China Will Not Privatize State Owned Enterprises – 100,000 Companies, 50% Of The National Economy, Still Run By The State SOEs are mostly instruments of political control. However their inefficiency slows down overall growth

By Paolo von Schirach

October 27, 2013

WASHINGTON – A relatively short article in Bloomberg Businessweek on China’s state-owned enterprises, SOEs, (China’s Big Meeting Has a Small Agenda, October 21-27, 2013), deserves a lot of attention. The piece points out that for the moment China’s leaders have refrained from taking any steps leading to SOEs privatization. And this lack of action is indicative of a huge and unresolved political problem.

The growth of the private sector

Yes, since the truly revolutionary decision made by Deng Xiaoping to lauch economic reforms, a process that started  taking form in the early 1980s, China has come a long, long way. The absurd and violent decades of the Cultural Revolution that almost destroyed the country are in the distant past. The new era unleashed by Deng allowed and indeed favored the growth of a dynamic private sector, export oriented manufacturers and the introduction of mass-produced consumer goods.

SOEs control 50% of China’s economy

That said, it is important to stress that China’s new private sector was not the result of a repudiation of the old state controlled system. The private sector was added to it. Indeed, contrary to popular belief, China did not abandon its statist past.

In fact, the state still controls about 50% of the national economy, including strategic sectors like banking, insurance, telecommunications, railways and energy. If you lump together China’s SOEs, big and small, the total is about 100,000 companies.

And this is not good. Many of these sometimes gigantic companies are not efficient. Some of them lose money. But they stay afloat because of easy “political” credit provided by state banks. It is clear to all Chinese reform oriented economists that this bloated public sector is a drag on overall growth.

Well, if it is indeed so, it would be smart to privatize the SOEs, this way allowing genuine entrepreneurs to bring these slow-moving companies in line with China’s more dynamic private sector.

No privatization

If we assumed that China were well on its way to become a true market oriented capitalist economy, this should be the logical next step. But this reform of the vast SOE sector is not forthcoming. The Chinese leaders are willing to tinker and experiment. But they are not willing to privatize the enormous public sector.

And why not? Because of politics rather than economics. The SOEs control the rest of the economy, while the Communist Party controls them via appointed managers who are always trusted political functionaries.  

Instruments of political control

In other words, China’s SOEs will stay because they are in large part an instrument to maintain political control. As long as the Beijing leadership believes that it needs this tool in order to stay in charge, there will be no serious economic reforms involving SOEs. Which is to say that economic efficiency and future growth is deemed to be less important than the self-perpetuation of the current leadership.

The price

In the end, by choosing continuity China’s leaders have safeguarded their own positions for many more years. But the inefficient SOEs will prevent China to sustain the rapid growth made possible by 30 years of export oriented boom. The export boom is over. Now China needs innovation created by a vibrant private sector.

But it would be unwise to expect the next technological breakthrough to come from subsidized SOEs led by political appointees.


Leave a Reply

Your email address will not be published. Required fields are marked *