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SOE Reform Once Again in the Spotlight

05-22 14:24 Caijing
The direction of state-owned enterprise (SOE) reform has shifted to the reform of state-owned capital.

By Chen Qingtai, research fellow, State Council Development Research Center 

The progress of SOE reform in China has been relatively stagnant for some time. Clarifying the underlying concepts and direction of SOE reform is beneficial for opening up dialogue and pushing forward transformation.

1.Enterprise growth and the entrance and exit of state-owned capital

The "entrance and exit of the state-owned economy" refers to the movement of state-owned capital investment, rather than the “entrance and exit of state-owned enterprises.” In other words, enterprises pursuit of growth is not influenced shareholder composition and equity structures; and the entrance and exit of state capital from industries or companies is not subject to the constraints of individual enterprises. The current constraint is that state-owned assets haven't truly been capitalized.

2.A shift in the dominant direction of SOE reform

The dominant direction of the SOE reform should shift from how to manage SOEs to finding a management style that can promote the development of productive forces in the capitalization of state-owned assets. The structural adjustment of the state-owned economy is not about using administrative strength to change individual SOEs business structures, but rather in the dynamic optimization of the layout of state-owned capital; enterprise system innovation needs to move further to turn state ownership into shareholder ownership and convert "top-level SOEs" into diversified equity companies. These two reforms focus on one point, namely, the capitalization of state-owned assets and shift away from "state-owned and state-run" to a "joint-stock system."

3.Privatization and the entrance and exit of state-owned capital

The entrance and exit of the state-owned economy should not be confused with the privatization of the former Soviet Union and Eastern Europe; the exit of state capital from a particular enterprise cannot be linked with the crime of partition without permission of state property.

4.Adjusting "licensed management" and the layout of state-owned capital

Adjusting the layout of state-owned capital requires the completion of two major tasks: First is the capitalization of state-owned assets, a process which should be entrusted to professional investment institutions to manage; second is the cancellation of "licensed management" and the overall restructuring of SOEs to establish the enterprises' independent market position.

"Licensed management" refers to the state giving a portion of its assets to enterprises to manage in order to improve the efficiency and vitality of enterprises; this has also led to an entanglement of ownership and management at the enterprise level.

5.Areas and forms that state capital can play a role in

In principle, sectors which are important to the state and that non-public capital has no intention or is unable to enter, such as fundamental science research, major science and technology projects, SME financing, the development of new industries, critical infrastructure, as well as public rental housing, compulsory education, social security and other fields, all provide important space for state capital to play a strong role and reflect its value.

6.Social security, public welfare funds and state-owned capital

China could consider transferring 30 percent or perhaps even 50 percent of state-owned capital held up in general industries into social security and public welfare funds, thereby allowing state-owned assets to once again be owned and shared by society.

7.Administrative monopoly and government regulation

The government has formed administrative monopolies (or franchises) in a number of industries, which are "controlled" by SOEs and are thus government-controlled monopolies. This kind of macro-regulation runs contrary to the laws of economics. Moreover, in areas in which social benefits exceed business benefits, it is not practical to rely on state monopolies as opposed to institutions and regulations to achieve social goals.

8.“Maintaining and increasing the value” of state-owned capital

The public nature of state capital is reflected in two types of investment. The first type involves the pursuit of financial returns, or using investment income to compensate for social deficits and maintain the social bottom line. The other type is directed at achieving public goals, and includes guiding social investment in areas which the market fails, promoting scientific and technological progress and industrial upgrading, protecting economic and national security, and supporting people's livelihood and infrastructure projects. If “maintaining and increasing the value” of state-owned capital are taken to inappropriate heights, fallacies will emerge and the price to pay will be unfair competition and lower socio-economic efficiency.

9.Relationships between government and enterprise

Enterprises have been divided into different levels based on ownership and administrative subordination relationships. With local protectionism still rampant, the unequal competition among various forms of ownership has been strengthened; these two types of strong anti-market competitive forces have reduced economic efficiency and inhibited development potential.

10.State advances and the private sector retreats and vice versa

The pursuit of the ruling party and government is not about which party advances and which party retreats, but rather about encouraging fair competition among enterprises and maximizing the development potential of all capital and resources. Casting off the corporate “ownership tag” and breaking the shackles of “state vs. private” will once again liberate productive forces.

11.Realizing a pro-market economy with state-owned assets

So far, we have equated the state-owned economy with SOEs and regarded "state-owned enterprises" in their practical form as the only way to achieve a state-owned economy in the industry arena. In general industries, the capitalization of state-owned assets will be an important breakthrough to further deepen reform.

Full article in Chinese: http://magazine.caijing.com.cn/2012-05-19/111852984.html

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