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What the Chinese Say and Will Do about Their SOEs

One of the central issues under debate around our government’s tightened rule over foreign SOEs is whether we should differentiate SOEs from non-SOEs. Some of those who disagree with such a differentiation have gone further to praise how China’s SOEs “operate according to conventional business principles.” (Hugh Stephens, Welcoming Chinese SOE Investment Cautiously into Canada, www.asiapacific.ca)

This is odd because SOEs are not popular in China, and their unpopularity has forced the Chinese communist party to introduce serious SOE reforms at its recent Third Plenum, the party’s five-year cycle of closed-door conclaves of its 370-strong central committee.

The most hailed point in the Third Plenum document, “Decision on Major Issues Concerning Comprehensively Deepening Reforms,” is the party’s call for the market to play a “decisive” role in allocating resources. (http://news.xinhuanet.com/politics/2013-11/15/c_118164235.htm) That is, until now, the market in China did not play this role. Instead, the governments’ monopoly through their SOEs, from the national champions to their subnational siblings, has long been distorting resource allocation in China. The detrimental consequence of such monopolies was so obvious that “breaking the SOE-monopoly” became a public consensus well before the latest Third Plenum. (http://finance.ifeng.com/news/special/gongshiguoqi/)

According to Mr. Zhang Zhuo-yuan, an economist in the drafting team for the Third Plenum documents, in the future Chinese economy, “enterprises will gradually fade away from their ownership colors.” (http://theory.people.com.cn/n/2013/1125/c148980-23649572.html) This may sound strange to our ears, but indicates a fundamental switch from the past rhetoric that promoted the dominant role of SOEs in the economy. In other words, if the “ownership colors” are fading away, then the SOE-dominated economy will also fade away from the China model.

How will the Chinese government accomplish such ownership discoloring? Mr. Zhang further explained the three building blocks of the party plan.

The first step is allowing all types of asset owners, state, collective, and private owners, to “mingle” with each other through cross-share-holdings within their enterprises. The desired result is said to be a mixed economy. Whether this indicates free-entry into the current SOE-controlled or dominated industries is unclear. But, there are signs that several industries, including financial, petroleum, electricity, railway, mineral and public utilities, will be opening up to non-SOE enterprises. http://www.zxxm.org/show.asp?id=20325

The second is transforming the SOE sector from a state-run sector to a state-invested sector. As reported in The Economist, Nov 23rd, the potential model for this transformation is Singapore’s Temasek, a holding company for SOEs, whose operations are detached from government administration. If this is true, many SOEs in China may even disappear for various reasons, one of which could be being dumped by the state investment agencies on account of their less than ideal profitability.

The final step of the plan is tightening up the operational budgeting system of SOEs and gradually raising their distribution of dividends to the government from the current 7-8 per cent on average to 30 per cent. This measure is a direct response to public anger at the SOE sector, which has long reaped the monopolistic profit for internal distribution, and hence, been criticized as one of the main sources of income disparity and social injustice in China. (http://theory.people.com.cn/BIG5/n/2013/0918/c40531-22967040.html)

What do all these reform plans mean for our tighter rule on foreign SOEs? A victory! As a Chinese Canadian, I am happy to see that our government’s tightened rule for scrutinizing foreign SOEs has helped and will continue to help wake up China’s SOEs to accept their public call for speedier and deeper reforms. A shrinking and tightly controlled Chinese SOE sector will benefit the Chinese market economy, which will not only generate greater market-sourced FDI for Canada, but also provide Canadians with a greater opportunity to do business in China.