China Power

China’s Powerful SOEs

State-owned enterprises are thwarting efforts at making big changes to the Chinese economy, a new report says.

China will make little progress in the next five years on ‘rebalancing’ its economy, a new report (PDF download) from the Eurasia Group says this week – despite a five-year plan that reads like an economist’s wish list. The rise of vast state-owned enterprises and other kinds of entrenched interests at all levels of government in China has hamstrung the power of central economic planners to make sweeping changes to the Chinese economy, said co-author Damien Ma, making rapid reform unlikely.

‘The top leadership has built this consensus around rebalancing,’ he said. ‘They recognize all the right maladies, and we actually think they've identified the right solutions. But our pessimistic takeaway is on the execution side of it – we think the political and economic institutions they’ve built are not apt to facilitate this kinds of changes.’

The report emphasizes an important development in China’s political economy – the rising power of interest groups to resist change imposed from Beijing. Understanding Chinese politics today is much less about parsing references hidden in speeches at party conferences, and much more about understanding the limits Chinese leaders face from powerful interests within the government.

‘Simply put,’ Ma said, ‘I think it’s a much more interest-driven kind of politics than we’ve seen for a long time in China. And this is important, because when you have to mediate among interests, your tendency is to compromise and appease various interests, you’re going to get these common-denominator outcomes. So if you’re not willing to go after certain interests, you’re going to get very modest change.’

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The power of SOEs, Ma said, has been supercharged in the past three years, since the state used them as channels for stimulus money during the economic crisis. The growth this money allowed them reversed the trend toward a largely private economy of the previous ten years – and further increased SOEs’ already powerful political pull. The national oil companies, Ma said, are the equivalent of ministries in their power and influence, while in 2007 Air China was able to use connections in the Politburo Standing Committee (PDF download) to have its own regulators fired when its monopoly standing was threatened. 

‘They’ve been carving out their territories, and they’re not really willing to move away from the status quo,’ Ma said. ‘And I think that’s really the problems political leaders have to address if they’re really serious about rebalancing.’

Over the past several years, Chinese leaders and Western economists have come to agree that China needs to rein in the export- and investment-based growth of the past ten years, in order to allow household income and consumption to rise. But, Ma said, the power of SOEs will allow them to resist plans to reform the financial system to allow private sector companies to borrow on equal terms with SOEs, and for the state to extract higher dividend payments in order to fund a social insurance system. 

Ultimately, Ma said, the state is likely to make progress on issues like energy, where there is a broad consensus for change. But many vital reforms will likely be lost in interest-group politics.

‘The aspirations, the intents are quite good, but the gains will probably be modest.  So our bottom line is that you shouldn’t expect the Chinese political-economy to change fundamentally by 2015,’ Ma said.