Beijing’s Leaders Will Engage Only In Modest Economic Reforms – The State Owned Enterprises Are Here To Stay This conservative course of action is about politics. The SOEs are instruments of power. Yet, long term, huge inefficiencies will hurt the economy

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By Paolo von Schirach

November 14, 2013

WASHINGTON – The much anticipated Chinese Communist Party Third Plenum did not produce that much, it would seem. There were prognostications about announcements of Grand Reform Plans that would finally transform China into a real market economy. Well, there are some signs of these intentions. But in typical Chinese style the way forward is somewhat contradictory.

Keep the State Owned Enterprises

There is a pledge to look at market forces as drivers of change. And this is good. But there is also a renewed committment to keep the antiquated state owned enterprises, SOEs, pretty much in the same dominant role. And this is bad. Once the incarnation of how the Communists all over the world believed that the economy should be run, today the more modern  SOEs are primarily instruments of political power, rather than instruments to drive progress and create value.

In China, a one party state, it is politically vital to control vast sectors of the economy. And this is the primary role of the SOEs. Funded at will by state controlled banks and managed by appointed political loyalists, the state run telecoms, oil companies, railways, insurance companies and more provide a powerful support structure to the one party state.

Political control over the economy

Which is to say that keeping the SOEs as they are –and this is what we are getting from the Third Plenum–is not a matter of economic policy preferences. It is a matter of pure political calculation. The Chinese Communist Party is thinking about China’s progress, of course. But it is thinking first and foremost about its self-preservation. By controlling several strategic economic sectors, the SOEs are a huge component of the self-preservation mechanism. From this perspective, the fact that many SOEs burn capital without adding any value is almost irrelevant.

There will be a price

That said, while the current politically controlled SOEs structure allows the party to be more confident about its chances to maintain control, there will be a price to be paid for large, built-in economic inefficiencies. A slower growing China cannot afford to waste resources.

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