China must rein in SOEs to gain upper hand in tech war, help private firms like Huawei to innovate
- Beijing’s unwavering support for its state-owned enterprises (SOEs) has been a central complaint lodged by the United States since the start of the trade war
- One academic claims the US fears Huawei, the privately owned telecommunications giant, more than China’s Dongfeng ballistic missile
China should not bet on its state-owned enterprises to win the trade war with the United States since they will not be able to achieve hi-tech breakthroughs, Chinese pro-market academics warned, saying they must instead rely more on the private sector to gain an upper hand.
There are around 120,000 SOEs in China, holding total assets worth around 195 trillion yuan (US$28 trillion) as of the end of June, according to a measure by academics from the university, with 48 central state-owned enterprises ranked on the Fortune Global 500 list this year.
“A government-made Global 500 company does not deserve respect, but [a firm] that enters the list through real technological innovation should be respected and is the hope of our nation,” said Li Jianwei, director of the Civil, Commercial and Economic Law School at the China University of Political Science and Law, who argued that the Chinese market was unable to achieve its true place in competitive fields due to the massive number of SOEs.
The subject of SOE subsidies was missing from the statements both countries made after the high-level trade talks in Washington earlier this month, while both claimed to have achieved progress on technology-related topics including intellectual property protection and forced technology transfer.
China, though, was not expected to make substantial concessions on SOE subsidies given the dominant role of state firms in the Chinese economy.
But Li suggested the government take a progressive approach to SOE reform, keeping a few state firms in strategically critical and monopolistic sectors, while proactively moving state firms out of competitive sectors and providing unwavering support for developing the private economy.
He called on authorities to adjust their ideology to use the nation’s total wealth as its guiding principle – without giving preference to either state-owned or private-owned firms – rather than focusing largely on state control through SOEs.
Wang Yong, director the Hongfan Institute of Legal and Economics Studies, a private liberal think tank, agreed that Washington might be concerned that China will be able to overtake the US in the hi-tech sector, no matter whether by “state capitalism” or a free-market approach.
“If we back the wrong horse [with the SOEs], the final consequences would be that the country won’t be strong and the people won’t be rich and that would be the most terrible [outcome],” Wang said during a forum on Wednesday at the China University of Political Science and Law.
Executives at SOEs lack motivation for long-term planning, generally focusing only on a short-term horizon of about five years, in line with the length of their government-determined assignments at the firm, Wang added. In addition, oversight by a series of government departments limited the ability of SOE mangers to make long-term plans on basic research and development programmes, which often require 10 years or more to produce results.
These shortcomings prevent state firms from achieving innovation breakthroughs in most areas, although they have had success in military technology given the government’s significant investment in that area, Wang said. Government support for SOEs crowds out private firms, who have better capabilities to innovate, he argued.
“We must clearly identify our strengths and have a long-term plan, but we should not put our fate at risk,” Wang added. “In the longer term, we should give more space to private firms, especially private hi-tech enterprises, and let them develop freely. Only in this way can China’s hi-tech sector truly grow up.”
There is growing concern about a potential decoupling of China and the US technology sectors as the trade frictions between the two countries have evolved into competition over hi-tech domination in the 21st century, the academics noted.
During the recent the Qingdao Multinational Summit, Craig Allen, the president of the US-China Business Council, requested that China review its technology policies, including the controversial “Made in China 2025” plan that “effectively serves to decouple the Chinese hi-tech sector from the global hi-tech sector”.
But Wang argued that China’s use of “state capitalism” to accelerate hi-tech development might only be an excuse used by the US government to justify starting the trade war.
“The US is a country of democracy and the rule of law, but there is no good or evil in the interests between nations,” he said.
Li Bing, a senior official at the State-owned Assets Supervision and Administration, conceded that reform of state-owned assets was a very important issue in China, but stopped short of backing the suggestions put forward by the academics to boost prospects for private firms.
“Personally, I do not agree with some of their opinions, some facts might not be comprehensive,” said Li Bing. “But we do need such an academic atmosphere for discussion.”