State Owned Enterprises (SOEs) in China is a key component of China’s Party-State structure. It receives policy and funding support from the State and Party and thus, holds a monopoly or oligopoly position in their respective sectors, especially in more traditional sectors. However, SOEs also have considerable negotiating power vis-à-vis local governments, albeit with some political constraints as appointments and promotions of top leadership in SOEs are made by Party organisations. SOEs are also critical in achieving several goals and objectives of the Chinese Party-State which continue to change as per the levels of modernization and sophistication in the economy. These goals include economic growth, structural changes due to technological advancements, sustainability and several social objectives such as social housing, pension, unemployment and more.
Moreover, ways and methods adopted by the Party for monitoring and guiding behaviour and business undertakings of SOEs have also undergone several modifications. For instance, in the early years of reform and opening up, transformation of state-controlled SOE work units into responsive market players has been a major change. Similarly, a significant change also happened with regards to decision making capacity of SOEs by linking these decisions to more market based incentives instead of State directives. Furthermore, SOEs are also utilised by the Party-State to guide market behaviour in a certain direction. For example, SOEs are often asked to invest in particular projects so as to also attract private institutions towards those sectors.
Lastly, despite re-orientation of SOEs towards market forces, the Party-State also adopts measures to enhance Party’s embeddedness into SOEs to regulate their conduct which has increasingly become relevant in recent times. In the past four decades since 1978 reforms, China has achieved some respectful achievements in In the past four decades since 1978 reforms, China has achieved some respectful achievements in terms of growth, development, structural changes and growing interactions with the outside world. During this period, emphasis over economic growth and development targets has remained a fundamental priority in China’s policymaking. SOEs have also become an Important tool for the Party to retain their control over the Chinese economy.
Phases of SOEs reforms
Reforms in SOEs can be categorised into four phases of which the first two phases emphasised on transitioning SOEs to become more adaptive to market behaviour and the next two phases reiterated the state control and role of SOEs in China. In the first phase from early 1980s to mid-1990s, measures were adopted to transition SOEs from mere work units to become more market responsive. It included measures such as Dual-track system, nudging SOEs to respond to market incentives and so on.
In the second phase from the mid-1990s to early 2000s, more standardisation and formalisation of the structure of SOEs was achieved to transform them into more recognizable market players. It resulted in corporatisation of SOEs under the ‘socialist market economy’. Entire SOE sector was also downsized with the idea of “grab the large and let go of the small" to reduce financial difficulties of SOEs. The Dual-track system was also largely abandoned and SOEs were gradually relieved of their social responsibilities. It enabled SOEs to remain a key part of the economy, but more as market players and not merely as another branch of the Party-State.
In the third phase between early 2000s to early 2010s, China adopted a two-pronged strategy for SOE reforms. Firstly, it focused on building institutions that can act as regulator/owner of the State sector. The State-owned Assets Supervision and Administration Commissions (SASAC) was established with this aim in 2003 at the central level and later at the provincial level as well to continue corporatization and institutional building for SOEs. Secondly, the significance of SOEs was further highlighted during the 2008 financial crisis as the stimulus package was largely implemented through SOEs. Further, SOEs also became an integral part of the newly proposed initiative for strategic emerging industries around 2010 to achieve technological self-sufficiency.
The last phase of SOEs reforms which began in early 2010s, was characterised by multiple development objectives for SOEs determined by the Party-State. Some of these objectives included technological advancement, building supply chain resilience as well as fulfilling social responsibilities. To achieve these objectives, different measures were adopted such as mixed ownership of SOEs to enhance their corporate governance. Similarly, market-based incentives were also improved and State-owned Capital Investment Company and State-owned Capital management Company were established. Even the Party's control over SOEs through leadership appointment and disciplinary
powers is also a part of these reforms.
How Does China’s SOEs Fare Today
Restructuring of SOEs over the years has been limited by market forces and they still continue to dominate only traditional industries despite efforts to establish state enterprises in emerging industries. SOEs have become profitable due to monopoly but are not efficient and its close ties with local government has proven to be a double-edged sword.
Data shows that the share of SOEs have decreased in urban employment over the years as against the private sector which has emerged as the largest employer in urban areas. In terms of fixed asset investment, share of SOEs has generally decreased, with a small uptake in recent years. Similarly, the share of SOEs and state-holding firms is also dominant in loss-making firms in the Chinese economy, highlighting profitability and efficiency issues among SOEs. With respect to average annual growth of value-added, SOEs have underperformed with continuous decline in their average annual growth rates. Moreover, industrial SOEs spend the least share of their expenditure on R&D well below private and foreign firms, thus limiting their growth in emerging industries. Lastly, central governmentcontrolled SOEs have declined and local government-owned enterprises have grown over the years.
Assessment of State Efforts for Strengthening SOEs
China’s economy has largely decentralised at the local level with provincial governments playing a major role in facilitating economic growth. However, due to centralised Party-State structure, policymaking is largely top-down which creates gaps in coordination across regions and ministries. More often, responsiveness of local governments may lead to wasteful/costly expenses, also causing overcapacity concerns. Furthermore, campaign-style implementation of policies can also lead to a strong backlash. Lastly, inconsistencies between strict Party discipline and market principles often leads to inefficiency among SOEs.
These remarks are part of a keynote address delivered by Dr. Sarah Y. Tong at the Global Conference for New Sinology (GCNS), 2024.
Author
Dr. Sarah Y Tong
Dr. Tong is a Senior Research Fellow at the East Asian Institute, National University of Singapore and its cluster coordinator for the economics team. She also co-drives the institute’s research efforts on the social and economic implications of population aging in China. Her research interests concentrate on the development and transformation of the Chinese Economy, including development in trade and foreign investment, development of regions, financial sector reforms, the reforms of state-owned enterprises, industrial policies and restructuring, and social economic impact of population aging. Her work appeared in journals such as Journal of International Economics, Global Economic Review, China: An International Journal, Review of Development Economics, China and the World Economy, Comparative Economic Studies, and China Economic Review. In addition to contributing chapters to numerous books on contemporary China, she also edited and co-edited books.