As trade war escalates, China intensifies role of state-owned enterprises

Beijing has affirmed the leading role of state firms in China’s technological and economic progress amid the escalating trade war with the United States, with a major nationwide conference planned for the end of September.

Two sources have confirmed to theSouth China Morning Post that the conference will be chaired by China’s top economic adviser and will showcase Beijing’s strong support for state-owned enterprises (SOEs). Washington’s strong objection to the prominent role of SOEs in the Chinese economy is at the heart of the trade conflict.

Vice-Premier Liu He – President Xi Jinping’s top economic adviser and chief trade negotiator with the US – is expected to urge China’s state enterprises to “make breakthroughs in key aspects” of cutting-edge technologies and call on them to “take a leading role at the front” of the country’s drive to make technological progress, according to one source involved in the planning for the conference.

Speaking to the Post on condition he not be identified, the source said the meeting would highlight the role of SOEs in advancing technological innovation as the government pushes ahead with its plan to play a large, if not dominant, global role in 10 major hi-tech sectors by 2025.

A second source, close to the State-owned Assets Supervision and Administration Commission, the government agency that supervises state-owned assets, said Liu would use the conference to lay out a set of guidelines for further SOE reforms.

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The conference is expected to be held at the end of this month, but a specific date has yet to be decided.

In July, Harvard-educated Liu was named chairman of the government’s leadership group focusing on the retooling and strengthening of the country’s state-owned industrial conglomerates.

As President Xi’s most trusted economic adviser, Liu has a broad economic policy portfolio, including heading the group which oversees the country’s technological development.

This became a pressing concern after Washington banned the sale of US-made semiconductors to ZTE Corp, the world’s fourth largest telecom equipment producer. The ban, which lasted several months, exposed China’s heavy dependence on US-made components for many of its hi-tech industries.

Earlier this year, Liu headed talks with the US which appeared to be making progress in easing trade tensions, only to have US President Donald Trump impose tariffs on Chinese imports shortly after the talks concluded.

Liu stepped aside after the collapse of those initial talks over a fundamental difference with Washington on China’s state-led growth model.

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At the SOE conference, Liu will avoid detailed comments on the trade war as the impetus for the SOE reform initiative, one of the sources said.

Rather, the reform agenda will be framed as a natural step in line with the 40th anniversary of China’s “reform and opening-up” – the movement started by former paramount leader Deng Xiaoping in 1978.

That was the beginning of China’s pro-market changes which opened the country to outside investors and unleashed its four-decade economic boom.

China has no intention of reducing the “backbone” role of state-owned enterprises in its economy and will instead seek to build on Xi’s vision of creating a “bigger and stronger” state sector, according to the source.

“SOEs will play a leading role in reforms and seeking new growth drivers,” he said, adding that this would be Liu’s message to the conference.

China’s financial system is dominated by a handful of state-owned institutions. In addition, the country’s 98 largest industrial firms, under direct supervision of the central government, control more than 50 trillion yuan (US$7.3 trillion) of assets and have de facto monopolies in oil and gas exploration and delivery, telecommunications and electricity generation and distribution.

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However, while many of these companies are huge, few lead in the development of new technologies.

Beijing aims to catch up through government-sponsored schemes including the “Made in China 2025” strategy, but has lately been keeping a low profile after loud complaints from Washington and Brussels about government subsidies, forced technology transfers and a lack of protection for foreign intellectual property.

Chen Wenling, chief economist of the China Centre for International Economic Exchanges, a government think tank, said an important revelation resulting from the trade war was that the country must develop its own core innovations and technologies to sharply reduce its dependence on foreign controlled processes and components.

“The trade war has drawn unprecedented attention to [the need for] innovation. Our R&D expenditure, including both government and corporate input, could see an explosion in growth,” the former government adviser told a seminar in late August.