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China Reform Plan to Test State-run Companies


A visitor looks at an E30 EV, a small electric vehicle of Chinese state-owned automobile manufacturer Dongfeng Motor Co., at China International Industry Fair in Shanghai, Nov. 5, 2013.

A visitor looks at an E30 EV, a small electric vehicle of Chinese state-owned automobile manufacturer Dongfeng Motor Co., at China International Industry Fair in Shanghai, Nov. 5, 2013.

China has announced a new wave of wide-ranging economic reforms that could put unprecedented pressure on the country’s state-owned enterprises and perhaps end decades of government dominance in some sectors of the economy.

China’s release late last week of a long list of what could become a historic new wave of reforms included specific details about a wide range of issues - from social changes such as easing the country’s one-child policy to measures to protect the environment. It even included plans to streamline the military, and anti-corruption measures that would provide government officials with housing and bar them from occupying other properties.

But, among the some 60 objectives outlined in the report, economic reforms were the most prominent.

China’s economy is expanding at its slowest rate in more than two decades and there are growing calls for the government to create a new economic model for the country. A model that relies less on exports and more on domestic consumption, that gives small and medium sized businesses more room, and allows the market to play a bigger role in the traditionally state-controlled economy.

Analysts say the proposed changes to state-owned enterprises will be key to ensuring the success of the overall reform effort.

Barry Naughton is an economist and professor at the University of California San Diego. He says, “The people who wrote this report are obviously trying to create significant movement on state-owned enterprises. They put a lot of concrete provisions about state-enterprise reform.”

Transparency and openness

Some of those provisions include a push for more transparency from state-run companies, more openness in their reports and budgets. The reform plan also addresses things such as the pay managers at state-owned companies make and the need to make the companies more market based.

State enterprises will also be asked to give a larger share of their revenues back to the government. Currently, state companies contribute around 10 to 15 percent of their revenues to social welfare. According to the plan, they will need to increase that amount to 30 percent by 2020.

In a recent interview with state-run broadcaster CCTV, a leading economic official in the Communist Party, Yang Weimin, vice head of the Office of the Central Leading Group on Finance and Economic Affairs, says the government’s reforms aim to create a more level playing field between private and state-owned enterprises.

The reforms would allow more private participation in state-owned companies and in some sectors, he says, the state may withdraw and let private enterprises take over. Yang says this really is new: "Perhaps people looking at the document might think that they have heard all of this before, but the intensity of these reform measures is considerably stronger."

Retain much control

China is unlikely to loosen state-run companies' control of key national security sectors, but according to the plan, the government will remove obstacles to foreign investment in the services sector, including banking and finance.

Cai Jiming, an economics professor at Tsinghua University, says the government is looking to make state-run companies more competitive by allowing outside investment.

"When foreign or private investment enters a state owned enterprise, exclusively state owned, and undergoes a transformation of its share holdings, then it can only operate according to modern industry standards, and has to integrate - blend in with the market," says Cai. "This means that they have to break away from the government's interference with the company."

UCSD’s Barry Naughton says one of the best things about the report is its mention that the government will reduce its intervention in the economy. And that is something where state-owned enterprise reform is key as well.

Naughton says, “There are many parts in it ((the report)) where it advocates a more fair, rules based competition. Everybody’s got the same rights. So, those are nice strong statements, but they don’t mean anything unless they are willing to tackle some of the privileges state-owned enterprises have."

State-owned enterprises have long enjoyed easy access to cheap loans from state-run banks, subsidies and unfettered competition. They also enjoy considerable political influence within the government and some enterprises are more powerful than government ministries. Because of that, analysts add, pushing these reforms through will be no small task.

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