Reforming the country’s state-owned enterprises (SOEs) has been at the centre of China’s transition from a command economy to a free-market one since the launch of the capitalist reforms of the late 1970s.
And now it lies at the heart of the current leadership’s strategy for reviving the world’s second largest economy to restore China to greatness, which was named the government’s central task at a party plenum in 2013.
In a keynote policy statement, the leadership also called for, as well as the overhaul of SOEs, market forces to become more central to – and the government less involved in – the economy.
Nearly three years later, there is little progress to speak of.
Central to the endeavour is how much freedom the government will allow free enterprise, while restraining the state’s role in the economy.
But there is a contradiction between the government’s reformist rhetoric and its less reformist deeds. President Xi Jinping has made statements contradicting the party document by pledging to make SOEs “bigger, stronger and better” state champions, rather than reducing their role and influence on the national economy.
SOEs are known for being inefficient, indebted and badly run. Economists say reforming them is crucial if China is to avoid falling into a protracted period of subdued growth as decades of state-driven growth comes to an end.
Firstly, more of them should be privatised. The two rounds of SOE reform between 1997 and 2009 under the two previous administrations have saw large-scale privatisation, as the number of SOEs was reduced to just 9,700 at the end of 2008, from 110,000 in 1996. There has been no major breakthrough since then.
Secondly, reform should also aim at shrinking those overinflated SOEs directly under the central government. But such titanic SOEs have further expanded in past decade, as growth of their assets has far exceeded those of private sector. Equally with its expansion of assets, their liabilities have also inflated at an even faster pace, which create new challenges.
Finally, there should be major steps in the breakup of state monopolies in key industries like major infrastructure, aviation, communications and energy, to dislodge SOEs’ dominant roles in their respective markets.
In past two years, the government has consolidated SOEs’ positions in the economy, through mergers, to expand their size and their share in some industries.
It doesn’t make any sense using mergers to make big bigger, such as the mergers of Baosteel with Wuhan Iron and Steel, the two biggest steel SOEs, and the merger of Shenhua Group, China’s biggest coal producer, and China General Nuclear Power, its biggest nuclear power producer.
The government has also stepped up the party’s control of SOEs with a keynote document stating the party has the final say on corporate affairs.
This retrogress is apparently a trade-off between reform and short-term growth, amid a host of challenges like near-panic-driven stock market declines, a falling currency, high and rising levels of debt, and a serious slowdown in economic growth.
But it reverses nearly two decades of attempts to remodel SOEs along the lines of those in free economies. The policy has become pretty clear now: to strengthen the state firms into more effective instruments of macro management at home, and more powerful agents of national economic, political and diplomatic aims abroad.
And as maintaining Communist Party ascendancy has prevailed and trumped the logic of reform, then it will be the party, not the market, that will play the “decisive role” in allocating resources.