BOFIT Viikkokatsaus / BOFIT Weekly 2015/25

​Despite an impressive launch in 2013, China has little to show for its latest attempt at reforming inefficient state-owned enterprises (SOEs) to make them operate in accordance with market principles. Reform efforts seem to have taken a step forward and a step back.

Efficiency measures announced this spring included pilot programmes for six large SOEs. The programmes are intended to provide lessons that can be applied on a wider basis to managing state firms. The nature of the pilot programmes suggests that privatisation will only play a minor role in reform efforts. At least as far as firms controlled by the central government are concerned, the main goal appears to be increasing market guidance through other means. Local administrations, which are in weaker economic shape than the central government, may have a greater appetite for privatisation sales of their businesses.

Only a tiny fraction of the huge number of companies owned by the central government and local governments have any actual strategic significance. The State-owned Assets Supervision and Administration Commission (SASAC) oversees such firms. SASAC currently manages 112 firms, but a two-thirds reduction in that number has been proposed. Progress was made this spring in the planning and implementing of mergers of SOEs, with a view to exploiting economies of scale. The consolidation of SOEs might result in significant synergies and raise the international competitiveness of Chinese SOEs, but competition in domestic markets will not increase.

Media reports note that SASAC has submitted to the government an outline of measures to increase efficiency and productivity at state firms. Sectors are currently classified according to their strategic importance and the government’s goal is to have absolute control, strong control or some influence over the sector. The SASAC proposes moving from the closed-sector model to an arrangement with ten or so large SOEs operating in strategic sectors.

The government’s latest policy framework is a clear step backward in reform. It calls for the Communist Party to take the reins in SOEs and increase state control. It says that appointment of top management in SOEs should be left more to party officials and the reporting duties of SOEs to the party should be increased. Such measures are inconsistent with efforts to raise market-based efficiency and competition. They also erode confidence that the government can succeed in reforming state enterprises.

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