SOEs should make more room for private sector
Although China pledged at the Third Plenary Session of the 18th CPC Central Committee to allow the market to play a decisive role in allocating resources and to streamline administrative measures and delegate more power to lower government levels, the progress hasn’t been entirely satisfactory so far.
At present, the government controls seven categories of resources that are critical for enterprises’ business development, such as water supply or concessions for market entry to important industries like banking, insurance and infrastructure. The government also controls resources such as price setting, subsidies and investment.
Also, authorities at all levels still use administrative powers to allocate large amounts of resources to State-owned enterprises (SOEs) by various means, thus distorting the resource allocation process. This situation perpetuates SOEs’ dominant market position and an unfair market environment, which is hindering the improvement of the socialist market economy and impeding the proper functioning of the market mechanism. Moreover, SOEs have been able to carry out blind expansion thanks to their unique positions and supportive government policies, which has not only squeezed the development space for privately owned enterprises but has also resulted in an improper industrial layout and overcapacity at some SOEs.
The achievements made by SOEs are partly thanks to having the lion’s share of critical resources, and this covers up problems such as a lack of economic efficiency and high operating costs, to the detriment of reforms of SOEs’ internal mechanisms. In this sense, the long-term dependence of SOEs on government resources has deprived them of the ability to gain the core competitiveness needed to survive in an undistorted market.
Needless to say, this imbalance in the allocation of critical resources also has a major negative impact on the development of the national economy. To establish a fairer market environment, it is necessary to properly handle the relationship between the government and the market as well as the relationship between SOEs and the private sector.
In the future, SOEs should play a greater role in major strategic industries, public services areas, and important areas of infrastructure that ensure the normal operation of the national economy and society. But even in these areas, SOEs should obtain government resources fairly through market mechanisms.
With regard to the relationship between SOEs and private companies, SOEs need to take a step back to allow more vitality in the private sector. In terms of allocation of resources, the government needs to let the market do its job so that the economy can thrive.
Specifically, efforts should be made in the following five aspects. First, the use of administrative power in allocation of resources should be reduced. Authorities should try their best to get economic resources that are currently in the hands of the government to various markets through reforms, allowing markets to actually play the decisive role in allocating resources and thus truly forming a macro-control system where the government regulates the market, which in turn guides enterprises.
Second, competition rules should be introduced to create a fair market environment for enterprises with varying ownership structures so as to give them access to resources that are still mainly in the hands of the government. Authorities should no longer directly allocate such resources to SOEs through administrative means. For some non-profit resources, like public services projects backed by the government, enterprises should gain the rights to proxy construction and management through competition.
Third, there should be greater adherence to the general reform direction of separating government functions from capital and enterprise management, completely cutting off the intimate relationship between the government and SOEs. In terms of preferential policies, the government should gradually remove the special protection for SOEs so as to force them to obtain resources from the market fairly.
Fourth, there should be deeper reforms in industries that are dominated by one or a small number of firms in order to establish a market environment that allows for fair competition. The authorities should loosen the entry requirements and lower the threshold in these industries, allowing private and foreign investors to form a fair market mechanism.
Fifth, the industrial layout of the State-owned sector should be adjusted, including the removal of SOEs from certain competitive areas. SOEs with serious overcapacity and some of those in highly competitive fields such as commerce, logistics, foreign trade, services and manufacturing should exit the market as quickly as possible. In the long run, SOEs that can survive in competitive fields but do not conform to the longterm development direction of the national economy should all consider their exit plans.