China Warns Tight Money Could Bankrupt State Firms

China's state firms must carefully manage their books or face a risk of bankruptcy as the government ratchets up its economic tightening, the head of the country's state asset watchdog said on Tuesday.

Companies overly reliant on credit to fund their operations will be squeezed and some are already teetering on the edge of trouble, said Li Rongrong, chairman of the State-owned Assets Supervision and Administration Commission, or SASAC.

China has intensified its year-end ritual of credit tightening in the past two months, leaning heavily on banks to freeze net new lending until the end of 2007, and bankers said the clampdown looked set to continue into the new year.

"Macro tightening has just started," Li said.

Earlier this month, China's top leaders said a priority for 2008 would be to tighten monetary policy in order to keep the economy from overheating. Chinese enterprises across a range of sectors have poured money into expanding production over the last few years, driving up capacity, pinching margins and forcing some to take out new loans just to pay operating costs.

China has let thousands of indebted state firms go under since the 1990s in a process of economic restructuring that has also enabled some key companies, particularly in the resources sector, to become strongly profitable.

China's state-owned enterprises administered by the central government reported annual profit growth of 31.7 percent in the first 11 months from a year earlier to 918.66 billion yuan ($124.5 billion), the Xinhua news agency said on Tuesday.


The official China Securities Journal estimated that more than 60 percent of last year's profits were generated by just nine companies, such as PetroChina, Baosteel and China Mobile.

Centrally controlled firms must submit by Thursday their plans to pay dividends to the government on last year's net profits, SASAC also announced, part of a long-awaited move to better distribute the nation's wealth.

The commission said it was collecting the dividends on a trial basis this year, charging only half the rate that will be due next year.

China said last week that companies in resource industries, including oil and power, would have to pay a dividend of 10 percent starting in 2008, while those in competitive industries, such as steel and electronics, would pay 5 percent.

SASAC administers just under 150 firms and has said it would like to use mergers and sales to cut that to fewer than 100.

Li reiterated the agency's wish to see more state-owned firms listing on exchanges in China and abroad, and he invited private Chinese and foreign companies to take equity stakes.