BREAKING NEWS: China on a Megamerger Tear - Global Trade Magazine
  May 25th, 2018 | Written by

BREAKING NEWS: China on a Megamerger Tear

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  • The Chinese government is revamping its state sector through megamergers involving SOEs.
  • Megamergers consolidate state control in strategic sectors of the Chinese economy.
  • “SOE megamergers threaten to undermine the global competitiveness of US businesses.”

For all the noise emanating from the Trump administration that US-China trade talks will help open the Chinese market to US companies, things appear to be going in the opposite direction.

That, at least, is one message of a report released yesterday by the US-China Commission entitled “SOE Megamergers Signal New Direction in China’s Economic Policy.”

The report covers the Chinese government’s efforts to revamp its state sector through a series of billion dollar megamergers involving central state-owned enterprises (SOEs). These megamergers consolidate state control in strategic sectors of economy and eliminate intra-state competition in China. They also contribute to increased debt levels among Chinese SOEs and undermine the competitiveness of US businesses and other global firms, according to the report.

Under Chinese President Xi Jinping, the government is revamping its state sector with a series of megamergers—the joining of two or more firms worth billions of dollars—as it seeks to consolidate state control in strategic sectors of the economy.

For the Chinese government, the megamergers aim, first, to improve firms’ performance by cutting excess industrial capacity, minimizing competition among SOEs, and increasing economies of scale. So far, that sounds pretty good, as the US and the world at large have been urging China to cut steel capacity, for instance, so that China is not tempted to dump its production in global markets.

But the second aim of the megamergers is more insidisous. According to the report, it is “to create larger entities that can compete internationally with increased size and market share.”

What are the implications for global markets and firms? According to the report, “SOE megamergers threaten to undermine the global competitiveness of US businesses and other foreign firms operating in accordance with market principles. The Chinese government’s efforts to merge large SOEs in critical sectors are increasing SOEs’ share of the domestic economy, enhancing their international competitiveness, and deepening concerns about unfair competition in China and overseas. Government support enables Chinese SOEs to offer products far below market prices, shutting out foreign firms—particularly small- and medium-sized foreign firms—from designated sectors.”

As a result, global marketplaces could become more dominated by a smaller number of companies. All  this raises the question as to whether and how massive mergers involving state-owned corporations can be regulated “to maintain free and fair economic growth and development.”


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