Reforming China’s State-Owned Enterprises (Page 2 of 3)

The National Audit Office also reported (as noted in this Financial Times article) that a number of SOEs, including China Mobile and China Huaneng Group, violated taxation laws by giving employees “invisible benefits,” including gym memberships and life insurance, that allowed them to transfer “public resources” without paying taxes on them.

Chinese citizens often have a dim view of SOEs. Some would say this is because of jealousy of the “iron rice bowl” afforded to employees, but it is also in part because of flagrant spending: Beijing News (reported in this Financial Times piece) listed 10 SOEs that spent 2.9 trillion yuan on receptions in 2012, with China Railway Construction Corporation heading the list, spending 837 million, or 10 percent of its net profits.

The managers of SOEs are rewarded for prestige projects, not necessarily profit, and leaders of SOEs are appointed by the central government, largely on a political basis, rather than because of their business experience.

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SOEs distort the Chinese economy in a number of important ways. First, as noted above, they guzzle much of the available credit, starving smaller enterprises, and their subsidies make it difficult for other companies to compete.

They also often don’t pay market price for resources, making them more likely to use those resources inefficiently, with implications for both the economy and environment. Additionally, a low level of accountability encourages a cavalier approach to efficiency in the use of resources (including employees) and end profits. Overcapacity can also be an issue, with industries producing product without considering the economy’s need for the item: this is particularly an issue in the steel and aluminum industries.

And from Economics 101: those in a monopoly position are able to charge more for their product. That puts pressure on Chinese consumers at a time when the government is trying to promote domestic consumption.

On a more general note, SOEs are happy with the status quo, and are powerful opponents of economic reforms, slowing the action needed to move China’s economy forward.

Foreign politicians claim that the privileges afforded to SOEs make their investments and acquisitions overseas unfair. And SOEs have been quite busy expanding their international portfolios: in 2011, China invested $60 billion abroad, 80% of that coming from SOEs, according to Xinhua. The state-run nature of these firms exacerbates foreign concerns about Chinese government involvement in companies on their own soil, particularly when these companies are potentially related to national security concerns, such as energy.

Recently, SASAC has been involved in a media campaign to promote the state sector as “transformed,” and “streamlined” via articles and reports carried by People’s Daily, Xinhua, and CCTV, as noted in this Wall Street Journal article. Anbound Consulting chief Jon Chen commented that the media blitz highlights that “State companies are an interest group and this is their pushback against reforms.”

An editorial in China’s state-run, “China’s SOE Monopoly Fallacy” argued that even within monopoly industries, such as oil and gas, there is competition: among state-run firms such as Sinopec, CNPC, and CNOOC.

SOEs have not been solely deleterious to the Chinese economy; positive ramifications have included shepherding key industries and giving China the building blocks for its rapid development.

Still, it is clear that reform is needed if the economy is to further evolve, and this is widely accepted by the Chinese leadership. In Li Keqiang’s first news conference as Premier this March, as reported by the Wall Street Journal, he said that the market would be given “greater room to operate, including allowing private businesses to compete on an equal footing with state-owned enterprises.”

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