Privatization of SOEs in China

Financial Times reports that “China will push ahead with partial privatization of state-owned enterprises (SOE) in key industries, the cabinet said late on Thursday, offering hope to advocates of aggressive market reforms aimed at overhauling the bloated state sector http://www.ft.com/cms/s/0/921b3fe4-60eb-11e5-97e9-7f0bf5e7177b.html#axzz3mZ2h3l8H.” The plan signals a big steps toward economic liberalization under the pro-market Xi’s government, which famously remarked that markets should take a “decisive function in resource allocation”.

Traditionally, Chinese SOEs dominate key sectors such as telecommunications and energy but often produce lackluster results that threaten to drag down the already slowed Chinese economy. Hence, some hopeful economists claim that “reform of the country’s 150,000 state groups, which control $17tn in assets and employ more than 35m people” (FT, 2015), could revitalize the Chinese economy. The prediction is probably built on the assumptions that with privatization, there will be more capitals from private investors, more prudent management by business professionals to drive up profit margins and more intense competition in the private sector to increase productivity.

However, the outcomes may not be as rosy as the economists wished upon closer examination of the SOE “privatization” in china. Essentially, the Chinese government is only allowing partial privatization through the issue of shares to private investors. The guidelines released on Thursday made it clear that state capital should maintain the “absolute controlling position” in national security sectors, as well as natural resources including water, grain, forests, oil and gas. With the control still in the hands of the government, government failures that has resulted in SOE’s disappointing performances will continue to plague these large state owned companies. In fact, Chinese government’s move to engage private businessman’s capital and expertise without ceding control will only help SOEs to grow stronger and bigger without actually shrinking the state sector.

It is crucial to understand why full SOE privatization will always be unrealistic in China. While the highly liberalized western markets believe strongly in capitalism, China’s capitalist market also has to serve Marxism, the political ideology of the party in control (CCP). Hence, it is inevitable that SOEs will be used as tools to fulfill the promises of Communism, which includes providing guaranteed lifetime employment. Therefore, a complete privatization that will focus on economic efficiency on the expense of achieving social goals will always be hard in the communist country.

    • Lia Wei