The Chinese Communist Party announced recently that it would hold its Third Plenum, an important political meeting, in November. The event is seen as an opportunity for the new leadership to begin pushing through a series of major economic reforms that are meant to revitalize the Chinese economy. But it is unlikely that serious reforms to the notoriously inefficient state-owned sector will be part of the package.
Warring news articles and editorials, one of the tools used for conducting policy debates in China, have appeared in media outlets in the past several weeks, in sum making it apparent that state-owned companies are safe from major disruption for now.
The primary problem is reaching a consensus among the powerful family and factional interests that control these sectors, which often become for them a source of political power and immense wealth, according to political analysts.
On the pro-market side of the leger was Bao Yujun, president of All-China Federation of Industry and Commerce, a state-backed business group. “Stated owned enterprises have a monopoly position in the market,” he told the equities website AAStocks.
“State owned enterprises have strong control over basic and pillar industries such as equipment manufacturing, automotive, electronic information, construction, iron and steel, nonferrous metals, chemicals, survey and design, technology and so on,” he said. Bao called them a monopoly that has to be reformed.
Zhang Weiying, the former dean of the Guanghua School of Management at Peking University, told First Financial, a major financial news platform: “In 2010, state owned enterprises accounted for 42 percent of the whole industrial assets, while it produced only 27 percent of the whole industrial value.”
He added: “The resources it cost and the outcome it produced are out of proportion.”
Some state owned companies make their money due to controlled factor prices — they are granted a franchise over a certain resource, and aren’t exposed to market forces.
Other state companies borrow money cheaply from banks, and then, often through financial intermediaries, lend it out at higher interest rates to private businesses.
Other times they borrow money and invest in real estate, on a massive scale. “It’s been like this for the past 20 years,” said Yu Hui, a researcher at the Chinese Academy of Social Sciences, a state-run think tank, in an interview with the Chinese media.
“State owned enterprises attract investments on the one hand, and then sell the real estate at high price on the other hand,” Yu said. “Many local governments have high debt, which was all borrowed through state owned enterprises.”
The debate has been shaped in ideologically charged ways that are favorable to the hardline incumbents. In 2011 Wu Bangguo, a senior Party leader, gave the infamous “Five Nos,” altogether meant to be a staunch defense of socialist rule, one of which was “no privatization.”
The constitution of the People’s Republic of China also appears to enshrine the role of the state in economic affairs. “In the primary stage of socialism, China should uphold the public ownership as dominant, and diverse forms of ownerships develop together,” it says.
The report of the 18th National Party Congress, given in November of last year when the reins of leadership were being handed from Hu Jintao to the current Party chief Xi Jinping, said: “China must unswervingly consolidate and develop the public sector of the economy, promote various methods of public ownership… and continually increase the vitality, dominance, and influence of the state owned economy.” Remarks made at such a forum are a definitive representation of the consensus of the leadership at the time.
If there was any doubt that it may have changed, the People’s Daily Online, the Internet mouthpiece of the Communist Party, published in its “theory” section recently an article by Zou Dongtao, the editor of the website saying that China needs to “resolutely make bigger and make stronger state owned companies.”
A large amount of privatization of state owned enterprises has already taken place in China, about a decade ago. Many of the state behemoths were partially privatized by stock market listings, often brokered by Wall Street investment banks — though the state retains at least half the ownership.
According to Cheng Xiaonong, an economist whose thesis deals with the privatization of state companies in China and Russia, “The problem in China is not privatisation or not. The problem is how to deal with a corrupt government and a corrupt elite.”
The reason that further privatization won’t take place now, or that it would not take place in a way that genuinely introduced competition into highly profitable sectors that the state now effectively controls, such as telecommunications, oil, and so on, relates to these entrenched interest groups, says Cheng Xiaonong.
“They’re a pillar of tax revenue for the Chinese central government. They’re also the places where the children of government officials are given jobs: high pay, a secure position, and no competition.”