Several Financial Times articles over the past month have pointed to a domestic business trend in China involving State-owned Enterprises (SOEs) coming in to gobble up private Chinese firms. The phenomenon in Chinese is called guojinmintui; literally, “the state advances as the private sector recedes”. One article cited:

Leaders have repeatedly denied that the government is implementing a policy of renationalising parts of the economy and most analysts agree there is no formal policy to support guojinmintui. But some argue that the government’s response to the financial crisis has allowed state-owned enterprises, which are often controlled by powerful political families and already monopolise the commanding heights of the economy, partially to reverse the privatisation that has occurred in China over the last 30 years of economic reform.

SOEs have become quite rich in the last five years because many avoid paying corporate taxes, many list on domestic bourses, they have low requirements for repaying surpluses back to the government, and free-flow bank loans on offer to extend their reach. Private companies in China, however, have few recourses to official means of gaining loans to grow or diversify, and must either bootstrap themselves or go to the gray market for loans.

Large parts of the economy seem to be increasingly dominated again by state-owned enterprises,” says Dan Lynch, a professor of international relations at the University of Southern California US-China Institute. “This is a long-term problem but it has been exacerbated by the financial crisis and the failure of large numbers of privately owned small and medium-sized enterprises.”

A perfect example of guojinmintui in action involves the sleight-of-hand replacement of the founder of Mengniu Dairy this past August by a state-appointed executive from China National Oils, Foodstuffs and Cereals Corp, (Cofco) China’s largest importer and exporter of food.

Analysts said the move reflected Cofco’s expansion ambitions and a move towards state expansion into industries including airlines, petrochemicals, consumer goods and metals where there had been a trend of sustained privatisation.

In the revived steel sector, yet another FT article cited:

A hostile takeover of one of China’s largest non-state steel groups by a state-owned competitor could be finalised as early as next week in a deal that has heightened concerns about creeping renationalisation.

State-owned Shandong Iron and Steel Group, the world’s ninth-largest steelmaker by capacity, is likely to take a two-thirds stake in privately held Rizhao Iron and Steel…

Of course, China does still have cases of reverse-guojinmintui, most recent and infamous of which involved the Beijing-based steelmaker Jianlong, one of the largest private firms of its kind in China. It had planned to take a majority stake in the Tonghua Iron and Steel Group, a provincial-level SOE that produces about 7 million tons of steel each year. A group of employees at Tonghua in ill temper at the thought of being made redundant violently and fatally disabused the interim boss of Tonghua of the notion. The acquisition has since been scotched.

If guojinmintui adds up to more than just a blip amidst the government stimulus program, then Tonghua may one day have its revenge by acquiring Jianlong.