Government aid stacks the deck in favor of SOEs

China COSCO Holdings Co, the world's largest bulk shipper, predicted on January 26 that it would see its second straight year of losses in 2012. If the company's forecast turns out to be true, COSCO will most likely have its Shanghai-listed shares slapped with a special treatment (ST) risk warning, a development which could potentially clear the way for its suspension from trading or even possible delisting.

Hundreds of mainland-listed companies have received such marks, yet nearly all of them have managed to avoid delisting. This is especially true for State-owned enterprises (SOEs), many of which are dependent on government support to meet minimum listing requirements despite their poor business performances.

Given COSCO's close government ties, the company's remarks have stirred up speculations that it will seek government subsidies to help it turn around from losses. Although the company's board secretary, Guo Huawei, took aim at such notions Wednesday when he was quoted in the National Business Daily as saying that COSCO's "management has never thought about living on government rescue," many still believe officials will come forward with some form of financial lifeline for the floundering shipper.

Government bailouts are commonly extended to listed SOEs, and easy access to money during times of financial trouble has not exactly done much to coax out greater efficiency. In addition to slowing down domestic economic growth and stifling innovation, this sort of aid has left the mainland stock markets bogged down with an excessive amount of dead weight.

One needs to look no further than PetroChina Co, the listed arm of China National Petroleum Corporation, one of China's largest State-owned oil giants, for evidence of this. The company's stock has been in free fall since it listed in November 2007 largely due to concerns about its weak profitability, and as of Tuesday PetroChina shares were trading at a discount of about 80 percent compared to their initial public offering price. Obviously, PetroChina has not won much love from investors, yet the company has managed to cement a place in the equity market thanks to the government's largess.

The support routinely offered to SOEs would not be so alarming if these companies didn't have such a large presence at local bourses. As of the end of last year, shares of SOEs accounted for over 50 percent of the value of the mainland stock market, according to statements made earlier this month from Wang Yong, chairman of the State-owned Assets Supervision and Administration Commission. With so many stocks potentially looking good just because the government is standing by to pump them full of cash when they need a top-off, hapless investors could be placing themselves in jeopardy by putting their capital into these shoddily run clunkers.

For the sake of the country's investors, I hope that COSCO can follow through with its pledge to get by without "rescue". If this sinking shipper can stand on its own two feet, it can show other SOEs that it is possible to survive without government help.