Photographer: Qilai Shen/Bloomberg

China’s State Sector: Bigger Than Ever

The giant corporations are deemed essential to the party.

On Sept. 29, China’s national bureau of statistics said profits of government-owned industrial companies dropped 24.7 percent in the first eight months of the year. The state-owned enterprises performed worse than companies that had foreign investors, which eked out profit growth of 0.7 percent. Private companies did best, recording a 7.3 percent rise.

The poor showing of the SOEs comes as President Xi Jinping is launching his long-awaited state-sector reform. Don’t expect mass shuttering or privatization of China’s more than 100,000 government companies, many of them money losers. Instead, policymakers aim to make “stronger and better” state champions, according to a five-year plan released on Sept. 13 by the State Council and the Communist Party’s Central Committee.

“Throughout the Chinese government, there’s now a strong feeling that state enterprises are an asset,” says Barry Naughton, a professor at the University of California at San Diego and author of The Chinese Economy. SOEs should “improve and develop the socialist system with Chinese characteristics,” says the official 20-page list of reform guidelines. Andrew Batson, Beijing-based China research director at consultants Gavekal Dragonomics, says the report is big on lofty statements but short on concrete details.

Encouraged by the leadership’s call for sweeping economic reforms at a party plenum two years ago, many China economists had been expecting a plan that would curb the power of the state sector, says Sandra Heep, head of economic policy and financial system at the Mercator Institute for China Studies in Berlin. Instead, “the leadership wants to build the state sector into an even stronger one, but they also want it to be more efficient, and they want to remain in the driving seat,” she says. “They are trying to square the circle.”

The biggest SOEs are expected to go through “massive M&A,” the official Xinhua News Agency reported the day the reform plan was released. China has already combined the two largest bullet-train makers; it will also probably merge two of its shipping companies.

As part of the plan, state-owned companies will be divided into public and commercial categories, with opportunities for various degrees of outside investment. The first group will include transportation and services such as city water and sewage systems. They’ll remain fully funded and run by the government. Commercial enterprises will be split into those operating in strategic industries (such as defense and nuclear power, which will continue to enjoy preferential support) and nonstrategic state companies (in retail, tourism, and logistics, which will be more open to investors). The least competitive of the nonstrategic companies could be allowed to go bankrupt, according to the guidelines.

State-dominated industries such as banking, telecommunications, oil and gas, and shipping will have permission to accept private and foreign capital, or what officials call “mixed ownership.” That’s supposed to encourage the long-coddled companies to pay more attention to customers. Changing ingrained practices at SOEs won’t be easy, with Beijing likely to limit outside investors to minority shares, says Kellee Tsai, a professor of social science at the Hong Kong University of Science & Technology. The phrase mixed ownership “is a classically ambiguous one,” she says. “I don’t really see it as providing the basis for real reform.”

The revolving door that shuffles top party officials into jobs running large state companies, and vice versa, is an obstacle to real change, says Sheng Hong, director of the Unirule Institute of Economics in Beijing, which favors market reform. “There will not be any solution from the party aimed at fixing state enterprises which in any way affects the SOE management groups’ interests,” he says. “So the SOE plan inevitably must just be beautiful words, but with no real reform in it.”

The bottom line: Economists had hoped President Xi would weaken the power of state-owned enterprises. Instead, the opposite may happen.

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