China Briefing

Breaking monopolies of state-owned enterprises is key for sustainable economy

Giant government-owned corporations, virtual kingdoms in their own right, distort markets and are breeding grounds for corruption

PUBLISHED : Monday, 12 May, 2014, 3:50am
UPDATED : Monday, 29 February, 2016, 12:19pm

Chen Tonghai, the disgraced chairman of oil giant Sinopec - so the story goes - once likened the state-owned behemoth to the "eldest son of the People's Republic" that was naturally entitled to monopolise its sector.

Such arrogant and high-handed remarks, if true, reflect the thorny problem of what is to be done about monopolies in the hands of state-owned enterprises. For Chen and other top executives of state firms, their situation is akin to the eldest son in a traditional Chinese family who receives special treatment over and above his siblings.

Despite the mainland leadership's decades-long efforts to restructure the state sector as a modern market economy, the major state-owned firms still maintain full or near monopolies in strategic industries like telecoms, energy, banking and public transport. If anything, they have become stronger and more powerful.

Thanks to the monopolies, easy access to bank credit and the lack of proper supervision, the state-owned enterprises have become a breeding ground for corruption.

In 2009, Chen was given a suspended death sentence - later commuted to life imprisonment - for accepting nearly 200 million yuan (HK$250 million) in bribes. Over the years, a number of top executives of state firms from China Mobile to China National Nuclear Corp have ended up in jail with convictions for graft.

Since last year, a high-profile scandal involving a number of senior executives at another oil giant, China National Petroleum Corp (CNPC), who were connected to the top leadership, has also highlighted the fact that state monopolies are also deeply involved in political infighting within the Communist Party.

Jiang Jiemin, who was detained last year, was the former head of the regulator of the state-owned enterprises and the former chief of CNPC. His detention is widely rumoured to be part of an unprecedented probe into Zhou Yongkang , a former Politburo Standing Committee member who oversaw national security for the past decade.

The lasted example is the detention of Song Lin, chairman of China Resources, one of the mainland's biggest conglomerates with a strong presence in Hong Kong, on allegations of corruption.

Indeed, the reputations and image of state firms have fallen from privileged eldest sons to the biggest liabilities of the People's Republic.

As the new leadership under President Xi Jinping has vowed to let market forces play a decisive role in the economy, it is time to clean up corruption-riddled state monopolies and make them more accountable and market driven.

To make this happen, the leadership must bite the bullet and break up the monopolies to introduce competition as it tries to steer the economy to be based more on consumption.

As Nobel laureate Michael Spence told the South China Morning Post last week, reform of the state-owned enterprises sector is more important to economic development than maintaining target levels of gross domestic product growth.

Spence's argument should add weight to calls for the party and government to stop their direct interference in the management of state firms.

At present, while the government encourages state firms to operate in accordance with market principles, it still appoints key executives, rendering boards of directors useless and making normal operations more difficult.

Moreover, top executives of those firms are also assigned bureaucratic rankings similar to those in the government, and the party insists that most of them be party members too. For instance, the head of China Mobile or Sinopec enjoys a ranking of deputy government minister. While this makes it easier for executives to move into government positions and vice versa, it makes their jobs more difficult as managers.

The transition requires several steps. First, the rankings must be abolished to leave executives free to focus solely on business operations.

Second, the government must exercise control through boards of directors to which it can appoint representatives to safeguard its interests, instead of by direct interference.

Third, it must allow the state firms to recruit professional managers internationally.

As boards of directors have the final say over business operations, the regulator of state-owned enterprises known as the State-owned Assets Supervision and Administration Commission should also be abolished. The ministerial-ranked body is staffed with bureaucrats who have little more to do than meddle in business operations.