Meanwhile, Chinese investors have poured more than $1 trillion in the last several years into loosely regulated trusts to bypass ultralow deposit rates offered by state-owned banks. The banks cannot readily afford to pay more because they need fat margins to cover losses on loans to politically connected borrowers.

For all the talk in recent years about the extent to which China has embraced capitalism, huge sectors of the economy still have not fully done so: those dominated by the country’s 145,000 state-owned enterprises.

With China’s top officials in Beijing for the 18th Party Congress, which is intended to put a seal of approval on the country’s next generation of leaders, one of the toughest issues on the agenda is how to overhaul this sprawling empire.

Many Chinese economists argue that the biggest conglomerates, especially banks and the leading oil and telecommunications companies, have grown so large that they swallow a large part of bank lending, crowd out more creative small companies and line the pockets of the politically well connected. The state sector ultimately threatens to choke the country’s economic growth and even damage its political stability, they say.

Almost no one has much good to say about state-owned enterprises these days — not even the people who run them. Wang Yong, the director of the State-Owned Assets Supervision and Administration Commission, which manages the enterprises belonging to the central government, chastised them publicly in a report to China’s legislature on Oct. 24.

“More efforts will be made to reform the power, telecommunications, oil and petrochemical industries,” Mr. Wang said. “Market entry into these sectors will be expanded based on the development of these industries.”

But whether those efforts will amount to more than window dressing depends on the willingness of the next Chinese leadership team to challenge the politically connected families that run many state-owned enterprises. And given the lavish opportunities these enterprises provide for insider corruption and self-dealing, that remains an open question.

On Thursday, at the opening of the party congress, the departing president, Hu Jintao, who has presided over an enormous increase in the wealth and influence of state-owned enterprises during his 10 years in power, seemed to suggest placing some limits on the sector and creating a more level playing field for private companies that try to compete against them.

But two political advisers to the incoming leadership, who have a deep knowledge of the factional rivalries in the Communist Party, expressed strong skepticism that most state-owned enterprises have much to fear.

The national, provincial and local governments are financially dependent on the profits of such enterprises and are reluctant to give them up, the advisers said. At the same time, the state enterprises provide political patronage for factions of the Communist Party and lower-level cadres, whose support is crucial to the government.

State-owned enterprises are also very important as providers of blue-collar jobs and as the operators of about 8,000 schools, hospitals and community centers for their current and former employees and their families.

Companies in which the state owns a majority represent 35 percent of all business activity in China, according to official figures. Yet they earned 43 percent of profits last year. Their hammerlock on a long list of strategic industries has allowed them to charge relatively high prices for their goods and services, even as they borrow at artificially low interest rates from state-owned banks.

Article source: http://www.nytimes.com/2012/11/10/world/asia/state-enterprises-pose-test-for-chinas-new-leaders.html?partner=rss&emc=rss