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Is China Rethinking the Dominance of Its State Sector?

People attend the closing session of the National People's Congress on March 13 in Beijing

Photograph by Lintao Zhang/Getty Images

People attend the closing session of the National People's Congress on March 13 in Beijing

The dismal performance of China’s state enterprises, characterized by “falling returns, rising debt, and a loss of strategic focus,” according to a recent report by China research house GavekalDragonomics, is causing policymakers to question China’s longtime national champions strategy.

During the just-closed national congress in Beijing, China’s premier, Li Keqiang, called for allowing private enterprise to enter into sectors long dominated by government-owned companies.

“We will formulate measures for non-State capital to participate in investment projects of central government enterprises,” the reformist-minded Li said on March 5. He cited resource development, oil, public utilities, railways, electricity, and telecommunications as sectors to be opened to private investors.

“A mixed-ownership economy, which allows non-State capital to take equity stakes in projects featuring investment by SOEs, has been a hot topic during the legislative two sessions,” wrote the official English language China Daily on March 13.

But the question remains what the ultimate aim of diversifying ownership is. Is it to give the private sector a real controlling stake in sectors long closed to their participation? Or is the primary purpose to strengthen state companies by providing them with new financing?

“Many private companies are worried that their investments in SOEs will only serve as capital boosts. How to achieve a sustainable influence on a mixed-ownership company in the long run is uncertain,” said Pan Gang, chairman and president of dairy company Inner Mongolia Yili Industrial Group, reported the China Daily.

Pan noted “completely different” management and business philosophies plus “the huge difference between the sizes of SOEs and private companies. SOEs are like elephants, and in comparison private companies are like carp.”

“The sheer size and scope of China’s state sector makes the country unique among the world’s major economies,” writes Andrew Batson, China research director at GavekalDragonomics, in a March 3 report, noting the country has more than 100,000 state-owned enterprises, with assets of roughly $3 trillion, according to China’s finance ministry. “The debate within China is not about whether there should be state-owned enterprises but rather what kinds of companies these should be and how they should be managed.”

Roberts is Bloomberg Businessweek's Asia News Editor and China bureau chief. Follow him on Twitter @dtiffroberts.

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