State-owned enterprise (SOE) reforms in China: A decisive role for the market at last?

31-05-2016

SOEs continue to play a key role in China's political economy, although after more than three decades of experimental and gradual reforms, aimed at preserving rather than eliminating them, their economic significance in terms of output, profit and employment has diminished with the expansion of the private sector. Since the Chinese government uses SOEs as a tool to pursue social, industrial and foreign policy objectives, they benefit from direct and indirect subsidies for factor costs (notably capital, energy and land) and regulatory preference, not least under competition law, in public procurement and as a result of a highly restrictive (foreign direct) investment regime. This has allowed them to maintain their position as administrative monopolies in a broad range of sectors. Despite their privileges, however, SOEs tend to lag behind the private sector in terms of efficiency and profitability and suffer heavily from over-capacity and debt. SOE reform is an important part of China's transition to a market-driven economy. However, despite the Chinese leadership's pledge at the Third Plenum of the Chinese Communist Party (CCP) in 2013 to let the market play a 'decisive role' in resource allocation, the current reform design suggests that SOEs are likely to retain many of their privileges, hindering private domestic and foreign firms in their attempts to compete with SOEs on a more equal footing in and outside China in the future.

SOEs continue to play a key role in China's political economy, although after more than three decades of experimental and gradual reforms, aimed at preserving rather than eliminating them, their economic significance in terms of output, profit and employment has diminished with the expansion of the private sector. Since the Chinese government uses SOEs as a tool to pursue social, industrial and foreign policy objectives, they benefit from direct and indirect subsidies for factor costs (notably capital, energy and land) and regulatory preference, not least under competition law, in public procurement and as a result of a highly restrictive (foreign direct) investment regime. This has allowed them to maintain their position as administrative monopolies in a broad range of sectors. Despite their privileges, however, SOEs tend to lag behind the private sector in terms of efficiency and profitability and suffer heavily from over-capacity and debt. SOE reform is an important part of China's transition to a market-driven economy. However, despite the Chinese leadership's pledge at the Third Plenum of the Chinese Communist Party (CCP) in 2013 to let the market play a 'decisive role' in resource allocation, the current reform design suggests that SOEs are likely to retain many of their privileges, hindering private domestic and foreign firms in their attempts to compete with SOEs on a more equal footing in and outside China in the future.