- January 14, 2016 Reform
Why Mixed-Ownership Reforms Cannot Fix China’s State Sector
As the urgency to overhaul China’s economy builds, attention has increasingly focused on how to reform China’s state-owned enterprises (SOEs). Economic reforms have significantly reduced the scale of SOE involvement in the Chinese economy. Yet these firms still account for a substantial share of both assets and employment and dominate many important sectors, including electricity, telecommunications, railroads, civil aviation, petroleum, and banking. The details of China’s ongoing SOE reforms are still emerging but appear to revolve around the corporatization of SOEs, the streamlining of SOE management and supervision, and the efficient allocation of SOE assets in the overall economy.
One aspect of China’s emerging strategy has received a disproportionately large amount of attention—namely, ownership reform, which was also the subject of another of our policy memos, co-written by Marshall Meyer from the Wharton School at the University of Pennsylvania and Wu Changqi from the Guanghua School at Peking University. A central component of the current plan has been to convert more Chinese SOEs into so-called “mixed-ownership” firms—in other words, firms in which the state and private shareholders hold joint equity stakes. But Milhaupt and Zheng argue that the introduction of private capital into SOEs will not, in itself, alter a key determinant of behavior in the Chinese economy: the relationship between firms and the state.
Indeed, they say, the boundary between SOEs and privately owned firms in contemporary China is blurred by China’s institutional environment, which permits the state to exercise significant influence over firms irrespective of its equity ownership stakes and where firms of all ownership types compete for state-generated rents. As a result, SOEs and many large, privately owned firms in China actually share substantial similarities. And these similarities exist in areas commonly thought to distinguish SOEs from private firms, such as market access, receipt of state subsidies, proximity to state power, and the execution of government policy objectives.
One crucial policy implication of their new Paulson Policy Memorandum, therefore, is that merely adjusting the ownership structure of SOEs will not, in reality, yield significant changes in how SOEs are positioned in relation to the state. As a result, focusing on SOE ownership reforms deflects attention from an even more pressing policy issue: how to create an institutional environment more conducive to the growth and innovativeness of all firms in China, regardless of where they fall along the spectrum from state to private ownership.
To put this point bluntly, Milhaupt and Zheng’s analysis suggests that meaningful efforts to improve China’s economic performance and innovative capacity should focus not on ownership-based reforms in the state sector but rather on measures to transform the role of the state from an active market participant to the designer and arbiter of neutral, transparent rules for market activity. This transformation can only be accomplished by limiting the reach of the state in the economy and by introducing accountability into the state’s relationship with business enterprises of all types.
Some of the recent initiatives undertaken in the name of SOE reform, such as the ongoing consolidation of some of the SOEs under central administration, actually strengthen the grip of the state in key sectors. These initiatives undercut the prospects for boosting growth and enhancing innovative capacity in the Chinese economy. In simplest terms, Milhaupt and Zheng make the case for institutional, not ownership-based, reforms.
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