Jun 20, 2013 02:23 PM

Why SOE Reform Cannot Be Avoided


A renewed quarrel about the performance and function of state-owned enterprises (SOEs) has erupted in China recently. The debate is unbalanced. The advocates of SOEs have been expressing their arguments through official news organs, while the critics mainly use websites.

Official media are praising SOEs more generously than ever. A story in May on the front page of the People's Daily, the mouthpiece of the Communist Party, stated that SOEs are the symbols of vitality, efficiency and influence, and form the backbone of the so-called socialist market economy. A handful of orthodox Marxists believe that the country must cultivate strong SOEs, instead of private enterprises, if the government hopes to achieve its goal of common prosperity.

Other supporters take a somewhat more realistic and economic approach. In their eyes, the country can rely only on SOEs to prevail abroad. Officials commonly feel that SOEs are convenient vehicles for stimulating the economy. And some scholars and those from the state sector claim that SOEs can take greater social responsibility than other types of firms in terms of environmental protection and disaster relief. In short, from this viewpoint SOEs are the foundation for the party's rule.

However, the critics urge the government to redefine the role of SOEs, and argue that these heavyweights should withdraw from all fields where the invisible hand of the market can allocate resources efficiently. They cite the evidence that SOEs merely make money due to the monopolies they enjoy.

The arguments from the SOEs themselves are contradictory. When measured by commercial standards, say, return on assets, SOEs argue their major task is to serve the public interest, rather than make a profit. When asked to shoulder public responsibility, say, by paying into the social safety net, SOEs reply that they are normal economic bodies pursuing a profit. Indeed, SOEs have become a monster that has erected a mountain of barriers to fair competition, technical innovation and eventually sustainable growth in China.

The current debate does not come out of nowhere. Deepening reform of SOEs has failed to become one of priorities of new leadership so far, but the country desperately needs breakthroughs in economic reform. A new reform plan is taking shape. According to the usual practice, a group of officials has been put in charge of drafting documents for the third plenary meeting of the party's Central Committee. The major task of the meeting, which will be held this fall, is to turn strategies put forward by party's 18th National Congress last year into concrete plans. Those who are concerned about whether the country's economy – which possesses huge potential but is faced with accumulated risks – can gain new momentum are paying close attention to what progress is made at the coming meeting. No doubt, the issue of SOEs will be one of the hot topics.

The path to reforming SOEs has had twists and turns. Under the leadership of former premier Zhu Rongji, the country restructured SOEs at the turn of century. In fact, most of them were privatized. Today, SOEs account for only 8 percent of employment. Despite this, SOEs still manage to control key industries, such as power, gas and telecoms. The reform of SOEs has stagnated in the last decade. In the aftermath of the global financial crisis, China is striving to boost increasingly weak growth. The second wave of SOE reform cannot be avoided.

As a prerequisite of further progress, the veil of ideology must be stripped from the SOE discussion. The government should look squarely at actual performance.

In 2011, the Unirule Institute of Economics, a renowned independent think tank in China, published a detailed paper that concluded that without tax cuts, subsidies and other almsgiving from governments at all levels, SOEs as a whole would be in the red. The paper created quite a stir. A spokesman for the State-owned Assets Supervision and Administration Commission, which is responsible for overseeing SOEs, said the calculations in the paper were wrong and promised to refute Unirule's points tit for tat. SASAC never did this.

If the conclusion of Unirule's paper is still valid, all semantic quibbles about the bad performance of SOEs are meaningless. Keeping the zombie companies on a respirator is dangerous. Consider the lesson of Japan.

In China, officials repeatedly argue that SOEs and private enterprises are equal competitors in markets. But in practice, SOEs benefit a great deal from their monopolies, particularly from their special ties with the government. Private enterprises are confronted with visible or invisible barriers to market entrance. This is no secret. Under the leadership of former premier Wen Jiabao, the county promulgated two rules to tear down many kinds of barriers, and 22 departments of the central government were told to come up with their own plans to carry out the rules. The situation, however, has remained unchanged, a stark irony in a country that boasts of its enforcement capability.

Over last two decades, loads of party mandates have dictated that all key and strategic industries should be controlled by SOEs, and state ownership should lead and dominate the economy. Obviously, the stance is at odds with basic ideas of a market economy. Indeed, the opposite of the argument is true: The more important an industry is, the bigger role the market should play in it. China needs to rethink this stance and start reforms now.
The author is deputy editor-in-chief of China Reform

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