China signals it isn’t embracing the market after all

(From Nikkei Asian Review)

China is embarking on reforms of its sprawling state-owned enterprises, aiming to foster globally competitive businesses. The plans announced so far, however, fall short of what many Beijing watchers were hoping for.

A woman walks past the headquarters of the state-owned Aviation Industry Corporation of China (AVIC) in Beijing

A woman walks past the headquarters of the state-owned Aviation Industry Corporation of China (AVIC) in Beijing

Rather than letting market forces improve efficiency, the government has signaled it intends to maintain strong control.

The reforms have been hotly anticipated since President Xi Jinping took office in March 2013. On Sept. 13, the Communist Party’s Central Committee and the State Council, the nation’s cabinet, jointly delivered guidelines for making changes. The mission: bolster state-run companies in order to boost the vitality and influence of the nation’s economy.

On the surface, the guidelines suggest Beijing will loosen its grip on management. They state that boards of directors will reserve the right to make important decisions according to the law, and that no governmental body can interfere with this process.

Yet the guidelines also state that the party will strengthen and improve its instructions to state-owned enterprises, and clarify its legal role in the governance of the businesses. This is yet another reminder that in China, the party stands above the government.

Beijing’s banks

This is not what other major countries had in mind when the Xi administration kicked off. Back then, Premier Li Keqiang stressed that a more “market-oriented” strategy was in order. Many analysts predicted that China would gradually shift toward an economic system like those in the US, Europe and Japan — albeit with the Communist Party maintaining strict political control.

It has since become clear that Li plays second fiddle to Xi, who has rapidly consolidated power.

China does not necessarily deny the importance of innovation by private companies. It is possible that, as it moves ahead with the reorganization, the government may narrow down the fields led by state enterprises. But these enterprises will continue to dominate the industries the Communist Party deems important, keeping the sectors under the party’s thumb.

Presumably, the party regards the reform of state-run banks as a success story. About 10 years ago, the government injected public funds to bail out state lenders that were struggling with huge non-performing loans. The institutions were converted into publicly traded companies. This might sound like Japan’s privatization of some of its state businesses, but there is a catch: The Chinese government still owns majority stakes.

They may be listed on the stock market, but these banks remain distinct from regular commercial banks. When the economy looks shaky, Beijing can instruct them to increase loans; normally, commercial banks grow cautious about lending during economic downturns.

Going its own way

When China set about opening itself up in 1978, it saw Japan’s postwar economic recovery as something to emulate. When then Chinese leader Deng Xiaoping visited Japan, the sight of bullet trains reportedly strengthened his resolve to reform the economy. Now that China has surpassed Japan in terms of economic scale, Beijing has opted not to take the Japanese approach to reforming state-owned companies.

In most major countries, the private sector drives the economy and capital is distributed through markets. Proponents of this system consider it the most efficient choice. The world’s second-largest economy evidently has other ideas.

It is too early to tell whether China’s blueprint will succeed, but this much is clear: It is setting its own rules and challenging the global market system.

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