BOFIT Viikkokatsaus / BOFIT Weekly 2019/39

The European Union Chamber of Commerce in China this week released its Position Paper 2019/2020 with its views regarding problems of China’s business environment and potential solutions. The competition-distorting advantages enjoyed by state firms were seen as the most pressing problem.

The latest annual corporate survey conducted by the European Chamber found that 70 % of responding European firms said they operated in fields that compete directly with Chinese state-owned enterprises (SOEs). Some 18 % of firms reported that Chinese SOEs controlled over half the market in their field. About 40 % of respondents believed that the status of SOEs will be bolstered at the expense of privately held firms over the next two years. Just a fifth of respondents saw the situation moving in favour of private firms.

The Position Paper notes that the increased advantage of SOEs in this decade is particularly evident in access to credit. As the share of lending to private firms has decreased, the share of lending to state firms has risen. The exceptionally long payment periods demanded by SOEs further tighten private firms’ financing position. SOEs also enjoy monopoly status, looser permitting rules, preference in public procurements and direct connections to regulators and policymakers. 

While SOE reform has been long discussed, the European Chamber notes that the push for reform has gone in the wrong direction in recent years. The report says that the government pursues “SOE reform with Chinese characteristics” where the authorities actually do not even try to restrict the size or status of state firms. In the words of president Xi Jinping, the goal is simply to make SOEs “stronger, better and bigger.”

The European Chamber concurs with IMF recommendations that the government restrict SOE access to credit, tighten rules on dividend payments, abolish implicit guarantees, wind down unprofitable firms, open up non-strategic sectors to private firms and foreign firms, as well as improve corporate governance.

The European Chamber puts its hope on the principle of “competitive neutrality”, noting that the term has recently been adopted by several major Chinese economic decision-makers. Current policy trends that aim to reinforce the Communist Party’s role may, however, refute such hopes.