2. Unsound development of China's large companies

During the global financial crisis, China's large companies played a key role in sustaining economic growth and hence became stronger; however, such development was unsound as a whole. The unsound development trends can be categorized as follows:

2.1 Pushed by fixed asset investment, state-owned companies achieved unsound development during the global financial crisis.

In order to fight the global financial crisis, the Chinese government implemented massive economic stimulus measures and the industry revitalization plan. Massive funds were distributed to large state-owned companies for more investment projects so that they could promote the national economic growth and the development of related industries. On the whole, China's large state-owned companies developed quite rapidly during this period as their assets continued to increase and their profit margins made a V-shaped turnaround; however, their returns on assets only saw small growth in 2009 compared with the previous year. This indicates that China's large companies suffered low efficiency in investment, or such investments haven't brought about enough economic benefits yet.

Figure 1-14. Profit margins and returns on assets of the Top 500 Companies of China (2007-2010)

 

Particularly, the return on assets of China's large state-owned companies should be mentioned. In 2009, assets increased by 23.27 percent (central: 19.4 percent; local: 28.67 percent); however, compared with the previous year, they saw a decline in the return on assets. Thus, there is quite a large gap between state-owned and private companies.

 

Table 1-29. Return on assets of the Top 500 Companies of China in 2008 and 2009

(Unit: percent)

 Note: The return on assets of the Top 500 Companies of the United States in 2010 is 1.36 percent.

 

2.2 With a rapid growth, China's large companies face problems in risk management.

On the whole, since China's economy entered the development stage of heavy and chemical industrialization in 2002, large companies have been developing quite rapidly due to increasing market demands. With doubled revenue, many of them earned high profits. This is partly attributed to improved management, and partly due to strong market demand. The point is, some companies cannot figure out why they are developing at such a high speed, but believe "they have strengthened the internal management" and hence ignore their internal controls and the external market management. Actually, as firms have become stronger quite rapidly, more and more companies have been left exposed to greater risks.

Risk management of central state-owned companies

Central state-owned companies are mostly connected with the national economy and people's livelihood. During the global financial crisis, some of them invested in financial derivatives but suffered heavy losses. Realizing gaps in risk management, the State-owned Assets Supervision and Administration Commission (SASAC) unveiled guidelines for SOEs. These guidelines have proven to be quite necessary. As most risks are transferred down the industrial chain, losses incurred in either upstream and downstream firms, or even the national economy, could have severe impacts on central owned SOEs.

Risk management of local state-owned companies

In recent years, local state-owned companies have continued to expand their scale and develop rapidly; meanwhile, they have accumulated a lot of risks. Due to the present fiscal decentralization system, many of them have become the financing platform and tools for local governments. With the support and intervention of local governments, they can even violate operating regulations and pile up huge debts. Such debt risks, combined with their internal management risks, potentially pose great dangers. If the national economic growth slows down or the external environment changes (for example, if China were demanded to achieve the mandatory emission reduction targets), these local state-owned companies and the corresponding local economies could potentially be influenced.

Risk management of private companies

Since China's economy entered the stage of heavy and chemical industrialization in 2002, China's private companies have also seen a golden period for development. They unprecedentedly expanded their businesses, ranging from the light industries to the heavy chemical industries. Jiangsu Shagang Group Co Ltd and Huawei Technologies Co Ltd, representatives of China’s large private companies, are even ranked among the Fortune Global 500 companies. Although few people pay attention to the internal management of these private companies, risks still exist in many aspects such as finance and family management.

Risk management of overseas assets

More and more of China's companies have been "going out" to establish branches in foreign countries, acquire local companies, or invest in financial derivatives, many amassing huge overseas assets. Most of these firms are centrally-managed financial companies, central state-owned companies subordinate to SASAC, local state-owned companies and large private firms.

Statistics indicate that by the end of 2009, 100 central state-owned companies will have established 5,901 branch units in foreign countries, Hong Kong and Macao, among which 4,860 are subsidiaries and 1,041 are foreign agencies. Such overseas assets amount to 4,015.34 billion yuan and have owner's equity of 1,844.54 billion yuan. In terms of risk, these assets are influenced by factors such as exchange rate, the local macro-economic situation and the political situation. Despite these factors, their risk management tends to be ignored.

Table 1-30. Major hedging losses of China's companies

 

 

China's financial companies always enter the overseas market at a higher price or risk themselves in investments they aren't familiar with, which tends to lead to heavy losses. In spite of various causes, external or internal, the key factor lies in their inexperience in understanding the ever-changing international financial market.

 

Table 1-31. Profits and losses of China's companies in major international financial investments

 

 

Data Source: according to statistics from Bloomberg and relevant companies

 

2.3 With rapid growth, China's large companies face pollution problems.

During the stage of the heavy and chemical industrialization, China's heavy chemical companies continue to expand their scale, covering the industries of coal, petrochemicals, natural gas, nuclear energy, autos, machinery, electronics, chemistry, steel, non-ferrous metals, construction materials and electric power. However, these industries are all energy intensive and highly polluting. In recent years, pollution incidents have been frequently exposed: a lot of coal mine accidents happen every year; dairy companies were blamed for the melamine-tainted milk power scandal in 2008; in August 2009, a lead smelter run by Dongling Group, the largest private company in Shaanxi Province, was scrutinized for lead poisoning in Fengxiang County; on July 3, 2010, a sewage leakage from the Zijinshan Copper Mine, which is owned by the Zijin Mining Group, the country's largest mining company, caused serious pollution; and on July 16, 2010, an explosion hit an oil pipeline and triggered an adjacent smaller pipeline to explode at an oil storage depot belonging to China National Petroleum Corp in Dalian Xingang Port.

On October 13, 2009, the environmental group Greenpeace issued a report criticizing 18 leading companies from both home and abroad for concealing polluting information, which is also a violation of Chinese regulations. They were Shell, Smasung, Nestle, LG, Kraft, Motorola, Denso, Bridgestone, Sinopec, Shenhua, China Aluminum Corporation, Dongfeng Motor, China Resources, China International Marine Containers (CIMC), China Coal Energy Company, Midea, Weichai Power and Hunan Nonferrous Metals. China's rules on environmental information disclosure, which took effect in May 2008, mandate that companies must reveal details of pollution to the public within 30 days of environmental authorities finding that these companies broke pollution laws. However, none of the 18 industrial leaders above followed the regulations on publishing environmental information. Much worse, China has become a "great place" for companies from both home and abroad to discharge pollutants.

These pollution incidents caused by large companies directly pose challenges for China's economic development mode - how to coordinate the relationship between economic growth and environmental protection, and how to supervise and hold accountable large companies for environmental protection. Although China has been making greater efforts to protect the environment since 2002, it lags far behind in environmental pollution standards and enforcement.

Summary	Report on Top 500 Companies of China in 2010
Chapter I.	Generation and Features
Chapter II.	Scale Features
Chapter III.	Performance Features
Chapter IV.	Industrial Analysis
Chapter V.	Regional Distribution
Chapter VI.	Ownership Distribution
Chapter VII.	R&D Expenditure
Chapter VIII.	Ranking Changes on Top 500 List
Chapter IX.	Other Features
Chapter X.	Progress and Achievements of Large Companies