November 25, 2013, by Editor

Pursuing mutually incompatible goals: Resilient SOEs, Leading Small Group, and the Market

Written by Yukyung Yeo.

The long-anticipated third plenum of the 18th Central Committee closed with two ambitious goals to achieve. According to the plenum communiqué, Chinese leaders once again desire to deepen reforms toward market-oriented economy, yet under the predominant status of SOEs in the market. A “Leading Small Group for Deepening Reform” (shenhua gaige lingdao xiaozu) will be created as a key mechanism to design and coordinate the range of reform agendas and oversee their implementation. The state-run Xinhua released the statement that “leadership also vowed to let markets play a decisive role in allocating resources, aiming to achieve decisive results by 2020, with economic changes a central focus of comprehensive reforms.” While a comprehensive reform with decisive roles for the market is pledged, the first priority of the new leadership ultimately lies in strengthening the legitimacy of the Communist Party. The resilient SOEs and newly established Leadership Small Group evidence the party’s vision. In particular, the dominant status of SOEs is emphasized in line with introducing more market forces into the economy. In the following, I briefly discuss why resilient SOEs, an empowered leading small group, and comprehensive economic reform are mutually incompatible, due to 1) discouraging private business, 2) politicizing corporate governance, and 3) enabling the party-state to influence structuring the market and competition.

As long as big SOEs remain the pillar of the economy, the party-state, not the market, will play a decisive role in governing the economy. This holds true because meaningful reform in the Chinese economy is only feasible when private business and capital are free to jump in the market and compete with each other. Therefore, opening an array of state-run industries to private firms is an essential step to move forward. However, state firms have dominated China’s most lucrative sectors, where market forces are indeed the most demanded, and any substantial change is not likely to occur as the party leadership reaffirms the core status of state ownership in the economy. Such monopolization of markets by big SOEs is problematic in that these state firms are tied by the upper hand of the party and will not allow any move to challenge their privileges in doing business. Most importantly, this discourages private businesses from entering the market. In addition, as seen in the recent corruption charges of top executives of CNPC and the director of state-owned Asset Supervision and Administration Commission (SASAC, the nominal ownership agency of central SOEs), resilient SOEs can be the breeding ground of corruption in both government and state firms. As such, the survival and even predominance of these SOEs would tarnish the effects of Xi Jinping’s anti-corruption campaign.

The resilient SOEs would also obstruct the introduction of modern corporate governance, which would allow diverse shareholders, particularly non-state stakeholders to play crucial roles in overseeing business performance and decisions. Corporate governance in Chinese SOEs has operated more by political logic than by economic logic in that the board of directors is nominated by the party organization inside and outside of firms; their top executives are those party members with little exception. Therefore, the priority for them is to secure the political and economic interests of the party, not the sound management and development of corporations. For those reasons, without breaking up the monopoly of large SOEs in the market, an emphasis on private business as an important component of the economy as well as crucial roles of the market will remain only an empty statement. A comprehensive reform in Chinese economy, as the leadership aims to achieve, is thus hardly expected.

Lastly, the rise of the Leading Small Group for Deepening Reform also shows that the market structure and competition would be carefully orchestrated by the party-state. As documented in the communique, “the market has a clearly defined role—resource allocation—where it is to be promoted, but the role of the party and government in managing everything else in society is primary.” The leadership group in Chinese politics is headed by either the president or premier and composed of senior officials who rank above ministries charged with pushing through economic reforms. If the chair of LSG for deepening reform is Xi Jinping, not Li Keqiang, its empowered function is expected. This body is often named “the joint venture” of the party and government and is tasked with dealing with important agendas China confronts. The creation of this leading small group thus suggests not only that the party-state, not the market, will play a decisive role in deepening reform, but leadership is also well aware of the potential strong resistance from various interests groups including SOEs or ministries. This upcoming LSG seems to be designed to coordinate and overrule those potential conflicts of interests that stem from further pushing reforms forward.

Though much detail for implementation will be specified later, the endorsement of SOEs as a pillar of the economy and the rise another leadership group for deepening reform clearly reaffirms that Chinese leadership will embrace the market forces in so far as that they do not challenge the interests of the privileged. Unlike the ambitious communiqué from the third plenum of the 18th Party Congress, in reality, the party-state, not the market, will play a decisive role in governing the Chinese economy through these resilient SOEs and leadership group.

Yukyung Yeo is Assistant Professor in the College of International Studies at Kyung Hee University, South Korea.

Posted in EconomicsPoliticsThird Plenum