China has need of well-run state-owned enterprises

Zhao Yajing and Woo Jun Jie suggest learning from Singapore's experience

PUBLISHED : Wednesday, 28 August, 2013, 12:00am
UPDATED : Wednesday, 28 August, 2013, 3:20am

Allegations of corruption plaguing senior executives in Chinese state-owned enterprises have damaged the reputation of these companies in recent years. Questions of accountability have been raised, with many calling for reform of the enterprises. And while reform is needed, there is a danger of throwing the baby out with the bathwater.

State-owned enterprises have historically played an important role in driving growth and development in emerging Asian economies; they have also been useful as a means through which governments provide goods and services to citizens. This should not be neglected.

Traditional institutional wisdom suggests that government should keep itself separate from business. However, China's state-owned enterprises and Singapore's government-linked companies have been the backbone of the nations' miraculous economic growth. In China, these enterprises contribute at least 30 per cent of gross domestic product growth while Singapore's government-linked companies are a major presence in its economy.

In both countries, reform has successfully created a number of national champions across various industries. Singapore, though, has managed to imbue these companies with a significant degree of accountability and profitability.

According to the International Monetary Fund, there has been no evidence that its government-linked companies have easier access to credit or receive any government privileges, meaning they operate under competitive market conditions. This commercialisation permeates their internal corporate structures, and foreigners have been allowed to obtain minority stakes in some cases.

In contrast, China's state-owned firms typically enjoy preferential treatment in terms of administrative approval and bank loans. Although most firms report profits, totalling US$920 billion from 2001 to 2009, the state is saddled with a negative 1.47 per cent real average return on equity after accounting for US$1.19 trillion of subsidy and foregone costs.

As Beijing embarks on reform of its state enterprises, there are key lessons from Singapore. First, they need exposure to competitive market pressures. Second, their governance structures must change; they need to be run by professional managers. Further, executives' incentives need to be tied to the performance of the organisation.

However, there is also a need to take a balanced view of reform. In both China and Singapore, these companies have played significant roles in national development. They build markets where none exist and provide goods and services to citizens.

From the government's perspective, such firms represent an additional means through which it can stimulate growth, as private firms are not usually concerned with national development.

Well-run state-owned enterprises are simply another form of organisation. Privately run enterprises are certainly not flawless either; just look to Enron and Lehman Brothers for recent examples.

Clearly, both state firms and private enterprises are necessary for any country's economy to prosper; they seek different goals and play different roles. And, post 2008, both are in need of greater accountability and transparency. Beijing can certainly take a leaf out of Singapore's book to develop transparent and profitable state-owned enterprises.

Zhao Yajing is a master of public policy candidate at the Lee Kuan Yew School of Public Policy, National University of Singapore, and Woo Jun Jie is a PhD candidate at the same institution