The Wall Street Journal - 19.03.2020

THE WALL STREET JOURNAL. Thursday, March 19, 2020 |A

sion that would weaken de-

mand and hurt Chinese manu-

facturers already battered by

the U.S.-China trade war.

In the long term, the coun-

try’s top-down emergency re-

sponse threatens market re-

forms many agree would

advance China’s economy.

“If and when the outbreak

fades, the conclusion is inevi-

tably going to be that the

overwhelming exercise of state

power saved China,” said An-

drew Batson, a former Wall

Street Journal reporter, now

China research director at

Gavekal Dragonomics.

State firms are expected to

pile up debts and losses from

the coronavirus, adding to ob-

ligations accumulated in the

slowed growth of past years.

State-owned steel plants and

auto makers are among those

anticipating sizable losses.

Increased government and

party control over the econ-

omy threatens to crowd out

private enterprise and foreign

competitors. These include

companies that provide 80% of

the jobs, as well as most tech-

nological innovation.

Market-oriented economists

said the government should be

finding ways to better moti-

vate entrepreneurs. Private

companies have been wiped

out by government campaigns

to cut excess capacity.

Voices advocating market

reforms—such as shrinking

state firms to make room for

more private investment in

telecommunications, energy

and elsewhere—are drowned

out by those focused on stabil-

ity and near-term growth,

government advisers say. The

outbreak could further weaken

support for reforms.

“The virus hurts the Chi-

nese economy, in large part,

by generating greater party-

state intervention,” said Scott

Kennedy, of the Center for

Strategic and International

Studies in Washington.

Mr. Xi issued his call to

arms as soon as he ordered

the lockdown of Wuhan and

surrounding Hubei province in

January, Chinese officials said.

China Pharmaceutical

Group, also known as Sino-

pharm, and China Resources

Group ramped up production

and imports of masks and

other medical supplies, to be

distributed by the govern-

ment. China National Petro-

leum Corp. and China Petro-

leum & Chemical Corp., two oil

giants, revamped production

schedules to focus on raw ma-

terials for medical masks.

Major landlords, including

China Resources and China

Poly Group, have reduced

rents by tens of millions of

dollars for businesses.

The central government

also has urged state firms to

keep its workers and hire

more, especially college gradu-

ates.

Strengthening central con-

trol over the economy has

been a hallmark of Mr. Xi’s

consolidation of power since

he assumed party leadership

in late 2012. Government di-

rectives, rather than market

forces, determine pricing for

such assets as real estate and

even commodities like pork.

Mr. Xi’s rule reversed the

ascendancy of private firms in

the decade following China’s

2001 entry into the World

Trade Organization.

The share of private firms

investing in factories, build-

ings and such in China peaked

at roughly 64% in 2015. It has

since been in gradual decline,

with state firms getting more

resources, including bank

loans.

Beijing now directly super-

vises 128 state firms, down

from about 140 in 2012. But

these enterprises have grown

larger because of government-

led consolidations aimed at

creating industry leaders, so-

called national champions.

State firms serve Beijing’s

goal of dominating such tech

industries as artificial intelli-

gence and 5G wireless.

The nearly two-year trade

war with the U.S. has left

China’s leadership more con-

vinced that it needs to acceler-

ate its state model to reduce

the country’s reliance on for-

eign technology.

China’s state companies are

grappling with deteriorating

finances that in many cases

reach back to their response

to the global financial crisis.

At the time, Beijing

launched a 4 trillion yuan

($586 billion) economic stimu-

lus, mostly carried out by

state banks, construction

firms, developers, steel pro-

ducers and local governments.

The spending spree ensured

China’s growth and helped pull

the world economy out of re-

cession. It also led to a

buildup in China’s debt load,

which hit 252% of national

output in 2019 from just more

than 130% 11 years earlier.

Most of the debt growth

came from state-owned com-

panies and finance firms con-

trolled by government.

“This year could be another

year of leveraging up due to

the coronavirus shock,” said

Larry Hu, a China economist

at Macquarie Group.

Banks are especially con-

flicted about Beijing’s eco-

nomic push. Some were al-

ready struggling with a surge

in bad debts in the past few

years and remain wary of

lending to private companies.

When China’s central bank

enacted a policy in February

to enable banks to make 300

billion yuan worth of inexpen-

sive loans, most of the money

went to state firms instead of

private businesses.

Even the full weight of Mr.

Xi’s Communist Party leader-

ship hasn’t been able to bring

China in sync with market de-

mands from the coronavirus

disease.

Gao Xiaoqing, a villager in

landlocked Gansu province in

northwestern China, was

trapped for days at home with

her family because they had

no masks, which were required

to move about in public. The

masks had sold out.

Village officials eventually

gave one mask to each house-

hold. Ms. Gao, her husband

and their two children take

turns wearing their mask to

leave the house.

At night, Ms. Gao carefully

cleans the mask and places it

by her pillow. “We’re thankful

that we even have one,” she

said.

BEIJING—As China pre-

pared to battle the coronavi-

rus disease, President Xi Jin-

ping ordered state-owned

companies to step up “uncon-

ditionally, and at any cost,” ac-

cording to officials briefed on

the late January directive.

At the center of the out-

break in Wuhan, China State

Construction Engineering

Corp. conjured up more than

20,000 construction workers

and engineers to build two

hospitals. Other state enter-

prises provided power and

materials. Within about 10

days, a 1,000-bed hospital and

a 1,600-bed facility opened.

To deal with the country’s

economic ills, state firms

pared electricity bills and low-

ered rents. State banks initi-

ated hundreds of billions of

dollars in low-cost loans.

In tough times, China’s

Communist Party rulers turn

to the nation’s vast state sec-

tor. The strategy, used during

the 2008 financial crisis, is

helping China absorb some of

the economic shocks of the

Covid-19 epidemic. It also

could hasten the retreat from

a market-oriented economy.

Many private manufactur-

ers are struggling to restore

production, yet more than 95%

of some 20,000 industrial

companies controlled by the

central government are churn-

ing out masks, medicines,

steel, heavy machinery and

other products—keeping

workers on the job.

That is the advantage of the

Chinese system, said an offi-

cial at the regulator oversee-

ing large state-controlled

firms, the State-Owned Assets

Supervision and Administra-

tion Commission: “It’s like in a

battlefield, and state-owned

enterprises are the ones who

can act fast and decisively.”

Amid signs the epidemic is

coming under control in

China, official data released

Monday revealed the heavy

economic toll from Mr. Xi’s de-

cision to lock down much of

the country: The economy

contracted in the first two

months of the year. Factory

output, retail sales and con-

struction activity all plunged.

Some economists expect no

growth in the first quarter.

The question is whether

China’s system can now get

the country back on its feet,

given a potential global reces-

BYLINGLINGWEI

China Steps Back From Market Economy

Communist Party

leaders turned to

state enterprises to

fight the coronavirus

Workers from state-owned enterprises quickly built two hospitals in Wuhan, the city at the epicenter of China’s coronavirus epidemic.

LI HE/XINHUA/ZUMA PRESS

Virus Battles Add

To Costs, Losses

China State Construction is

among the state-owned enter-

prises facing steep obligations

that will worsen in the corona-

virus pandemic. It had loaded

up on debt to build infrastruc-

ture in China and abroad. As of

September 2019, the most re-

cent data available, 76% of its

assets were financed with debt.

For years, it looked to ag-

gressively pursue big-ticket

projects. The effort is expected

to expand as part of Beijing’s

fight against the coronavirus

and to prop up growth. Yet it

will further drive up debt at the

company, according to Standard

& Poor’s.

The firm likely will have in-

sufficient cash on hand to pay

for its operating expenses, ac-

cording to S&P. The company

didn’t respond to requests to

comment.

Despite the darkening finan-

cial outlook, Chinese President

Xi Jinping has said China must

adhere to its development tar-

gets, which call for doubling the

size of the national economy in

the decade through 2020.

Officials say the goal re-

quires economic growth this

year of about 5.5%. Current es-

timates by many economists

are below 5%.

State firms will be pivotal

to reaching that goal, even if it

means more risk.

In late February, China’s

state planner, the National De-

velopment and Reform Com-

mission, pressed the country’s

largest energy producers to cut

oil and gas prices to help busi-

nesses restart operations, offi-

cial notices said.

That could lead to steeper

losses for the energy giants,

which are struggling with

plunging oil prices, analysts

said.

The State Grid Corp. and

China Southern Power Grid Co.

announced plans to shave

some 59 billion yuan from the

electricity bills of more than 50

million industrial firms.

THE CORONAVIRUS PANDEMIC

Growing Obligations

Xi Jinping has tried to control China's debt growth in recent

years, with limited success.

DebtasapercentageofGDP

Source: Macquarie

250

0

50

100

150

200

%

2002 ’05 ’10 ’15 ’

SOE104%

Private30%

Central24%

Local48%

Household

Government

Corporate

45%in 2019

onization of Ms. Liao, saying

she helped propagate fictions

that clouded the severity of

the outbreak in its early days.

The outrage was sparked by

Ms. Liao’s appearance at a

press conference this month or-

ganized by the Chinese govern-

ment’s publicity office, where

she said she and her fellow re-

porters are “iron people” serv-

ing bravely on the battlefront

against a deadly epidemic.

“If you have a little con-

science, then you should re-

fuse the accolade and decline

to speak,” read a widely circu-

lated essay posted on a public

social-media account belong-

ing to Gu Wanming, a retired

Xinhua reporter. “Otherwise

people will say that you ‘trod

on the blood of others to as-

cend the podium.’ ”

The essay has since disap-

peared. Mr. Gu hasn’t re-

sponded to a request to com-

ment. Reached by phone, Ms.

Liao referred queries to Xin-

hua, which didn’t respond.

The furor over Ms. Liao has

flared into broader attacks on

the Communist Party’s muz-

zling of the news media, even

as President Xi Jinping sought

to trumpet his government’s

successes in containing the ep-

idemic. Some analysts say

such outbursts suggest Mr. Xi

still faces significant public

anger at the party’s initial mis-

steps in handling the epidemic.

“Chinese people have long

been distrustful of party pro-

paganda,” said Qiao Mu, a

Washington-based consultant

and a former media professor

at Beijing Foreign Studies Uni-

versity. “But this time, with

lives at stake, public anger is

amplified, and continues to

manifest and ferment through

the criticism of Liao Jun.”

Ms. Liao, a 41-year-old Com-

munist Party member, has re-

ceived glowing coverage across

state media for her reporting

on the coronavirus crisis. One

party-run newspaper said she

wrote more than 500 news re-

ports and more than 90 “inter-

nal reference” reports for party

officials between late Decem-

ber and early March, or a rate

of roughly 8.5 reports a day.

One of the articles, dated

Dec. 31 and co-written with a

colleague, repeated a state-

ment by health officials in Hu-

bei’s capital of Wuhan that

they hadn’t detected any obvi-

ous signs of human-to-human

transmission of a mysterious

new pneumonia discovered in

the city—an assertion later ex-

posed as untruthful.

In another article the fol-

lowing day, she and a col-

league reported that Wuhan

police had punished eight peo-

ple for spreading rumors about

the disease—punishment that

many Chinese later decried as

an attempt to suppress infor-

mation that could have helped

contain the outbreak.

Ms. Liao, who oversees the

metro desk at Xinhua’s Hubei

bureau, later appeared at a

March 8 news conference in

Wuhan, organized by the Chi-

nese government’s information

office to mark International

Women’s Day by showcasing

six women serving on the

front lines of the epidemic.

“Going to the most danger-

ous places and hearing the

most truthful voices of ordi-

nary people is our responsibil-

ity and calling as the party’s

news workers,” Ms. Liao said

at the briefing. “I think this is

where our courage lies.”

China’s State Council Infor-

mation Office didn’t respond

to queries.

Shortly after Ms. Liao’s ap-

pearance, which was widely

publicized by state media, some

social-media users accused the

reporter of bathing in glory

while shirking responsibility for

writing misleading reports that

might have cost lives.

Some defended Ms. Liao,

saying she was probably just

doing her job. Others took their

criticism further, lobbing barbs

at the larger propaganda sys-

tem in which Ms. Liao works—

a politically riskier step that

signaled broader frustrations

with the Communist Party.

“We can say she is a rubbish

reporter, that she has no pro-

fessional ethics, or even that

she is an emotionless writing

machine,” one user wrote on

the WeChat social-media plat-

form. Even so, “this definitely

isn’t just an issue in the product

assembly, but a problem with

the entire production process.”

HONG KONG—As China’s

government promotes its suc-

cesses in containing the coro-

navirus to audiences abroad, a

heated backlash against a

state-media reporter’s cover-

age of the pathogen shows that

Beijing still faces a tough task

selling its narrative at home.

With the numbers of new

Covid-19 cases in China dwin-

dling, the country’s ruling

Communist Party has worked

both internally and interna-

tionally to portray itself as de-

cisive and forceful in facing

down the pandemic.

These efforts included glori-

fying the work of Liao Jun, a

veteran reporter with the offi-

cial Xinhua News Agency,

whose coverage of the coronavi-

rus epidemic in central China’s

Hubei province has been por-

trayed by Beijing as heroic.

Chinese social media has

recoiled with anger at the li-

BYCHUNHANWONG

Beijing’s Glowing Crisis Coverage Sparks Skepticism

The furor over one

state reporter has

spread to attacks on

media clampdowns.

Pharmaceutical workers in Urumqi, China. State-owned companies ramped up production and imports of masks and other medical supplies.

DING LEI/XINHUA/ZUMA PRESS