People walk past a poster to mark the 100th anniversary of the founding of the Chinese Communist Party on display at the central business district in Beijing on July 6. China is reshaping its business landscape with a strong Marxist ideological push and an ultranationalist sentiment. Photo: AP
Jingzhou Tao
Jingzhou Tao

The danger of putting SOEs back in centre of China’s economy

  • As state-owned enterprises increasingly serve as powerful political and policy tools, their dominance and special treatment will undermine fair competition and entrepreneurship
  • Private entrepreneurs and foreign businesses may well vote with their feet – and leave Beijing facing a string of WTO and other lawsuits

After Deng Xiaoping initiated the open-door policy in 1978, he encouraged the rapid development of private enterprises, welcomed foreign investments and attempted to organise the retreat of Chinese state-owned enterprises (SOEs) from non-essential and non-strategic economic sectors.

However, for the last several years the ideological wind has started blowing in favour of SOEs as the Chinese leadership placed increasing emphasis on SOEs’ role in addressing the existential problems of China’s political regime.

Indeed, SOEs serve as a powerful tool for political and policy implementation, instead of as modern corporations competing on the same legal footing as other businesses. Their ultimate mission is to act as a buffer against any internal or external shocks or instabilities.

SOEs enjoy streamlined, and sometimes unlimited, financing facilities, if not outright subsidies, when many small and medium-sized private enterprises have great difficulty securing a modest loan from state banks.
The re-emergence of Marxist ideology has been the force pushing SOEs to rapidly grasp control in all industrial sectors. The “ mixed-ownership reform”, initially designed in the late 1990s to encourage private investment in SOEs and attract a more vibrant, entrepreneurial spirit, has since been turned on its head: giant SOEs have started absorbing private companies, and there is a visibly strong tendency to systematically integrate SOE participation into the capital of major private companies.


‘Socialism with Chinese characteristics’ explained

‘Socialism with Chinese characteristics’ explained
Consolidation and mergers among SOEs have also been on the agenda in the past several years, resulting in the number of mega SOEs under the central government falling from 117 in 2011 to 97 this year.
This consolidation eliminated competition among SOEs, which had rather limited competition to begin with. Such mergers and concentrations were also rarely subject to Chinese antitrust law, while much smaller mergers among private and foreign investors face a lengthy approval process.
All SOE executives and staff must spend substantial amounts of time studying Communist Party doctrine and all SOEs, whether listed or not, must amend their corporate charters to make their Communist Party branch one of the decision-making bodies of the company. It is even anticipated that the Communist Party branch in an SOE will have a “golden share” to veto any decision made by shareholders or the board of directors.
The company’s secretary general should also be its chairman. The intertwining of politics and business signals a worrying return to the pre-Deng era, with the emphasis now placed on political correctness instead of business performance.

West must know what drives modern China

It is perhaps no surprise, therefore, that Western leaders and media are sceptical about Chinese SOEs’ investment activities in their territories. Such scepticism is underpinned by fears that Chinese SOEs are simply government instruments with a hidden agenda to achieve political, military and diplomatic objectives.
Another interesting development to observe is that China seems to have abandoned its efforts to claim market economy status within the World Trade Organization framework. Since its accession to the WTO in 2001, China has been fighting for market economic status with the United States and European Union to no avail.

For many years after its WTO membership, China embraced various market-oriented measures and tried to level the playing field for business operators. Unfortunately, such efforts have been progressively suspended in the last several years.

People pose in front of the 4.4m high bronze statue of Karl Marx, created by Chinese artist Wu Weishan and donated by China to mark the 200th birth anniversary of the German philosopher, in his hometown of Trier, Germany on May 5, 2018. Photo: Reuters

China is reshaping its business landscape with a strong Marxist ideological push and an ultranationalist sentiment. The comprehensive control exerted by SOEs across all economic sectors and their special treatment by the government may well undermine fair competition and dampen the entrepreneurial spirit.

The Communist Party’s policy statement at its 18th party congress in 2013 claiming the market will “ play a decisive role in the allocation of resources” now seems confined to a very distant and unreal past.

If such trends cannot be revisited by China’s leadership, private entrepreneurs may respond to the substantial limitation to their businesses by voting with their feet (provided they can manage to leave the country), and will attempt to transfer their wealth through shadow banking or bitcoin.

China may also find itself at the receiving end of WTO claims by other countries for its treatment of foreign companies, and foreign investors who feel mistreated may well initiate investment arbitration outside China.

Jingzhou Tao is an independent arbitrator specialised in international commercial disputes