Jack Austin Centre: Why China is undergoing State-owned Enterprise reform

As China’s economy slows to a medium-high growth forecast, the government has revealed plans for structural reforms around State-owned Enterprises (SOEs). Though these reforms offer opportunity for the Chinese economy, they are not without potential pitfalls.

Dr. Bo Chen, Professor of Finance and Economics at Shanghai University, outlined his thoughts, including the challenges and opportunities that the reforms will result in, at a special presentation hosted at the Segal Graduate School of Business on July 11.

Hosted by the Jack Austin Centre for Asia Pacific Business Studies, the presentation was the third year in a row that Chen had visited the Beedie School of Business to discuss developments in Chinese policies on economic growth.

“Chinese reforms are not a new thing – we have been talking about it for three decades,” said Chen. “However, it remains one of the key topics. We never achieve what we want to achieve, so we have to continue to face these challenges.”

China is experiencing a structural change, caused by a decrease in its global competitive advantages. In the past, it benefitted greatly from its cheap labour and weak institutional attitudes towards environmental policies. However, this type of development model cannot be sustained anymore, as a result of surging environmental costs, and the country exhausting its demographic bonus.

“When we exhaust the so called under employed labour from the rural areas we see that this is a developing country problem that has been occurring in China since 2008,” said Chen. “Surging environmental costs have also contributed to the slowdown of economic growth, but the government have since announced they are going to be very serious about their environmental protection.”

These two problems are fundamental reasons why the Chinese government is focusing on structural change. Yet several problems exist that will potentially hinder progress on the reforms. In addition to unreliable labour costs, land is also an unreliable commodity in China, due to it being  owned by the government.

Meanwhile, much of China’s resources, particularly those in the upstream industries, are monopolized by the SOEs, while capital in the financial sector has been deliberately controlled by the central government, and is also now highly monopolized.

China’s reform guidelines eliminating entry barrier in industries that mainly face administration monopoly. In the past year alone, China saw the emergence of seven new national private banks to compete with the existing 16 state banks.

Industries that mainly face a natural monopoly will be introduced to mixed ownership and a professional CEO system. In addition, industries that mainly operate domestically in a monopoly will be split into several smaller firms in order to enhance the efficiency of the firm, while industries that have significant international business will be combined into larger firms to increase the opportunity for scale and international competitiveness.

Many pilot schemes are already underway in many of these areas, with varying degrees of success thus far. Yet Chen revealed that there are some concerns about the efficacy of these reforms.

“When dealing with SOE marketization, when we want to make them fully oriented we have to accept bankruptcy in some cases,” he said. “Sometimes we have to accept in some regions big unemployment pressure, which will cause the government to lose face.”

In response to Chen’s presentation, former member of the Canadian Senate, Jack Austin, said that Chen had made the argument of those who say China is not a market economy because one third of it is controlled of it by the SOEs of the government. He said that the problem China has, from a western capitalist market economy point of view, is that the Leninist system of governance must be applied in order to be controlled in the party’s interests.

“You come to a clash of maintaining state control through the Leninist system and the benefits of economic enterprise for economic enterprise,” said Austin. “In China, economic enterprise is only valid so long as there’s no threat to that enterprise of the government system. It’s very difficult to reform the party’s control of those things that the party believes are essential to its continuation.”

Austin noted that state ownership is not unique to China and the Leninist model, but that there are different reasons for state ownership in the west. One is the incapacity of the private sector to put infrastructure in place, so that the country invests in a social discount model. Then when the capacity becomes commercial these enterprises are sold. That, however, is inconsistent with the Leninist model, where nothing can be sold or control is lost.

For more information on the Jack Austin Centre for Asian Pacific Studies, visit beedie.sfu.ca/jack-austin-centre/