China-US economic dialogue: A new challenge for SOE reform

Updated: 2013-10-12 06:55

By Chen Weidong(HK Edition)

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Since China's reform and opening-up, the practice of its SOE (State-owned enterprise) reform, as well as the theoretical debate, has never stopped. China is committed to accelerating SOE reform, further stripping their social function and improving the administration of benefits to the retirees. According to reform requirements on income distribution, China will keep increasing the proportion of dividends paid by SOEs, and their application to social security and other livelihood expenditure.

In its trade negotiations with the US in July, the European Commission (EC) placed antitrust and merger terms applying to SOEs on the agenda. The EC seemed eager to discuss the possible damage governments may inflict on competition by supporting SOEs, and suggested imposing universal standards to monitor the transparency of SOEs.

The US, China and European Union are the three largest economies in the world, and also the most influential political entities. In the most important bilateral negotiations between each other, they all agree it's a prominent topic to discuss the position of China's SOEs and their route to reform. Obviously, China's SOE reform has become a major issue across borders.

First, China has increasing impact on the global economy and politics. Second, in recent years, SOEs have greatly affected China and the world economy, especially after the 2008 global financial crisis, since when SOEs have expanded aggressively at home and abroad. Third, SOEs don't gain their superiority through their capacity to innovate and operational efficiency, but by their complex and opaque relationships with the government, which is against the rules of a competitive market. The market economy has developed an almost complete set of rules today, in which open, fair, and transparent trade is administrated by a legal framework. It's like a boxing match: China's SOEs, especially the central government-owned enterprises, appear on the stage without being weighed. The referee doesn't know which level of competition they belong to but they've already started the fight and won the upper hand. What to do next?

Debate among domestic scholars and media is more complicated. It's not only about being "fair", "transparent" or "how to adapt to the rules", but also about the complex of "social ideology", "value orientation", "group interest" and "personal interest". And it is in such an environment that SOE reform in the past decade has remained stagnant.

In recent years, SOEs with a resource monopoly have developed and been active in the overseas mergers and acquisitions market. This is one of the prime reasons why the US and EU took notice of SOE reform. Foreign governments' attention and participation is inevitable and not necessarily a bad thing, as it could accelerate the reform instead.

In the fifth China-US Strategic and Economic Dialogue, trade negotiations between the US and EU projected the direction of China's SOE reform for the foreseeable future. First, China must accelerate the separation of government functions from enterprise management, to make their relationships completely open and transparent, and make enterprises the real players in the market. Second, China should accelerate the separation of social functions from enterprise management to give enterprises more clear goals and responsibilities, and specific budget allocations. Only when SOEs achieve these objectives can they have access to sustainable development and repaying the community.

The issue of SOE reform is not on the same level as the improvement of enterprise management. SOE reform is to further clarify the relationship between enterprise and government, and the relationship between enterprise and society. It's a problem of enterprise positioning. Improving enterprise management is about efficient management of the corporate, which is an eternal topic for all companies. And enterprise reform is interaction with an external environment such as government. Thus, SOE reform cannot succeed without the joint efforts of the government, enterprises and other interest groups.

The author is a procedural law professor at the Renmin University of China.

(HK Edition 10/12/2013 page6)