Is there a need for privatisation in China?

China's ascendency in the ranks of economical hierarchy is largely attributable to the effort made by its government in shifting policy away from the state's hands into a free market oriented system where supply and demand dictates the price level in the economy. This has meant a considerable amount of Chinese citizens participating more liberally within their economy and thus driving growth on an upward trajectory that has seen this "Sleeping Giant" accomplish astounding economical feats in a short period of time.        

Needless to say as we've seen the mood sombre down after a hard landing many had hoped wouldn't occur, sentiment has changed from the once thought flawless motion of perpetual growth to a deeper look into the mechanical workings of its economy that have seemingly halted activity in a rather dramatic manner.

These investigative observation have revealed startling contrasts from the previous thought by highlighting a number of obstacles that remain incomplete leading to a stunt in growth.

One of the most prevalent of these is the ever presence of government's involvement in the economy although at a smaller fraction than it had been two decades ago but not near enough to be defined as an open economy.    

China's state firms are bigger than Germany and that's a problem https://t.co/3bGuJHc9wC pic.twitter.com/NaAEBxyEaJ

— Bloomberg Markets (@markets) September 1, 2016

An interesting compilation of research and data analysis by Bloomberg showcases the enormity of SOE's in China whose cumulative revenue eclipses the gross domestic product of Germany! That would register these firms income stream as the fourth largest economy in the world if they were considered one.

Herein lies the problem for China, as much as the figure may leave us grasping at the sheer size of it, these entities are at the forefront of receiving generous subsidies and bailouts from government as a measure of action used in fronting their objectives to the masses, one of which being employment. The use of these firms as a vehicle to absorb the negative impacts of reality only serves to intensify the inefficiencies they spew out and burdening the citizens with an incremental debt bill to payoff.

A great example of this happening can be seen in the Chinese steel industry where margins are traded off to prevent huge retrenchment of workers, an event government thinks could turn the tide on the positive image its created amongst millions of steelworkers. However China is merely exporting it's problems into the global market with the outcome being a glut of steel pushing prices down and pressing fierce competition amongst the world's top steel producers.  

Yet the likelihood of such endeavours continuing indefinitely is wearing thin as the Chinese government grapples to get hold of the nation's debt load which stands at 250% of GDP. The figure has raised the alarm bells for policymakers who've accepted that the country can no longer rely on the extensive use of debt to spur on growth as it once did.

Under the disguise of debt reform, the Chinese government will fast track the pace of privatisation by passing these firms onto to organisations that have the scope and ability to shape them into globally competitive industries but this would come at a cost of job losses and a drop in capital expenditure, two key aspects that's fuelled growth in the past. This possibly explains why government would prefer giving it up to business rather than itself in a bid to save reputation.    

The stagnancy of the Chinese economy means the current structure has reached its limits and the need to find a new avenue of bringing back the vibrancy of growth increasing with every ghastly review of the outlook. But this will only come if government were to accept a lesser stake in the economy in exchange for a greater competitive advantage in a global context, an admission that hasn't been offered...