By Scott Kennedy
Source: Minale Tattersfield Roadside Retail’s flickr photostream, used under a creative commons license.
Chinese state media reported on April 27 that China may radically reduce the number of its central state owned enterprises (SOEs) through mergers. This news, if true, is significant, but is potentially a bad sign. The Chinese Communist Party leadership has promised a full blueprint on SOE reform for a while, and it hasn’t been issued yet. There are many of possible options, including allowing private and foreign greenfield investment in the sectors where SOEs currently dominate, among them financial services, education, healthcare, the internet, steel production, and refining. Party leaders could also allow non-state firms to buy minority stakes in SOEs or outright acquire them. They could reform the internal governance of SOEs, which have a heavy party presence that has a large say in selecting the top leadership and strategic investment decisions. Instead, so far with this announcement, the focus is on merging existing SOEs. The logic is to make supervision of central SOEs easier simply because there will be less of them to track, reduce domestic competition among SOEs, and make them large enough to compete with the largest multinational corporations. The merger of the north and south railway investment companies may be a model for others.
There may be some cases where mergers make commercial sense, but observers should in general be dubious and see this as politically expedient but commercially problematic. If the sectors dominated by SOEs are not open up to more competition, especially by private and foreign firms, and internal governance of SOEs is not carried forward, these mergers will simply mean greater dominance of certain sectors by a smaller number of more powerful and non-transparent SOEs. It will leave these “vested interests” more entrenched, and make a mockery of China’s antimonopoly law, which is viewed as being used in a discriminatory fashion against foreign companies. It would also signal that implementation of a U.S.-China Bilateral Investment Treaty and potential Chinese entry into the Trans-Pacific Partnership would be problematic, since opening up of some of the sectors where SOEs dominate and creating a more even playing field for SOEs is central to these agreements.
Bottom-line: Those supporting change in China’s economy should hope that SOE “reforms” means true reform that moves the country toward a different kind of economic governance model.
Dr. Scott Kennedy is Deputy Director of the Freeman Chair in China Studies and Director, Program on Chinese Business and Political Economy at CSIS. Follow him on twitter @KennedyCSIS.
Scott Kennedy
Dr. Scott Kennedy is senior adviser and Trustee Chair in Chinese Business and Economics at CSIS.
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