World Trade Organisation (WTO)

China must shrink state-owned enterprises if it wants reforms to succeed, says former WTO chief

But view is disputed by China’s lead manager of state-owned enterprises, who says that they remain the core of “our economy and they need to become bigger and stronger”

PUBLISHED : Wednesday, 11 April, 2018, 9:07pm
UPDATED : Wednesday, 01 August, 2018, 4:04pm

China needs to shrink its state-owned sector as a proportion of its economy if it wants the next wave of reforms to succeed, according to Pascal Lamy, the former director general of the World Trade Organisation.  

Lamy said more privatisation of SOEs should be carried out “carefully” to reduce, what he considered, an overly big state ownership that has “distorted” the competition landscape.

He noted some 40 per cent of China’s manufacturing industry is state-owned, citing figures from the International Monetary Fund, and 70 per cent of the capitalisation of China’s listed firms is attributed to SOEs.  

“China will not succeed in this next wave of economic opening without shrinking the state-owned sector,” he told a panel discussion on SOE reform at the Boao Forum for Asia on Wednesday. 

“China has done a great job of opening its economy in some areas, in removing some obstacles and tariffs … [but] in some cases, SOEs have benefited from the privilege of a very low cost of capital.” 

Such “privilege” has resulted in too much capital allocation to SOEs, constraining the availability of funds for the growth of privately owned companies and a lack of level playing field, including foreign ones.

His comment came a day after President Xi Jinping pledged to further open up China’s economy, including lowering barriers for foreign participation in financial services and car manufacturing. 

The promise of more reforms came after the administration of US President Donald Trump imposed import tariffs on various Chinese products, and complained of market restrictions in many key industries. 

Xiao Yaqing, chairman of the state-owned Assets Supervision and Administration Commission that oversees the central government’s 97 SOEs, rejected the idea that the state-owned sector should be contained. 

“The fact that the state-owned sector remains the core of our economy was a result of four decades of economic reform and competition, there is no doubt that SOEs must remain core of the economy and they need to become bigger and stronger, as long as their growth is subject to market-based competition,” he said.  

Xiao noted within the state-owned sector, which collectively made annual revenues of some 26.4 trillion yuan (US$4.2 trillion), about 60 per cent of the companies were partly owned by private investors. 

Zhu Min, president of National Institute of Financial Research and a former deputy managing director of the IMF, said that more than the size of SOEs, “it was their core competitiveness that was important”. He said they have huge potential for further growth if they leverage technology to digitalise the supply chain of traditional industries where SOEs tend to dominate.

Lamy said WTO rules are neutral on whether companies are state or privately owned when it comes to judging whether a country has an environment for fair competition. 

“Where it makes a difference, is whether you have subsidised companies … this is a problem which will need to be tackled … the interpretation of WTO rules will probably be put to test at some stage,” he added. 

China has long attracted criticism from western nations for unfairly subsidising its manufacturing industries that helped them gain global competitiveness and hurt overseas rivals. 

Boston Consulting Group chairman Hans Burkner said Chinese SOEs should globalise their operations “in a sensible way”, noting some have bid for overseas assets at more than double the price offered by the second highest bidders. 

They should take a “step by step” approach in foreign markets expansion, by building “familiarity and relationships” to avoid prejudiced views by people in those countries towards Chinese SOEs, said Burkner.