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SOE Reform: Direction and Challenges

Oct 30-2020   



The evolution of domestic and international situations has brought about fresh challenges for China’s SOEs, said Prof. Li Lixing of the NSD in Langrun Policy Talk, a signature symposium of the NSD. His research on China’s SOE reform is included in the joint report China 2049: Economic Challenges of a Rising Power by the NSD and the Brookings Institution. Prof. Li is also a Young Scholar of the Chang Jiang Scholars Program of the Ministry of Education.

 

Internally, SOEs have to confront such issues as an ageing population, rising labor costs and a slowdown in economic growth, all of which point to the need of SOEs to improve efficiency. Besides, SOEs are saddled with heavy debts, not least the invisible ones taken on by local governments through state-owned municipal investment firms and financing platforms. More radical reforms, including mixed ownership and debt for equity, seem unavoidable if they are to pay back the debts. Moreover, SOEs enjoy administrative monopoly and access to resources and favorable policies, thus impeding the development of private firms and entailing a tremendous opportunity cost in terms of suppressed social innovation and industrial upgrading.

 

Externally, SOEs are causing some jitters in the international market when conducting international M&A and acting on industrial policy functions. In some cases, the non-market behaviors of SOEs have run into more and more criticism. Such clashes have been intensified by de-globalization agitations and Sino-US trade frictions. As SOEs are bound to continue with international M&A and industrial policy functions in the next 20 to 30 years, they will need to allay global concerns and advance global initiatives.

 

The successful experiences of SOE reform dovetail with the principles of competitive neutrality, which include respecting market forces, slashing administrative monopoly, amplifying incentives, and letting the price factor play its role. Adherence to competitive neutrality will also help win international support.

 

As policy advice, Prof. Li suggested that the positioning and industrial distribution of SOEs should be properly defined. A negative list could be used to further clarify the strategic industries and strategic interests. In addition, a level playing field should be created for SOEs and private firms. Even in strategic industries, private firms should be permitted to participate in some ways so as to strengthen corporate governance. What’s more, SOEs’ capital management and supervision should be optimized by such measures as establishing ad hoc asset management institutions and investment funds. To put a wider wedge between the government and SOEs, management of SOEs should be clearly defined as professional managers and not officials. The gargantuan assets and profits of SOEs should be put in more effective use to benefit all citizens. In this regard, Singapore and Malaysia offer some good examples.

SOE Reform: Direction and Challenges

Oct 30-2020   



The evolution of domestic and international situations has brought about fresh challenges for China’s SOEs, said Prof. Li Lixing of the NSD in Langrun Policy Talk, a signature symposium of the NSD. His research on China’s SOE reform is included in the joint report China 2049: Economic Challenges of a Rising Power by the NSD and the Brookings Institution. Prof. Li is also a Young Scholar of the Chang Jiang Scholars Program of the Ministry of Education.

 

Internally, SOEs have to confront such issues as an ageing population, rising labor costs and a slowdown in economic growth, all of which point to the need of SOEs to improve efficiency. Besides, SOEs are saddled with heavy debts, not least the invisible ones taken on by local governments through state-owned municipal investment firms and financing platforms. More radical reforms, including mixed ownership and debt for equity, seem unavoidable if they are to pay back the debts. Moreover, SOEs enjoy administrative monopoly and access to resources and favorable policies, thus impeding the development of private firms and entailing a tremendous opportunity cost in terms of suppressed social innovation and industrial upgrading.

 

Externally, SOEs are causing some jitters in the international market when conducting international M&A and acting on industrial policy functions. In some cases, the non-market behaviors of SOEs have run into more and more criticism. Such clashes have been intensified by de-globalization agitations and Sino-US trade frictions. As SOEs are bound to continue with international M&A and industrial policy functions in the next 20 to 30 years, they will need to allay global concerns and advance global initiatives.

 

The successful experiences of SOE reform dovetail with the principles of competitive neutrality, which include respecting market forces, slashing administrative monopoly, amplifying incentives, and letting the price factor play its role. Adherence to competitive neutrality will also help win international support.

 

As policy advice, Prof. Li suggested that the positioning and industrial distribution of SOEs should be properly defined. A negative list could be used to further clarify the strategic industries and strategic interests. In addition, a level playing field should be created for SOEs and private firms. Even in strategic industries, private firms should be permitted to participate in some ways so as to strengthen corporate governance. What’s more, SOEs’ capital management and supervision should be optimized by such measures as establishing ad hoc asset management institutions and investment funds. To put a wider wedge between the government and SOEs, management of SOEs should be clearly defined as professional managers and not officials. The gargantuan assets and profits of SOEs should be put in more effective use to benefit all citizens. In this regard, Singapore and Malaysia offer some good examples.