China Marks 40th Anniversary of Economic Changes With Increased State Interference in Businesses

China Marks 40th Anniversary of Economic Changes With Increased State Interference in Businesses
Investors monitor stock prices at a securities company in Shanghai on Sept. 25, 2018. (Johannes Eisele/AFP/Getty Images)
Frank Fang
Deng Xiaoping, the former Chinese Communist Party (CCP) leader, is synonymous with China’s economic reform policies that were rolled out in 1978, which opened up the country to foreign businesses and investment.
This year marks the 40th anniversary of the policies’ introduction, with Chinese state-run media boasting that the reforms have led to a “prosperous China.” However, the reality is that the Chinese economy may now be headed in the opposite direction and further away from Western economic models.
Recently, the name “Xiaoping” has become associated with the idea of shoring up the economy by having private companies merge with state-owned enterprises.

More Central Planning?

Internet murmurs about Beijing pushing toward a more state-planned economy first emerged in early September, when Wu Xiaoping, a self-identified senior financial expert, penned an online article stating that “the private sector has already fulfilled its historical mission of helping the public sector to grow by leaps and bounds.”
The next phase wasn’t about the private sector blindly expanding their businesses, Wu wrote, but rather “a new form [of the economy] with greater centralization and cooperation” would be ushered in, one based on a “scaled-up mixed economic system,” where private and public sectors would be merged into one.
Wu’s article was widely circulated on both Chinese social media and mainstream Chinese media outlets. It drew a lot of speculation about the future of private firms, given that many of China’s biggest corporations have been felled by the Chinese regime in recent months, including Anbang Insurance Group, one of China’s largest insurers, after former Chairman Wu Xiaohui was sentenced to 18 years in prison for fraud and embezzlement in May.
Jitters among China’s private sector were heightened when another person with the name of “Xiaoping” made headlines. On Sept. 13, China’s Ministry of Human Resources and Social Security posted on its website comments made by Deputy Minister Qiu Xiaoping, at a meeting about ways to deepen “democratic management” in the private sector.
At the meeting in Hangzhou, the capital of eastern China’s Zhejiang Province, Qiu stated that, under the leadership of the Chinese Communist Party, employees working at private companies should “jointly participate in business management, and enjoy the fruits of their company’s development” and that both managers and employees should “shoulder the risks of the company together.”
This runs counter to conventional Western management structures that typically hold executives—and not employees—accountable for a company’s financial loss.
Workers process pork at a food factory in Rongcheng in Shandong Province, on July 19, 2018. (AFP/Getty Images)
Workers process pork at a food factory in Rongcheng in Shandong Province, on July 19, 2018. (AFP/Getty Images)
Worries about the private sector becoming more vulnerable to Party influence aren’t unfounded. According to statistics compiled by Chinese financial media outlet Caixin, more 20 private companies in China received investment from state-owned enterprises this year. Beijing has encouraged that, since the Chinese regime called for more state-controlled assets to invest in the private sector as part of its 13th Five Year Plan unveiled in 2016.
One such private company was Kingee Culture, a Beijing-based company in the gold, silver, and jewelry business. In July, one of the company’s majority stockholders, Bikong Longxiang, a Beijing-based asset management company, sold 73.32 percent of Kingee’s shares for a total of 1 yuan (15 cents) to HKJ Group, according to China’s state-run Yancheng Evening News. HKJ Group is a financial-services company controlled by a local branch of the state-owned Asset Supervision and Administration Commission (SASAC). The SASAC is a government agency that oversees China’s state-owned firms.
On Sept. 25, Dafu PeiTian Investment, based in the southern Chinese city of Shenzhen, saw 29.99 percent of its stock (about 230 million shares) sold by one of its major shareholders to Xing Gang Investment, a state-run company owned by the managing committee of the Zhengzhou Airport Economic Zone located in the eponymous city, the capital of Henan Province, according to China’s state-run financial newspaper Securities Daily. The transaction was valued at 280 million yuan (about $40.7 million).

At the Expense of Private Sector

There are already opposing voices within China against any move toward a mixed economic system. According to Chinese news portal Sina, Yao Yang, head of the China Center for Economic Research at Peking University, during a Beijing seminar organized by China’s State Council on Sept. 16 and 17, said state-owned enterprises shouldn’t take advantage of distressed private companies, as that would be a serious blow to confidence in the private sector.
Beijing in recent years has rolled out policies that favor state-owned assets. For example, the Chinese regime has enacted financial deleveraging to reduce its massive debts, especially debts incurred by state-owned firms and local governments.
That effort to reduce debt has instead put private companies at a disadvantage because they aren’t able to obtain bank loans due to Beijing’s tightened lending policies. At the same time, Beijing also imposed a $300 billion taxation and social security plan, for the purpose of generating funds for deficit-ridden local governments—also at the expense of the private sector.  
In June, China’s Chengxin International Credit Rating Company, reported that 13 companies defaulted on about 20 bonds, totaling 14.8 billion yuan (about $2.15 billion), in the first five months of this year, according to Sina. For seven of these companies, it was their first-ever bond defaults—six of them were private companies.
On Sept. 6, the Party mouthpiece People’s Daily reported that over 27 million private companies possessed combined registered assets of over 165 trillion yuan (about $24 trillion) in China as of the end of 2017. They contributed to roughly 60 percent of China’s gross domestic product.

While the private sector that has contributed more to the Chinese economy, it remains to be seen if more state-owned companies will invest in or take over private companies before the end of this year.