The Role of M&A Fund Development in Reforming Chinese State-Owned Enterprises

Abstract

In recent years, the Chinese economy has been facing an economic slowdown in which the growth rate is sliding to between 6% and 7%, in stark comparison to the average annual growth of 10% from 2002 through 2011. To achieve sustainable economic development, China needs a new growth impetus distinguished from the traditional demand-side polices. Against this backdrop, on November 10, 2015, President Xi Jinping announced that China will strengthen "reform of the supply front" to increase the quality and efficiency of the supply system. China's reform of the supply front is a comprehensive strategic deployment that involves various aspects including micro and macro control, labor and capital, and the fiscal and taxation systems. The most crucial aspect of the plan would be the proper execution of stronger reform across state-owned enterprises (SOEs). Chinese SOEs are notorious for their low efficiency, and have been blamed for overinvestment and excessive production capacity stemming from easy access to public banking. It has long been argued that such problems should be solved by improving SOEs' corporate governance structure. In the 2000s, the Chinese government implemented polices involving debt-equity swaps by state banks or stock market flotation in the stock market to improve the efficiencies of SOE corporate governance, but they have not been very successful. Many large SOEs are still dominantly controlled by state owned capital instead of being managed by market mechanisms. Such 'indirect' methods previously employed to reform SOEs have failed to boost their efficiency. SOEs are still suffering from overcapacity and increasing debt, which could ultimately damage China's financial stability