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November 11, 2013

In China, Expectations Growing for Bold Reforms

by William Ide

In China, there are signs that the top leaders at a closed-door summit in Beijing are considering major changes for the country's powerful and politically connected state owned enterprises. The state-owned enterprises, or SOEs, dominate large parts of the Chinese economy and have long been viewed by critics as obstacles to reform and private enterprise as well as sources of corruption.

Without getting into specifics, an editorial Monday in the People’s Daily newspaper, a mouthpiece for the Communist Party, spoke about the need to change regardless of the risks or difficulties. It also said that not pushing forward with deeper reforms would bring even more challenges.
 
The official Xinhua news agency says that when the meetings finish Tuesday, reforms will feature breakthroughs in three areas: development and transformation, fairness and justice as well as government and the market.
 
Sun Lijian, an economics professor at Shanghai’s Fudan University, said one of the key challenges after the meeting will be giving the market more say in the economy.
 
“The government should loosen controls, address the relationship between the state and businesses so the market takes the lead in creating wealth.”
 
According to the English version of the state-backed China Daily, after the meetings wrap up, China will take major steps toward reforming the country’s state-owned enterprises and open them up for private investment.
 
The report quotes officials at the State-owned Assets Supervision and Administration Commission, a government body that oversees 112 large state enterprises, as saying that private investors and companies will be allowed to purchase up to a 15 percent stake in state ventures. It was unclear from the report whether each enterprise or investor could take a 15 percent stake or whether the private limit was capped at 15 percent total.

Either way, the signal that reform might also be coming to the country’s state-owned enterprises was a welcome shift. Earlier expectations were that reform of China’s SOEs was not likely to be on the government’s agenda. The heads of some of China’s large state companies - many former party officials - have great influence within the government and among those at the leaders summit in Beijing.
 
Zhang Tianyu, associate director of the school of governance at the University of Hong Kong Business School said the idea seems like a good experiment.

"Fifteen percent, is from zero to 15 already now, I think this is one big first step they are taking to reform the SOEs, so maybe step by step they can take away or increase this limit," Zhang said.
 
He added, however, that if 15 percent is the cap, that would mean that the state or government still holds 85 percent and that means investors would just be putting their money into the company. Zhang said he wonders how many would be brave enough to do that.
 
According to Sun Lijian, broader reforms are needed to help create a more level playing field for private companies.
 
“Those who perform better should get a larger proportion of the resources. In other words, the distribution of resources should not be simply judged by the enterprises’ ability to pay mortgages," Sun said. "When it involves state-owned properties, the banks will grant special treatment to state-owned enterprises. That situation cannot go on any more.”
 
Sun added that that if private enterprises are given more room to compete they could be the biggest benefactors of the government’s latest round of reforms.