China’s state capitalism conundrum
Preferential policies let SOEs hog money and labor without concern for their bottom line. If they sell at a loss, they can always borrow more from state-owned banks. The state also prevents SOEs from failing,creating “zombie” companies kept alive on a steady drip of government support. For instance, when state steel giant Sinosteel tried to file for bankruptcy in 2014, the move was blocked by the government SOE agency’s leaders, reports Caixin (link in Chinese; paywall). Instead, state-owned banks kept on lending to it.
There is precedent for such change. From 1997 to 2003, the Chinese government shuttered or privatized some 60,000 wasteful SOEs—putting 40 million people out of work—a policy spearheaded by then-premier Zhu Rongji. The threat of being shut down or privatized upped performance of SOEs and galvanized new opportunities for the private sector—an approach that would be effective today, argues Andrew Batson, economist at Gavekal, in a Sep. 15 note. (In a promising sign, current leaders recently consulted Zhu on Xi’s reform plan, reports Bloomberg.)
Xi’s weak reform plan
The first idea is neither effective nor new, writes Capital Economics in a Sept. 16 note. Thanks to government promotion of “mixed ownership” that began in the early 1990s, four-fifths of SOEs are now partially private-owned—with little improvement in SOE performance.
“For the economy, this is as undesirable a reform step as could be taken,” he said. “What the Party is effectively seeking is to prop up SOEs by coopting their private competitors. Not new, still the same terrible.”