Caixin
Oct 23, 2018 04:37 PM
OPINION

Editorial: How China Can Achieve ‘Competitive Neutrality’

The seemingly unfamiliar expression “competitive neutrality” has entered public discourse in China. On Oct. 14, Yi Gang, the governor of the People’s Bank of China, told a G-30 meeting that China would accelerate domestic reform and opening-up to the rest of the world, strengthen protection of intellectual property, and consider treating state-owned enterprises (SOEs) with the principle of “competitive neutrality” in order to solve the structural problems of the Chinese economy.

Australia first proposed the principle of competitive neutrality over 20 years ago. The Organization for Economic Cooperation and Development, a club of mostly rich countries, began promoting the principle in 2011. This principle has become an international trend. Its core meaning is that any action taken by the government should have the same effect on both state-owned and private enterprises, without giving an inappropriate competitive advantage to any market participant, especially any SOE. China’s acceptance of this principle would demonstrate that the country has taken the next step toward integrating its domestic economic policies with international rules and regulations. Considering the size, number, and special status of SOEs, this decision will inevitably advance structural reforms, promoting long-term economic development, and also help the smooth implementation of the Belt and Road Initiative.

Competition is the inexhaustible driving force of a market economy. Even though the Chinese public may be relatively unfamiliar with the term “competitive neutrality,” in reality, they are already well-acquainted with its core spirit. For many years, the Chinese government has held the stance of protecting fair competition between enterprises regardless of their ownership status and viewing private and public enterprises the same way. The third plenum of the 18th Party Central Committee in 2013 emphasized that the state should protect the ownership rights and legal interests of enterprises regardless of ownership status, allowing them equal use of factors of production, and allowing them to openly and fairly participate in market competition, receiving the same legal protections. It also emphasized supervising all enterprises in accordance with the law, regardless of ownership status. However, regrettably, SOEs still maintain advantages in areas that include taxation, land and financing, among others. Going forward, China must turn its policy of fair competition into reality.

China’s acceptance of the principle of competitive neutrality shows a desire to eliminate the market distortions caused by unfair competition. This is something China urgently needs as it pursues high-quality development and the comprehensive deepening of reforms, in order to boost the confidence of private enterprises and stimulate economic vitality. Competitive neutrality should not be criticized as a foreign invention, and we must not assume that China is succumbing to external pressure if it accepts this principle. This narrow-minded perception should be abandoned. In the future, as China pushes forward the international efforts of its SOEs and promotes the Belt and Road Initiative, it must do its utmost to eliminate the international misunderstanding that SOEs are strategic tools of the Chinese government by practicing the principle of competitive neutrality. This will also help ease the trade conflict between China and the U.S., and avoid giving people another reason to criticize China.

It is worth noting that, as soon as the Chinese government began expressing firm acceptance of competitive neutrality, some officials and scholars began warning of so-called “reverse discrimination” against SOEs. Their arguments are worrying and inconsistent with reality, reflecting stubborn prejudices. Private enterprises still don’t have access to fair competition — how would they even dare to engage in “reverse discrimination”? How can comparative neutrality be implemented if people sensationalize the risk of “reverse discrimination”?

“Competitive neutrality” is not just an empty slogan, and China is not starting from zero when it comes to this principle. Chinese policymakers have long paid attention to the issue of fair competition among enterprises regardless of ownership status, and have taken action in recent years. One major step was the attempt to establish a mechanism for reviewing fair competition. In 2016, the State Council released an opinion document on establishing such a system, and a group of government departments, including the National Development and Reform Commission, jointly issued interim implementation rules in 2017. However, the system has not yet achieved significant results. Governments at all levels should use the acceptance of competitive neutrality to accelerate the establishment of a fair competition review system.

The international community has not yet reached a consensus on the implications of the “competitive neutrality” principle. China is in a good position to explore best practices and demonstrate the behavior of a “responsible power.” Its action plan should still be to “make the market play a decisive role in resource allocation while making better use of the government.” In 2015, the Central Committee of the Communist Party of China and the State Council issued “Guiding Opinions” on the deepening of SOE reform, which stated that “the reform of SOEs should follow the laws of the market economy and the law of enterprise development, and adhere to the separation of government and business, the separation of government and capital, and the separation of ownership and management.” To achieve this, governments at all levels must correct their relationships with SOEs. Otherwise, it will be difficult to eradicate paternalistic thinking. It is also necessary to make adjustments to the deployment of SOEs. If SOEs are deployed without regard for their functional orientation, they will crowd into fields like real estate where they have an average level of competitiveness, making it difficult to achieve competitive neutrality.

In order to turn SOEs into independent market entities that are independently operated, financially autonomous, independently responsible, self-disciplined and self-developing, China should truly abolish the administrative ranks at SOEs that practically make executives equal to government officials. The abolition of these ranks must go beyond a mere formality. China should effectively harden the budget constraints of SOEs, raise requirements for the return on investments, and take “zombie enterprises” off life support. It is also necessary to further promote mixed-ownership reforms, and the supervision of state-owned assets should shift from “managing people, affairs and assets” toward simply “managing capital.”

Implementing the principle of competitive neutrality requires improving the guarantee of rule of law, and gradually establishing a set of rules and regulations covering areas that include assessment, review, implementation, and appeals, in order to create a good business environment. The Chinese government needs to better fulfill its commitments to the World Trade Organization, including its commitments to fighting discrimination, monopolies, and unfair competition, as well as treat enterprises equally in terms of supervision, bidding, procurement, subsidies, tax incentives, and loans, regardless of ownership status. It should break administrative monopolies and relax restrictions on market access.

A recent State Council meeting determined that China needs to focus on the “striking difficulties faced by small- and midsize enterprises (SMEs),” and called for “precise and effective measures” to support the development of these businesses. SMEs need larger tax cuts and clearer measures to reduce their costs. But deepening reforms and implementing the principle of competitive neutrality will give them the strongest boost. Competitive neutrality will be realized the day people no longer care whether an enterprise is private or state-owned.

Translated by Teng Jing Xuan (jingxuanteng@caixin.com)

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