Unirule’s caustic take on state-owned enterprise reform

Most liberal-leaning thinkers in China seem to be disappointed with the long-awaited plan on state-owned enterprise reform that was published in September, a reaction I share. But if you would like to read a thoroughgoing rant on why the SOE reform plan is not just disappointing but completely missing the point, I recommend reading the interview below.

The speaker is Sheng Hong of the Unirule Institute, an independent and very liberal think tank. They are also unapologetically out of the mainstream of the Chinese discussion on SOEs, so you won’t see these kind of opinions represented in most reporting. I probably wouldn’t frame the issues the same way they do, but I still appreciate their views, which are a bracing corrective to most of what is written about SOEs in China.

The interview was also quite fun to translate, since it is so plain-spoken and polemical; hat tip to the folks at China Policy for the pointer. (Note: I have translated most but not all of the interview, leaving out some repetitions and some of the harder-to-follow bits; the original is here).

Interviewer: Why do you not support the new round of SOE reform?

Sheng Hong: Reform is about solving problems, and this reform basically does not address the problems I am talking about. For instance, the issue of state enterprise monopolies, the issue of state enterprises using national resources for free or for a low price, the issue of not sharing their profits, the issue of unlimited allocation [of resources] within state enterprises–these are the real problems.

What I think is the most serious problem is that state enterprises even exist. State enterprises make it impossible for the government to treat both non-state and state enterprises fairly, damaging the impartiality of government. Officials move back and forth between state enterprise jobs and civil service positions, which means that government officials and SOE executives are the same group of people. The existence of state enterprises makes it very difficult for us to expect the government will treat state and non-state firms equally, which damages the basic reason for government to exist: that it is impartial. We give state enterprises so many favorable policies and monopoly rights, how can private companies compete with them? They are not equal competitors in the market, which damages the basic principles of the market economy.

The fact that these monopolistic state enterprises exist, and occupy a large share of our national resources, creates an enormous loss of resources–many trillions of yuan a year. The slowdown in our country’s economy is to a large degree a result of the existence of monopolistic state enterprises and protected monopolies. This is a pressing issue, every day it is not fixed we lose billions. If it is not going to solve this problem, then what is reform for?

Interviewer: The reform document mentions that we should make state enterprises “stronger, better and bigger.”

Sheng Hong: To make state enterprises “stronger, better and bigger” is a mistake. Why do state enterprises need to be bigger and stronger? State enterprises are not normal companies, they should not be competing with private companies in profit-oriented sectors. If profit-making companies can do something, then state enterprises should not do it. Add to that the fact state enterprises can use their political capital to obtain monopoly rights, they can use their political strength to obtain free resources–this harms the Chinese people. …

What we say are problems, they [government officials] do not think are problems, what we think are not problems, they think are problems. What can this reform plan for state enterprises really mean? They have completely ignored different opinions and critical voices in society, and are hell-bent on making state enterprises bigger and stronger. Can this be called reform? Under the flag of reform they are doing anti-reform things, this is just deceiving the public.

Interviewer: Aside from the problem of monopolies, there are also internal governance problems with state enterprises. You have mentioned the fact that insiders control the award of bonuses, and this reform document also calls for separating state enterprise managers into two categories, [political] appointees and those recruited [from the market]. Can this have any effect on the vested interests of state-enterprise executives?

Sheng Hong: It cannot. Say you split the executives into two categories, one category is commercial, the other category is public interest. Let’s just talk about the commercial ones. I want to evaluate you according to your performance, but how to assess your performance? The performance is not real. Where does your profit come from? Because you have a monopoly, because you don’t pay rent for your land, because the interest rate on your loan is low, you only pay 30 yuan a ton for oil exploration rights while everyone else pays 400 yuan, it is completely unequal. So how am I supposed to judge your real performance?

Take finance as another example: banks make a lot of profit, but you have to know where their profit comes from. The central bank determines the gap between deposit and lending rates, and though it has been adjusted some in the last couple of years, for more than 10 years the margin was unchanged at 3%. This margin is equivalent to a monopoly price, and it is also a regulated price: the government determines your 3% margin. In most countries this is 1.5%-2%; in countries with a market economy the margin is decided by competition. But this 3% is decided by administrative departments, how can it be a true indicator? How are you supposed to judge whether these people are really working hard? If you give an idiot the right to a monopoly won’t he still make money? …

Interviewer: The reform document also covers the management of state assets, and drawing on the Temasek model, it proposes a change from the management of state assets to the management of state capital. … What do you make of the Temasek model?

Sheng Hong: Discussion of the Temasek model is superfluous. All you need to know is that some people in China want to keep state enterprises, so they are always bringing up Temasek. Why do we need to talk about the Temasek model? Temasek is called “state capital” rather than a state-owned enterprise, this means it is a company operated according to civil law but its capital is owned by the state. The problem is why do you want this state-owned capital, there is no need for it. The state capital can be given to the Singaporean people. The basic principle is that a state or a government gets its income from taxes, so why do you need to do this stuff? There is no value in having a deep discussion of this [Temasek model]. …

Interviwer: You have previously proposed dismembering state enterprises, for instance splitting PetroChina and Sinopec into many small companies. But instead we see that after the merger of the two railcar makers, there is now a wave of mergers among the central SOEs. What effects will this have?

Sheng Hong: After the mergers and acquisitions the power of the monopolies will only get bigger, which means nothing good for society, for consumers or for private companies. The logic is very simple: as monopoly power gets stronger there is less and less you can do to constrain it. After the merger of central SOEs, it will be even harder for the central government to manage them, because there will be more conflicts. Take PetroChina and Sinopec–the NDRC and NEA cannot control them, you cannot say no to these monsters. If you merge the three oil companies into one oil company, then it would be even worse. If Premier Li Keqiang goes up against China’s one and only oil company, then his negotiating position is not at all the same as if there were three companies or five companies.

Another example is that when there was just one telecom company, China Telecom, the cost for the central government to negotiate with it was very high. Later when China Unicom entered the market, the change was very rapid. So if the central government really wants to reform, it should not do mergers, but the exact opposite: breakups. …

It’s just like Jia Yi said during the Han dynasty: the more dukes there are, the less power they have. In the early Han, there were many dukes who were too powerful, and the central government could not control them, so it used its power to grant titles to increase their number. For instance if one duke had three sons, after the duke died all three sons were given a title, so each one got a third of the land. In this way after a few generations each duke became very small, and this was beneficial to the central government. For monopolistic state enterprises it’s the same: if you think that merging them together will make them easier to manage, that is a very foolish idea. …

Interviewer: There’s one thing I really don’t understand. After the late 1990s, when China Telecom, China Unicom, PetroChina, Sinopec and all these central SOEs were set up, why has market reform of state enterprises slowly ground to a halt?

Sheng Hong: Because the interest groups figured things out. In the beginning, no one really understood the market economy, but later the state enterprises and government departments figured it out: if you get rid of competitors you can make more profit. There is also some historical background. In the late 1990s, state enterprises were all in deep trouble, so there was discussion of how to bail out state enterprises, Zhu Rongji was also trying to solve the triangular debt problem, and so on. Around 2000, resource prices were fairly low, including the price of oil, coal and land, so the resource-based state enterprises had very serious difficulties. At that time the state enterprise executives understood the benefits of monopoly, and Zhu Rongji thought this was a good way to bail them out. Especially at the beginning no one really noticed. The monopoly of the three national oil companies was established in 1999 with a series of mergers. At that time the oil price was pretty low, so they wanted a monopoly. The justification at the time was to save the SOEs, so there was not much political opposition. That’s the historical background. No one paid much attention, and didn’t think much of the three national oil companies; it was only later that they started thinking the three oil companies were so great. As the oil price gradually rose, it made them aware of their own interests, so they reinforced their monopoly rights. That was the process.

2 Comments

  1. It does not appear that the speaker, Sheng Hong, has a complete grasp of the various roles played by SOEs. Their utility is obvious from the point of view of a neutral government shaping national consensus – but not to anyone without experience in governance or to anyone who believes that individual gain and enterprise efficiency are goods in themselves.

    A sympathetic treatment of China’s SOEs has yet to be published in English – hardly surprising since the West’s theories and practice of governance are at a low point not seen since before the treaty of Westphalia. And it has – deliberately, for how could it be otherwise – escaped the notice of Western media that the most profitable, most valuable companies on earth are Chinese SOEs. What possible good could it do to allow such treasures to fall into private hands – the very hands that have proven so incompetent, dishonest and destructive to our own economies – Western financial institutions?

    Reply

  2. For contrast, here is a sympathetic view of why unambitious SOE reform is preferable:

    http://knowledge.ckgsb.edu.cn/2015/09/30/china/soe-reforms-why-it-is-better-to-go-slow/

    “[Privatization] would improve corporate governance only if private shareholders were better able to hold management to account than China’s current system,” says Leslie Young, Professor of Economics at Cheung Kong Graduate School of Business, adding that China’s weak legal framework does not have sufficient strength to support better corporate regulation.

    He adds that China’s immature business institutions would allow the wealthy and well-connected to also loot state assets in a “Big Bang privatization” scenario, as we have witnessed in Russia and other eastern European countries in the 1990s.

    The rapid privatizations simply made enormous profits for the Western companies and private equity investors that bought up and stripped eastern Europe’s SOEs,” says Salvatore Babones, Associate Professor of Sociology at University of Sydney. “China’s current leaders must be aware of the long-term economic dependency that this generated.”

    Reply

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