted with unpredictable international developments and a complicated and sensitive external environment. Our task at hand is to maintain stability as we continue our reform and development,” he was quoted as saying by Xinhua.

“Great efforts are [also] needed to deal with challenges facing the disposal of ‘zombie enterprises’ to unleash untapped resources,” he added.

Yet eliminating the SOE ‘walking dead’ might be easier said than done.