Privatization should occur ‘carefully’

It’s been some 35 years since the late Chinese leader Deng Xiaoping and his followers held the Party meeting that set China’s reform and opening-up policy in motion and instigated China’s economic miracle.

Since then, China’s spectacular economic growth has seemed unstoppable, with the nation expected to replace the United States as the world’s largest economy.

However, many have argued for some time that the nation’s economic growth model isn’t sustainable, based as it is on low-cost production, foreign direct investment and exports.

Change, it is argued, toward domestic consumption and innovation must come sooner rather than later. So there’s much anticipation about the outcome of the Third Plenum of the 18th Central Committee of the Communist Party of China, which ends on Tuesday.

It is not just Deng’s announcement at this time in 1978 that has proved pivotal to China’s economic emancipation.

In 1993, former Chinese president Jiang Zemin used this session to cement the market reforms necessary to facilitate the nation’s entry into the World Trade Organization in 2001.

So, what announcement should we expect this time? Perhaps major reform of Stateowned enterprises?

Those of a more liberal persuasion have long argued for a rather revolutionary approach to ending the dominance still enjoyed by the SOEs. Although their numbers have declined, SOEs still account for almost 50 percent of China’s GDP.

While certain SOEs will probably remain under tight government control for some time, don’t be surprised to see privatization accelerate in the banking and energy sectors.

But is the wholesale privatization of the SOEs, however gradual, really the answer to increased efficiency and competition across Chinese industry?

Privatization of SOEs usually sparks a stock market frenzy among investors. But few look at the long-term outcome.

For example, in the United Kingdom, energy prices charged by privatized utilities have risen far faster than the cost of living in recent years. Yet these companies face scant competitive threat.

China should note such examples carefully, despite rising criticism targeted at the SOEs.

The nation should instead opt for a partial privatization with sufficient government power to prevent excessive profits and artificially high costs for Chinese consumers.

Partial privatization should still go far enough to allow for an infusion of private-sector discipline, such as careful cost controls.

Let’s hope that the Chinese government can accept the evidence of Western utility privatizations over many years; which is that utility markets can never sustain anything like the competitiveness necessary to guarantee choice and affordable prices for consumers.

Over the past 35 years, the government has enacted numerous economic reforms with the caveat “with Chinese characteristics”. Let’s hope that any privatization plans and policies are no different.