China needs to make substantial reforms to its army of state-owned enterprises (SOEs) by introducing more competition and building a government subsidy system that is transparent and in line with international best practices, according to a prominent state economist.
State firms are widely expected to play a bigger role in the “dual circulation” strategy introduced by President Xi Jinping in May, with Chinese Communist Party leaders due to meet later this month to start to flesh out the policy for the new five-year plan for 2021-25.
“We need to focus on adjusting the structure of state capital in the 14th five-year plan … and make substantial moves in pulling out of inefficient and noncore businesses and concentrating on key industries,” said Huang Qunhui, who is advising the government on developing the new five-year plan in his role as the head of the Institute of Economics under the Chinese Academy of Social Sciences.
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Xi announced in May that the new so-called dual circulation strategy would focus more on the domestic market to allow China to survive and also grow in an increasingly unstable and hostile world.
The plan, however, has left many questions over the future of the private economy, and also raised scepticism from abroad, particularly from the United States and the European Union.
In sectors such as the power grid, telecoms, railways, petroleum and natural gas, we must fully open up business segments that are suitable for market competition
“In sectors such as the power grid, telecoms, railways, petroleum and natural gas, we must fully open up business segments that are suitable for market competition,” added Huang, who is also a member of the national manufacturing strategy advisory committee, in an article published in the state-run Study Times on Wednesday.
“[At the same time,] we must set up a subsidy system that is in line with international practices and form a compensation system that is reasonable, reliable and transparent.”
Huang specifically suggested that two large state-run conglomerates, namely the State Grid Corporation of China and China Southern Power Grid, be broken up so that their sole purpose would be running the nation’s electric power grid.
Two months ago, the State Grid Corporation of China, with assets worth 4.1 trillion yuan (US$604 billion) and six listed subsidiaries, transferred control of its property development unit Luneng to another state owned group in a bid to streamline its operations and focus on its core business.
To help generate more funding for research and development to enhance the nation’s innovation capability, Huang also recommended that private-sector investors be allowed to purchase bigger stakes in state-controlled firms.
China’s state-owned industrial firms had combined gross assets of 210 trillion yuan (US$31 trillion) at the end of 2018, with their net assets after subtracting debt totalling 58.7 trillion yuan, government data showed. Many of the 96 central-government owned industrial firms directly overseen by the State-owned Assets Supervision and Administration Commission are included in the Fortune 500 list of the largest firms in the world.
SOEs have long been viewed by Beijing as a pillar of the socialist market economy, although their proportion of the nation’s total economic output has dropped significantly in the last decade. The state economy enjoyed a triumphant return during the state-led stimulus in response to the global financial crisis in 2008-09, leading to an outcry from private sector and foreign firms about the uneven commercial playing field that resulted from their preferential treatment.
It will give a clear timetable and road map for specific reform tasks and those measures will be quantified and can be reviewed
Compared to previous endeavours to create “national champions” through mergers and acquisitions, the Chinese government has already shifted its tone to “building state capital bigger and stronger”.
Private investors have also already been allowed to take minority stakes in state firms, while noncore businesses and the enormous burden of retirees have either been sold or placed under government management.
The role played by SOEs in the fight against the coronavirus pandemic this year won high praise from the Chinese leadership, and Beijing is now also expecting SOEs to lead the effort to make the scientific and technological breakthroughs in the fight to overcome US efforts to contain China’s economic development.
“It will give a clear timetable and road map for specific reform tasks and those measures will be quantified and can be reviewed,” Peng Huagang, secretary general of the national state assets watchdog, said in July.
This system calls for a close link between business and the state, via a strong government role in guiding the economy, a major role for SOEs, and adherence to Communist Party leadership by all key actors in the economy
The government has introduced a three-year action plan for the reform of SOEs that was approved by the top-level Politburo meeting at the end of June, although no details have been released.
Louis Kuijs, head of Asia economics at Oxford Economics, said China’s SOE reform has been “less impressive” compared to the progress in reforming the hukou household registration system, urbanisation, the business climate and monetary framework.
“That’s because this system calls for a close link between business and the state, via a strong government role in guiding the economy, a major role for SOEs, and adherence to Communist Party leadership by all key actors in the economy,” Kuijs said.
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This article China’s SOE reforms must encourage competition and provide subsidy transparency, state economist says first appeared on South China Morning Post