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Reform of state-owned enterprises has been key in China’s continuing transformation from a command to a market economy. The country’s leadership has, incrementally, reduced the overall share of SOEs in the economy, created space for private Chinese and foreign enterprises, and made SOEs more productive by exposing them to market forces. Gradually, the government and party pulled out of board rooms, giving way to a market-based development. Banks, for instance, could give loans based on the creditworthiness of a lender and not on political targets. These policy choices played a central role in the meteoric rise of China’s economy. Chinese entrepreneurship has blossomed, producing global leaders in sectors such as IT and e-commerce.
In 2013, ambitious policy documents promised another leap forward in this process. New reform plans gave rise to the hope that more SOEs would be deleveraged, privatised or turned into regular market actors. However, an increasing number of observers are beginning to worry about the direction current reforms have taken. Instead of bolstering efficiency and productivity of SOEs, mega mergers and private money are supposed to stem the tide of red ink, with SOEs holding some two-thirds of corporate debt. Particularly worrisome is the verve with which the Communist Party seeks to fortify its primacy.
First, recent media reports about amendments to the corporate constitution of state-owned enterprises leave little doubt that the party is retaking full control. So-called “organic governance” raises many questions. When chairmen of central SOEs now have to be party secretaries at the same time, what will be the basis for decision-making? What will be the impact on China’s economic model when party committees have more operational power than the board of management? What does it mean for private and foreign companies when politically backed, subsidised and overfunded SOEs compete for tenders or go global?
Second, some analysts suggest that, even in China’s private sector, business decisions are more and more subject to political influence. Recent investments by private business, for example, in debt-ridden SOEs have raised doubts among some economists about whether they are made to make profits or to conform with political expectations.
If this trend persists, it may fuel further suspicion about the proper functioning of the market in China. Moreover, it will strengthen sceptics in Europe and elsewhere who question the nature and objective of Chinese outbound investment.
Third, the party’s growing influence on SOEs also seems consequential for the many joint ventures between Chinese and foreign companies, especially if the foreign partner holds a minority stake. European companies have raised concerns about informal and formal attempts to strengthen party influence in joint ventures’ work culture.
Informally, management-level employees increasingly seek to influence personnel and business decisions, guided seemingly by the party line rather than company business interests. Formally, some Chinese partners push to renegotiate existing joint venture contracts to officially establish party cells and involve them in major corporate decisions.
Either way, a possible surge in conflicts of interest will most likely negatively affect the performance of joint ventures. It might even bring the foreign joint venture partner into conflict with shareholders back home, who cannot be expected to brook internal meddling by an actor not responsible to them.
China has vowed to fully embrace market principles. Indeed, economic reforms since 1978 have helped market forces take huge strides towards becoming the dominant factor in the Chinese economy.
They helped create enormous economic growth, lifting hundreds of millions of Chinese citizens out of poverty and creating a 300-million-strong middle class. They fostered Chinese innovation and raised productivity. Hence, more market rather than less is key to sustaining China’s economic growth in the long term. It’s time to reconsider the most productive relationship between the Communist Party and the Chinese economy.