DEBATE RENEWED ON PUBLIC, PRIVATE FIRMS
President stresses key economic roles played by both sectors
President Xi Jinping has re-emphasized the importance of both State-owned enterprises and the private sector to the success of the Chinese economy.
During a visit to Northeast China on Sept 27, he said it was wrong to “bad-mouth” State-owned enterprises. The president was speaking to workers at Liaoyang Petrochemical, a subsidiary of China National Petroleum Corp, the State-owned oil and gas giant.
It is not the first time he has stressed the importance of SOEs to the economy, having done so in his report to the Communist Party of China 19th National Congress in October last year.
On his visit to Liaoning province, Xi also pledged the Party’s “care and support” for the private sector, which in recent months has been beset by financing issues.
Xi’s comments have nonetheless sparked renewed debate about how the public and private sectors contribute to the overall economy.
Many commentators, particularly those outside China, give the private sector greater credit for the country’s economic transformation since reform and opening-up was launched 40 years ago.
Yet many State-owned companies, particularly the 102 supervised by the Stateowned Assets Supervision and Administration Commission, are among some of the world’s most powerful, including CNPC, whose offshoot Xi visited, and giants such as telecom operator China Mobile.
As of last year, the combined revenue of SASAC companies was 23.4 trillion yuan ($3.38 trillion), bigger than the economies of the United Kingdom ($2.94 trillion) or France ($2.93 trillion).
In any debate about the Chinese economy, it is also important not to overlook the role of State direction, with central planning remaining key with the government publishing comprehensive and detailed fiveyear plans, which are blueprints for action. It is also launching initiatives such as Made in China 2025 to guide the country in making breakthroughs in key new technologies.
Edward Tse, founder and CEO of management consultancy Gao Feng Advisory, who has advised both Chinese SOEs and leading private enterprises, believes Xi is right to emphasize that China now has a “dual track” economy.
“Both parts of the economy contribute in their own ways. The SOEs have had to deal with a lot of issues, such as overcapacity and also problems concerning corruption, but they have also played a major role driving forward the economy,” he said.
Tse, author of China’s Disruptors: How Alibaba, Xiaomi, Tencent and Other Companies are Changing the
Rules of Business, said that you only have to look at China’s high-speed rail network to see how effective SOEs can be.
In little more than a decade the network, spearheaded by the SOE China Railway Corp, has become the world’s largest, with 27,000 kilometers of track, enabling trains to travel throughout the country at speeds of up to 300 kilometers per hour.
“No private company would have been able to do this in such a short period of time. In the private sector, everything has to be measured in commercial returns, and because of the cost, high-speed railways would not have been able to deliver them,” Tse said.
“Yet you cannot measure the contribution of this network in terms of profit and loss because it has delivered major benefits to the wider economy and society.”
However, the State sector is now the smaller part of the overall economy. The private sector contributed more than 60 percent of the country’s GDP last year, according to the All-China Federation of Industry and Commerce.
It also brought in more than half of fiscal revenue, generated 80 percent of jobs and contributed 70 percent of all technological innovation and new products in the country, according to the federation.
Zhu Ning, Oceanwide Professor of Finance at Tsinghua University, said the private sector has played a significant role since reform and opening-up.
“It has obviously delivered the bigger share of economic growth since 1978 because the private sector didn’t really exist before then. Its contribution has been quite enormous,” he said.
“We now find ourselves having this renewed debate about the relative importance of the State and private sectors because it is perceived that the environment for the private sector has become more difficult over the past three years.”
Zhu said this is partly a result of the regulators clamping down on wealthmanagement products — a major source of funding for some enterprises — in order to maintain the financial stability of the overall economy.
He said another problem is that a number of listed private companies have had funding difficulties because of falling stock market values. The Shanghai Composite Index, China’s main stock market index, had fallen by nearly 28 percent from 3559.47 on Jan 24 to 2568.10 on Monday.
“A typical situation might be a private company that was 60 percent owned by its private owner. This owner may have funded the company by using shares as collateral. With the stock market in China falling, the owner no longer has sufficient collateral. As a result, the only way out may be to sell to a Stateowned company. The deals are often brokered by banks,” he said.
Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington, agrees that private companies in China are facing an increasing squeeze.
“Private firms are being crowded out. Their share of bank lending and investment has been falling, and from
the beginning of 2017 to now the value-added growth of private industrial firms has lagged behind State firms for the first time in 40 years.”
Lardy, author of Markets Over Mao: The Rise of Private Business in
China, believes this is worrying for China’s economy, since SOEs are not as productive as the private sector.
“State enterprises are an increasing drag on China’s growth, since their productivity lags that of private firms by an increasing margin,” he said.
George Magnus, a leading commentator on the Chinese economy and an associate at the Oxford University China Centre, said the country’s financial authorities have been trying to address the funding problem faced by private companies.
“There is no doubt they are less favored when it comes to loan financing, credit terms and other forms of preferential treatment that SOEs enjoy,” he said.
“There have been attempts this year, and also before, to coax banks into lending more to private companies and ease credit terms for export firms and small and medium-sized enterprises.”
Magnus, author of the recently published Red Flags, which looks at China’s economy, said not every private sector company is experiencing this funding shortage.
Jeffrey Towson, managing partner of investment and advisory company Towson Capital and also professor of investment at Peking University’s Guanghua School of Management, agrees that the startup sector is far from being starved of funds.
“There is tons of capital available in China. The venture capital industry is quite buoyant. There is a lot of venture capital money coming from the three tech giants, Tencent, Alibaba and Baidu,” he said.
Wang Qing, professor of marketing and innovation at Warwick Business School in the United Kingdom and also guest professor at Zhejiang University in Hangzhou, Zhejiang province, said there is a danger of the current debate about the relative merits of the State and private sectors in China becoming too polarized.
“Every country has a slightly different model in achieving a balance between the State-owned and private sectors of the economy. India, for example, doesn’t have many state companies because the state is quite poor. However, in the hospitals sector, the state will dictate that a certain percentage of the beds have to be free. So the state has influence in other ways. There is no one size fits all,” she said.
In China, the State’s role in the economy is also not solely restricted to the ownership of enterprises. Since reform and opening-up, it has played a very active role in the development of private enterprises.
In the 1980s, it set up special economic zones in the coastal regions, which were a catalyst in the country becoming the manufacturing workshop of the world.
China now abounds with science and industrial parks as well as free trade zones aimed at fostering enterprise.
National strategies such as Made in China 2025 and the target of becoming a global technology leader by 2035 also spur action.
Tse, at Gao Feng Advisory, said that through such initiatives the State has played a very big role in transforming the economy.
“Deng Xiaoping didn’t say ‘let us forget about the State’, and if you go back over the various eras from his and through to Jiang Zemin and Hu Jintao to President Xi, the State has played a major role in giving direction.”
Towson, at Guanghua, said the overwhelming advantage of China’s State-directed economy is its decisiveness.
“This has been demonstrated time and time again, whether it is developing renewable energy, electric cars, a major sports industry or ambitious initiatives such as the Belt and Road or setting up the Asian Infrastructure Investment Bank. All these have happened very quickly and they are a tremendous engine for innovation and entrepreneurship. When the State decides to do something in China, the State decides to do something.”
Peter Williamson, professor of international management at Judge Business School at Cambridge University and an expert on Chinese innovation, said the value of strategies such as Made in China 2025 is in coordinating efforts.
“State-driven initiatives around climbing the technological ladder and China 2025 are needed to make things work more smoothly, improve productivity in innovation and accelerate progress,” he said.
“If China can get this institutional framework right, with SOEs, policymakers and private companies working in partnership, that will prove a powerful combination.”
China is not the only country where there is a debate about the relative roles of the state and private sectors.
The UK was a trailblazer in privatizing nationalized industries under the Conservative governments of Margaret Thatcher in the 1980s.
Yet Jeremy Corbyn, leader of the Labour Party, the UK’s main opposition party, pledged at its annual conference in September to renationalize railways and water utility companies.
Magnus said this turnaround is more down to changing attitudes toward the “justice and fairness” of ownership after the disappointment of the financial crisis, and not about viewing China’s SOEs as a template
In China’s case, however, Tse at Gao Feng Advisory believes that Xi is clearly right to acknowledge the contribution of both the State and private sectors.