The merger of two giant Chinese state-owned companies is a tiny step dressed up as a big one. Construction groups Sinoma and CNBM are being crunched together, following similar mergers in other sectors plagued with surplus capacities like steel and shipping.
Judged on traditional merger logic, this is a fail. There are few obvious synergies. The two construction and cement giants preside over a sprawling empire of over a hundred subsidiaries and have little geographical overlap, according to an analysis by Deutsche Bank. That, along with political considerations, means it’s unlikely jobs will be slashed, or cement production capacity, 35 per,cent of which lay idle nationally at the end of 2015 according to state-run Xinhua News Agency, will be closed down.
So, why merge the companies at all? For planners in the ruling Communist Party, creating a bigger company under centralized control could make it easier to get things done down the road. The company will have a bigger balance sheet so can better weather a downturn. There’s some bureaucratic efficiency to be had too. Mergers have cut the number of central government-run firms from 111 to 104 this year, and numbers could eventually fall to 40, official newspaper Economic Information Daily reported last year.
That may eventually create companies that are a little less bad. But, it will take more than that to stop them from sucking up credit and dragging on growth for years to come.
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Source: Business-Standard
