By Charlotte Windle BBC News business reporter in Shanghai

China's state owned enterprises: basket cases or well run firms?

The Hong Kong branch of the investment bank UBS did an interesting thing lately - it challenged the conventional wisdom that China's state owned economy is a basket case by comparing it with corporate America.

UBS's chief Asia economist Jonathan Anderson reached two startling conclusions:

• "China's state run firms are no more loss-making than their US-listed counterparts" and
• "Chinese firms are not subsidised by China's government or its state owned banks in any meaningful way".

According to the UBS report, as of the end of 2004, China had 34,280 industrial state owned enterprises, of which 11,112 reported a loss in the same year.

In other words, 32.4% of Chinese industrial state firms reported losses last year.

UBS compared that with a sample of 6,000 companies on the New York Stock Exchange and the tech-weighted Nasdaq exchange.

The result was that 36.2% of those US firms were found to be loss-making.

Furthermore, aggregate Chinese losses came to just 0.5% of national output, compared with 1% for the US firms.

This is not to say that Chinese companies are "world leaders", says Mr Anderson.

"The Chinese state sector has a long way to go before it can catch up to US firms in terms of profitability, return on equity or return on investment," he points out.

Preferential access

Indeed, says Stephen Green, senior economist at Standard Chartered Bank in Shanghai, pointing out that the corporate landscapes of China and America cannot be easily compared.

Mr Green, who is also author of the book 'China's Stock market', argues that very few of the US companies that are making losses today will still be around in two years time.

"They'll be closed down, and others will open, whereas in China, most of these state owned enterprises will remain loss-making or be bailed out, with much greater economic damage done," he says.

China's Big Four state run banks currently have $125bn worth of non-performing loans.

The vast majority of those bad loans are loans to state owned enterprises, which cannot afford to repay their debts.

While in the US firms have to pay the going rate for finance, Chinese state firms get "preferential access to finance from state banks, stock market listings, bond issuance, tax holidays, cheap land and monopoly protection", Mr Green says.

Improved transparency

Mr Anderson disputes the conclusion that Chinese state owned enterprises are bailed out as a matter of cause, or that they are allowed to run losses significantly longer than firms in other countries.

"Rather than bailing out loss-makers, since 1995 China has actually shut down tens of thousands of insolvent state firms and put more than 30 million state workers out of work, making this the biggest mass industrial retrenchment of the 20th Century," he says.

"This explains why Chinese state losses are so low today."

Nevertheless, there are still thousands of loss-making Chinese firms in existence and their profit and loss figures cannot be completely trusted, points out Mr Green, adding that Chinese companies do not have a history of transparency.

That said, China's government is trying to improve transparency by increasing the degree of private ownership in many of the larger state owned firms.

The majority of the companies listed on the mainland's two stock markets in Shanghai and Shenzhen are state owned firms and only small portions of those companies are traded.

Individual investors are therefore in a poor position to have their voices heard on such issues as corporate governance, profitability or asset disposal.

Over the next few years the government is planning to sell off assets worth $264bn by forcing state owned enterprises to launch large additional share sales.