When it comes to busting up state monopolies, reformers in China have been building a solid case.
Starting in 1993, China’s top power duo at the time, Jiang Zemin and Zhu Rongji, broke down the hold state-owned enterprises (SOEs) had on the economy. Millions of Chinese were laid off and the country’s “iron rice bowl” was smashed in the process. Much of that work was undone between 2003 and today. Then-president Hu Jintao revamped the power of the state in business, claiming the firms would drive China’s economy.
But after two decades of reform then revision, state firms may have provided all evidence China’s new administration needs for a comprehensive overhaul.
Chinese consumers have long been the loser at the expense of the state’s ability to set prices. SOEs lower the price of inputs and sell at above market prices. They pay little for natural resources such as land and also pay below-market interest rates on loans, a perk that essentially transfers China’s savings to the state.
Although state firms have a powerful position – their assets accounted for 62% of GDP in 2010 – they give little back to the economy. Between 2007 and 2009, 992 listed SOEs paid 10% in income tax, according to data from Beijing-based think tank Unirule. Privately held firms averaged 24%.
Seeking to get more money into the public purse, the government in 2007 ordered large SOEs to cough up between 5%-15% of profits to be transferred back into China’s economy. Little came of that. Most of the money paid out is handed over to the State-owned Assets Supervision and Administration Commission, or Sasac, and routinely reinvested into the state sector.
In short, state business have been slowly transferring public assets into their own pockets, with few stipulations on giving back to larger society. And they’re not even very good at it. The return on assets at non-financial SOEs fell to 2.5% in 2011, down from 5% a year earlier.
Yet there was a philosophy behind the state’s leaching and low returns. SOEs were supposed to pump profits into strategic sectors that the government had marked out for them, such as oil, telecoms, railways and construction. Hu’s administration said they would lead innovation and power the economy. It was, in theory at least, a benevolent monopoly that would give the people a return on public assets, which in China are vast.
Still, the mammoth firms refused this as well. Since 2006, when the central government reasserted its commitment to consolidating SOE presence in certain key areas of the economy, incomes from these industries have declined. The profits SOEs generate from the long list of strategic sectors actually fell to 65% in 2010 from 76% in 2006, according to data from GK Dragonomics, a consultancy.
Instead, many state firms have been playing the property game, using their privileged hold on precious assets to leverage their positions in China’s booming real estate market. Despite the wealth of resources and competitive advantages bestowed upon them, SOEs have been set on easy gains.
“SOEs have proved much more interested in profiting from the real estate boom than in redoubling their investments in strategic industrial sectors that will help drive the country’s future growth,” Andrew Batson at Dragonomics wrote in a report a year ago.
It was nice while it lasted, but SOEs’ sloppy record of management is now front and center in the debate on weakening the state’s grip on business. The Third Plenum, a political meet of top leaders held last month, pledged to increase market forces in the economy while also boosting fair competition. The plenary session, led by president Xi Jinping and Premier Li Keqiang, also called on introducing outside shareholders into the companies, including from the private sector.
There won’t be a fire sale of SOE assets anytime soon. That would be a foolish route in light of the fact that the companies are worth so little to begin with. Plus, a Soviet-style selloff would only put what were once public assets into the hands of well-connected party members at rock-bottom prices.
Xi and Li will need to pick up where Jiang and Zhu left off more than a decade ago. Shutting down non-performing assets in the sector would be a start. Given the poor performance of state business, these reformers have a one-up position on those intent on maintaining the status quo.