Last month China released a long-awaited set of reforms to its notoriously corrupt and inefficient state-owned enterprises (SOEs). This week, as a part of China’s new economic Five Year Plan, the government issued specific guidelines for instituting these reforms. Despite the enthusiastic rhetoric coming from state-run media, these recent revisions will make it more difficult for China to continue integrating with the global economy.
State-owned enterprises (SOEs) have a long history in the People’s Republic of China. These institutions laid the economic foundations that led the country from the period of famine and unrest after its establishment in 1949. In fact, until reforms began the mid-1970s, SOEs completely dominated China’s industrial sectors. Since this period of centrally planned economic policies, China has seen more than three decades of market liberalization and increasing competition. Some of the greatest hurdles (and most valuable contributions) to this transformation have come in the reforms to SOEs. The last significant set of reforms came in the 1990s, when the number of SOEs was dramatically decreased through mergers, and the companies opened up on China’s stock exchange. Today SOEs continue to employ more than 30 million people in China. Although they no longer suffocate the Chinese markets (except for a few key industries of “national importance” including aviation, oil, and telecommunications), SOEs continue to be riddled with corruption and often portray the worst of China’s state capitalism.
Last month the Chinese State Council published its latest guidelines on the reform of SOEs. In the months leading up to the announcement, anticipation was great. Xi Jinping’s administration had set the bar high with the “Decision of the Third Plenum” in 2013. Ever since the Reform and Opening Up period in the late 1970s, the third meeting of the Party’s Central Committee, or Plenum, after a convention of the National People’s Congress (held once every five years) has been a traditional platform for announcing important economic reforms. In 2013, President Xi used this opportunity to address the question of SOEs. A major theme of the Decision centered around “allowing the market to play a decisive role in allocating resources;” with respect to SOEs, this meant expanding the divide between ownership and operation of SOEs, increasing the number of “professional” managers, making SOEs’ business conduct more transparent, and using market-based salaries. But this push for reform got caught up in red tape and for over two years, was nothing more than a plan.
That all changed this past summer, when rumors began circulating that the CPC would put forth a new set of SOE reforms. Particularly, they were expected to implement the ideas in of the 2013 Third Plenary Decision. In addition, there was talk that the reforms would encourage increased private investment in China’s SOEs. Ever since the first Chinese companies began to be publicly traded on the Chinese exchange in the 1990s, SOEs have not been completely owned by the government. Instead, today the great majority of China’s SOEs are “hybrid” companies, with varying degrees of capital invited from the private sector while the government maintains a majority (or at least controlling) stake in the company. The continued increase in private investment is arguably one of the most important tools China has to get its SOEs in line with the themes of the Third Plenum: not only will China’s capital resources be more efficiently distributed to the most productive industries, but larger private stakes will also pressure SOEs to make their business practices more transparent and reduce corruption.
Another key expectation for reform measures would set China on a track similar to Singapore, a nation that has successfully reorganized its own SOEs. Temasek, Singapore’s $253 billion asset manager, uses an independent, market-driven, and long-term approach to its investments. The ownership of state funds has been completely separated from the operation of state companies, marking a transition from state-owned enterprise to ‘state-owned capital.’ Temasek’s initial portfolio was composed of companies formerly owned or jointly owned by the Singapore government, who remains its sole shareholder. China was expected to set up its own Temasek-style company, keeping in line with the Third Plenum’s call for the market’s “decisive role” in allocating the state’s capital.
The plan revealed last month failed to live up to expectations. The two-pronged narrative is still there, calling for revamped management and more private investment to continue bringing SOEs into the modern era. But perhaps the most unexpected part of the plan was the emphasis on the greater role of the Communist Party of China (CPC) in controlling SOEs. Thanks largely to the efforts of the State-owned Assets Supervision and Administration Commission (SASAC), the governing body that oversees China’s SOEs, one of the policy’s key provisions will consolidate the number of SOEs through mergers and acquisitions. Although taking the guise of attempting to save national resources, these mergers are feared to create gargantuan, monopolistic super-companies that will do just the opposite. This plan is based on the problematic belief that multiple SOEs in a single sector are redundant and that the state can streamline the process by merging them. Many believe this will only decrease competition, increase the risk of corruption, and potentially disturb global markets in massive state-controlled industries like steel.
Although this week’s guidelines discuss forming new capital management entities like Temasek, they provide few specifics on what their role would be and how they would decrease the micromanagement of SASAC. No firm barriers are set up to separate ownership from operation. With respect to private investment, the new policy does not differ from those of the past in any meaningful way, as the state will remain the controlling shareholder in every case. The benefits of private investment in SOEs will continue to be stifled as long as the voices of these investors do not sway major decisions. An increase is good, but lasting change will come when the government gives up its control. China still has a long path ahead in making the transition from state-owned enterprises to state-owned capital.
In a broader view, this latest reform package from the Xi administration can be viewed in the continued trajectory of China’s economy since Reform and Opening Up. China has increasingly liberalized its market policies and integrated itself into the world economy, lifting hundreds of millions of people out of poverty in the process. But the latest SOE reforms look like nothing but another hurdle to furthering this trend. At a critical time when investors are beginning to turn away from China, the CPC blundered the rescue of its volatile stock market, and the Trans-Pacific Partnership is set to pose unprecedented challenges, the Chinese government missed a decisive opportunity.
The image featured in this article was taken by the Foreign and Commonwealth Office. The original image can be found here.