Reform of State‐owned Enterprises in China: Autonomy, Incentive and Competition

Citation

Tisdell, C. (2001), "Reform of State‐owned Enterprises in China: Autonomy, Incentive and Competition", International Journal of Social Economics, Vol. 28 No. 9, pp. 766-768. https://doi.org/10.1108/ijse.2001.28.9.766.1

This short book is number 13 in the Development Issues Monograph Series published by NCDS Asia Pacific Press and consists of six chapters written by eight contributors. As a book it is somewhat unusual in that it does not contain a preface and an index. A preface is often useful in giving the rationale behind a book and an index is important for reference purposes. As an edited book, it is also somewhat unusual in that its initial chapter does not provide an overview of the contributions in the book, nor is there a concluding chapter which synthesises or summarises results. So it is more like an issue of a journal than a book. It is a pity that it does not contain these missing features. However, it is not uncommon for monographs to be “half‐finished” in relation to the above. Most established publishers, however, at least insist on an index.

Apart from the above shortcomings, readers with interests in the Chinese economy and economies in transition will find the essays in this book useful as background reading. They are policy‐oriented and non‐technical in nature, so they can be profitably read not only by economists generally but by non‐economists with an interest in change in China’s socio‐economic system.

The initial chapter by Yiping Huang (The Australian National University), Fang Cai (Peking University) and Ron Duncan (The Australian National University) provides a historical overview of the reform of state‐owned enterprises (SOEs) in China in which key measures and major issues in the policy debates about the reforms of SOEs are systematically outlined. It provides a detailed backdrop which helps to put most of the succeeding chapters in context.

In Chapter 2, Ding Xuedong (National Administrative Bureau of State‐Owned Property, China) gives particular attention to systems of property rights in SOEs and outlines five different schools of thought about how reform of China’s SOEs should proceed.

Albert Kreidel (World Bank Resident Mission, Beijing) outlines trends in the rates of returns to SOEs. Overall returns on investment in SOEs have sunk to very low levels in recent times and their indebtedness to banks has risen to levels causing concern. Many of their debts are bad debts and there is a risk that Chinese banks may be driven into insolvency by their “over extension” of credit to SOEs. Kreidel outlines and discusses possible causes of SOE losses and evaluates China’s reform strategies for SOEs in an illuminating manner. In its more recent strategy, China has let go of small SOEs but has been more reluctant to do this with larger ones, possibly for political reasons. It seems, however, that the state may have to divest itself of property rights in some of the large SOEs or do so partially in the future, given their accumulating losses. Kreidel suggests that the government, in order to deal with the difficult situation faced by it, will prefer to concentrate state resources on a small number of newly incorporated large SOEs (p. 80).

Chapter 5 does not deal with China but with Vietnam. In this chapter, Suiwah Leung (The Australian National University) highlights significant features of Vietnam’s reform of SOEs and their implications for market competition. Vietnam began its doi moi or “economic renovation” policy which abolished direct subsidies to SOEs, increased market direction of industry and resulted in laws to encourage foreign direct investment in 1989. But there are features of Vietnam’s policies and institutions which have actually increased the market domination of SOEs. This has been reinforced by the fact that most joint enterprises with foreign firms are with SOEs. So the monopoly position of SOEs seems to be strengthened. Privatisation in this case will not solve the monopoly problem on its own. Leung (p. 119) observes “ its effect will simply be to pass inadequately regulated monopoly powers from the public into private hands”. To some extent, this is what has happened in Russia. Leung also brings attention to structural imbalances in the growth of the Vietnamese economy. While the chapter is well presented, its relevance in this collection would have been increased by the inclusion of some comparisons with the Chinese situation.

Both On Kit Tam (The University of New South Wales) and Dong Dong Zhang (AusAID) raise several controversial issues. In Chapter 4, Tam claims that China is trying to follow the Anglo‐American style of corporate governance (described as the outsider‐based system) rather than insider‐based system of Germany, Japan and Continental Europe in which banks exert considerable control on firms. The former system is being introduced top‐down rather than being allowed to evolve. This chapter raises the question of whether it is the better of the two systems for China or whether China may find it useful to adopt a mixed system. For example, should banks be provided with equity shares in SOEs in return for reduction in the debt of SOEs to the banks? Should the banks have representation in this case on a Board of Directors of corporatised SOEs? There is no prospect of many SOEs ever repaying their bank loans. Several of the matters raised by Tam go to the very heart of issues involved in property rights and the reform of SOEs. Creation of politically independent corporations does not in itself ensure that their managers are subject to economic discipline because of principal‐agency problems and transaction costs involved in governance. These issues are well canvassed by Tam. There is, however, one aspect of managerial discipline that Tam does not discuss, namely the role of possible take‐overs in the western system as a constraint on the managers of companies.

Zhang’s contribution (Chapter 6) is highly perceptive. It concentrates on the politics of the reform of China’s SOEs. Zhang points out that SOEs have underpinned the legitimacy of the Chinese Communist Party (CCP) as the ruling party. The reforms of SOEs involve a cleft stick for the CCP and the CCP is likely to have to develop new means of supporting its legitimacy to manage a single‐party state as the SOE reforms proceed.

Zhang states (p. 141) “Since launching economic reform, the CCP has been struggling with the dilemmas and the challenges arising from SOE reform. On the one hand retaining state ownership means that the CCP faces the consequences of SOEs continuing to lose money. On the other hand, changing the state ownership structure means that the CCP would relinquish at least part of its control of the economy, with serious implications for its political power”. If a further significant reduction in state ownership of industry is to occur with privatisation or partial privatisation of SOEs, how will the CCP legitimize itself? Will its performance in relation to economic growth be enough? Will possible reforms prove to be its Achille’s heel? All these issues must be a worry to CCP leaders.

Zhang cleverly points out how the nature and timing of reforms have been influenced by the political aspirations and considerations of the CCP. In general, reforms of SOEs appear to have been delayed until the economic losses have become too great in relatio tothe political advantages of propping up SOEs. In carrying forward its SOE reforms the CCP faces its greatest challenge since it began its economic reforms in 1978. But the tide can hardly be turned back. With China’s entry into WTO, China’s SOEs will come under increasing competitive pressure. The survival of many may be threatened. Further reforms may provide the best chance of survival for many of the enterprises concerned.

So one can see that a wide range of issues are covered in this short book, only some of which are mentioned here. A careful reading of the book is bound to provide the reader with new perspectives on China’s process of economic transition. The reform of large corporations is proving to be a stumbling block because of corporate governance issues, issues of a similar type to those first raised by Berle and Means about the separation of the ownership and control of modern corporations but not discussed in traditional neoclassical economics.