Beijing’s latest measures to redistribute state capital in key sectors while enhancing the influence of state-owned enterprises (SOEs) are arousing concern in China’s private sector while also fuelling foreign suspicion about the return of state capitalism.
Chinese officials, namely President Xi Jinping, have commented on the need to build bigger, better and stronger state firms.
But some analysts say that may run counter to pledges of market-oriented reform in the state sector. In particular, there are questions about whether the nation’s antitrust law will be applied to China’s many state-owned firms as it is now being applied to private-sector technology companies.
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Enhancing the influence of state-owned firms fits well with Beijing’s new economic strategy emphasising self-reliance to offset external uncertainties, including decoupling attempts by the United States and its allies.
Reforms since the mid-1990s did not shrink the state sector, but solidified SOEs’ role as agents of state capitalism
But many analysts say the way those SOEs are treated is key to judging Beijing’s pledges to combat monopolistic activities and to promote competition neutrality for state, private and foreign investors.
The power of state-owned enterprises came into the spotlight during negotiations of the just-signed China-European Union investment deal, with the EU demanding that Beijing rein in the behaviour of SOEs as part of the agreement.
Additionally, the United States moved last week to begin the process of delisting from US stock exchanges three state-owned telecommunications giants – China Mobile, China Unicom and China Telecom – in compliance with US President Donald Trump’s executive order to ban investment in any company with connections to the Chinese military, only to reverse that decision late on Monday.
“Reforms since the mid-1990s did not shrink the state sector, but solidified SOEs’ role as agents of state capitalism,” Andrew Batson, China research director for Gavekal Dragonomics, wrote in October in a report titled The State Never Retreats.
The need to restructure the monopolies enjoyed by state enterprises in certain sectors has been a subject of the ongoing debate on China’s transition toward a more market-oriented economy from a Soviet-style central planning model.
Although the private sector now has a far bigger presence in the world’s second-largest economy – contributing more than half of national tax revenue, over 60 per cent of gross domestic product and more than 80 per cent of urban jobs as of the end of 2018 – China’s Constitution remains committed to public ownership of the means of production as embodied in Beijing’s strong grip on national security and the need to protect strategic sectors.
The value of non-financial state-owned assets held by 13,000 non-financial state-owned enterprises nationwide rose to 233.9 trillion yuan (US$36.2 trillion) as of the end of 2019 – up 11.2 per cent from a year earlier – according to the Ministry of Finance.
More than 90 per cent of those assets are concentrated in key sectors such as petroleum and petrochemicals, national defence, the nation’s electric power grid and power generation, transport, telecommunications, machinery and construction. China now has more than 100 state-owned national champions competing for global influence.
Some 1,151 companies listed on Chinese stock markets are controlled by state-owned parents, accounting for 28 per cent of the total listings and 44 per cent of market capitalisation, according to the China Association for Public Companies.
Gavekal’s Batson pointed out that state control over the financial sector – it is roughly 90 per cent state-owned – has been the key to providing SOEs with abundant and cheap financing that has enabled industrial and other state-owned firms to continue growing roughly as fast as competitors in the more efficient and profitable private sector.
China’s six largest state-owned banks extended about 6.4 trillion yuan worth of new loans last year, or 38 per cent of the national total.
Moreover, China’s financial sector has become more centralised since 2017 amid the government’s deleveraging push to eliminate financial risks, according to a Gavekal Dragonomics study. For instance, the share of city commercial bank assets controlled by state-owned shareholders rose to about 70 per cent in 2019 from 60 per cent in 2015.
A few years ago, there was a heated domestic debate about whether a 2008 antitrust law – which highlights the backbone role of state firms in the economy, but also encourages competition – should be used to reform SOEs. The law then did not provide a clear answer, leaving both sides to quote different clauses to support their arguments.
Beijing’s efforts to encourage competition among state players has progressed slowly, leading to a renewed call in the 2021-2025 five-year development plan to push forward market-oriented reform in the energy, railways, telecoms and public utilities – four sectors notorious for their tightly controlled state monopolies.
In the petroleum sector, the three central government-owned giants – China National Petroleum Corporation, Sinopec Group and China National Offshore Oil Corporation – control the vast majority of the nation’s crude production. This output is used exclusively in their affiliated refineries, forcing smaller private refiners to rely heavily on imported supplies.
And the government controls both energy imports and domestic prices. The Ministry of Commerce sets an annual petroleum import quota for private refineries – 185 million tonnes – while the National Development and Reform Commission sets retail petrol and diesel fuel prices, effectively controlling the profit margins of all refiners.
Beijing has tried to advance mixed public-private ownership to invigorate state firms in some sectors while focusing state capital on national security, public services and sectors where China wants to be a global leader.
It has promised wider market access for foreign firms, and the 2020 negative list of sectors in which foreign firms were not allowed to invest was trimmed to 123, from 131 in 2019.
The new policy drive to grow ‘bigger, stronger and better’ SOEs will impose further pressure on Chinese antitrust regulators to not go after SOEs, as they do not want their actions to be seen as contradicting national economic policy
Angela Zhang, an associate professor of law at the University of Hong Kong and author of the book Chinese Antitrust Exceptionalism, pointed at lingering critical voices that state firms are actually the biggest source of monopolies.
“The new policy drive to grow ‘bigger, stronger and better’ SOEs will impose further pressure on Chinese antitrust regulators to not go after SOEs, as they do not want their actions to be seen as contradicting national economic policy,” she said.
However, “foreign regulators are ramping up enforcement against Chinese SOEs abroad”, she noted.
In the bilateral investment deal, the EU won commitments from China that it will ensure SOEs make decisions based solely on commercial considerations and will not discriminate against European companies. Beijing also agreed to consultations when inappropriate SOE behaviour occurs.
The State Administration for Market Regulation, the antitrust enforcement agency, initiated 103 investigations last year, including 28 cases concerning monopolistic deals, 15 cases concerning the misuse of market dominance, and 84 cases focused on the restriction of competition with administrative power, according to data published by the agency. It collected about 320 million yuan (US$49.5 million) in fines in 2020.
But while several domestic SOEs have been targeted in the past, China’s antitrust authorities are better known for targeting foreign companies.
In February 2015, American chip maker Qualcomm, which returned to the spotlight in 2018 amid the US-China trade war, was fined 6.1 billion yuan (US$945 million) for charging “unfairly high” licensing fees due to its wireless technology dominance.
The penalty in that one case accounts for nearly one-third of the total collected by the antitrust agency in the past 12 years.
In contrast, the National Development and Reform Commission’s investigation into China Unicom and China Telecom in 2011, citing their dominance in the broadband market, ended with no concrete punishments, but rather corporate pledges to change business practices.
Cuts in telecoms charges and faster internet speeds were later demanded of Chinese operators by the State Council, the country’s cabinet.
Recently, the spotlight has turned to the antitrust investigation into e-commerce giant Alibaba, which owns the South China Morning Post, for allegedly misusing its market dominance. In separate cases, subsidiaries of Tencent and Alibaba were fined 500,000 yuan (US$77,400), respectively, last month for failing to disclose acquisitions of smaller competitors.
[Fair] competition should be the basic policy overriding other economic goals
Wang Xiaoye, a researcher with the Chinese Academy of Social Sciences, said the antitrust law should be used to promote market competition, and as a catalyst for further economic reforms and opening-up of the domestic economy.
“[Fair] competition should be the basic policy overriding other economic goals,” she told China’s Economic Observer newspaper in September. “However, to some extent, industry policy still receives a higher priority in China … and some large state firms haven’t realised the importance of fair competition policy.”
That sentiment was echoed by Jet Deng, co-chair of consultancy Dentons China’s competition and antitrust practice, who noted that Chinese antitrust investigations into state companies often encounter strong resistance because the state firms tend to be well connected at the ministerial level and have strong lobbying power within the government.
Foreign companies are also concerned that China’s enforcement doctrine is not always in alignment with the modern enforcement doctrine
Nevertheless, “from a technical perspective, antitrust investigations can be used as a tool to force reforms of SOEs”, he said.
Beijing has indicated that it plans to strengthen fair-competition clauses in its planned amendment to the antitrust law. The draft was released in early 2020, but no progress on its review or enactment has been seen.
Lester Ross, a partner at law firm WilmerHale in Beijing, said foreign companies could be subjected to greater scrutiny in their mergers and acquisitions in China, and forced to agree to strict conditions to obtain clearance from Chinese authorities.
“Foreign companies are also concerned that China’s enforcement doctrine is not always in alignment with the modern enforcement doctrine,” he added, pointing to the influence of China’s industrial policy on antitrust enforcement.
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