No better time for fundamental reform of China's state enterprises

The Chinese government's Central Economic Work Conference that concluded last week sets out the priorities and policy directions to further the country's growth. While these are important for economic planning in the short term, reform remains China's best bet for development in the longer term.

We should make 2014 the Year of Reform and roll out the many measures proposed by the party's third plenum.

Things are already moving as far as state-owned enterprises and assets are concerned. Within a month of the launch of the plenum's resolution, Shanghai has accelerated its pace of change while Shandong, Guangdong, Chongqing and others have begun to initiate market reform.

China's state-owned enterprises have long dominated the market. Hence, the resolution's call to clarify the relationship between government and market in the economy, so the market can play a "decisive role" in the allocation of resources, cannot be more timely.

There's no lack of good ideas of how state-owned assets can be reformed. Reorganising state assets and encouraging private capital to invest in state-owned enterprises - to name but two - are workable, complementary ways to change state-owned enterprises for the better.

In recent years, the sheer dominance - and influence - of state players in the market has skewed debate about state-owned enterprises. As soon as the topic of property rights reform is broached, we hear dire warnings about the loss of state capital; every time there is any discussion of the harm of monopolies in the power and telecommunications sectors, there will be an outcry about the importance of safeguarding national security; and anyone who calls for the better management of state assets is accused of advocating the evils of privatisation. In this environment, it seems, making state-owned enterprises more efficient and stronger are the only acceptable changes.

Many state-owned enterprises make substantial profits, thanks to their market dominance and the government's hefty subsidies and generous stimulus in the wake of the 2008 financial crisis. But in terms of return on assets, return on equity and other such measures of performance, they compare poorly with private companies and foreign-owned companies.

The model of the insatiable, ever expanding state-owned companies is no longer sustainable. In these days of slowing growth, some state-owned companies, like those in the steel and shipping sectors, can no longer hide their inefficiencies and are now losing money.

By contrast, the private companies that hire over 90 per cent of the country's workers and contribute 73 per cent of its tax revenue have been treated most unfairly. Measures that have been rolled out over the years to encourage private enterprise, starting from the "36 rules" introduced in 2005, have all proved to be mere talk.

For the first time in an official document, the plenum's resolution stresses the equal importance of state-owned enterprises and private business in developing China's socialist market economy. This is an important ideological breakthrough.

The resolution is right to order the shift of government priority from micro-managing the assets, people and operations in state-owned enterprises to overseeing their return on capital. At the same time, the government has pledged to be more focused in its investment, to favour industries related to national security and major economic sectors. It will also focus more on the provision of public services, developing strategic industries, supporting innovation and protecting the environment and national security.

There should be some flexibility, however. For instance, private companies can be invited to provide public services while industries of natural monopolies need not be closed to private capital.

Private capital elsewhere in the world has proved how competition can spur innovation. Hence, the Chinese government should as far as possible exit industries that are already competitive and focus on those that lack private investment.

This approach will complement the resolution's call to encourage mixed ownership of state-owned enterprises. Allowing an injection of private capital into state-owned companies will improve competitiveness and encourage the growth of both the public and private sectors. In the process, the government must ensure the equal treatment of both private and public shareholders.

Given the difficulty of raising taxes to boost government revenue, reform of state-owned enterprises is all the more crucial to ensure their profits could be used to benefit the people.

With the direction for reform clear, the government that is now working out the plan for implementation must get the details right, including the steps and time frame for change.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caing.com