China’s state enterprise reform could strengthen state

[LeveragedBuyout]

Excellent article. We finally get some detail about the reform process, and the conflicting drives that are slowing the process down. If Xi succeeds, perhaps he should rename the CCP to the "Chinese Capitalist Party," but if the reactionary wing of the CCP succeeds, then we'll be in for a wild ride over the next few years.

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Guest post: China’s state enterprise reform could strengthen state
Sep 5, 2014 1:00amby guest writer
00
By Bo Zhuang of Trusted Sources

Overhauling state-owned enterprises (SOEs) is key to the Chinese growth story for the next 10 years. But, while the approach being taken by the Xi Jinping leadership acknowledges the need for change, it also stresses the parallel need to strengthen the Communist Party State. This could mean reform will take a rather different form to the assumptions of markets, which have risen on the back of expectations of market-friendly change.

Some elements of the reforms are starting to take shape. The State Assets Supervisory and Administrative Commission (SASAC), the national SOE umbrella organization, has proposed two new ownership forms. One involves state asset-holding companies to manage state-owned capital on the lines of Singapore’s Temasek. The State Development and Investment Corporation (SDIC) and the China National Cereals, Oils and Foodstuffs Corporation (COFCO) will be the first two platforms for this. Meanwhile, Sinopharm Group and the China National Building Materials Group will participate in a pilot programme aimed at mixed-ownership to give private capital bigger equity stakes in SOEs.

The XinXing Cathay International Group, China Energy Conservation Investment Corporation, Sinopharm and China National Building Materials will be in a scheme to let directors decide the assignment, evaluation and remuneration of senior executives.

The chosen companies are, for the most part, attractive investment targets. But the programme does not address two fundamental issues: breaking up monopolies and equality of political and legal status for private enterprises and SOEs. In addition, two major questions run through what will be a long process – the extent to which the state will relinquish control and the nature of “mixed ownership”.

The result could be what is known as a “mixed ownership monopoly model” with private capital boosting the resources of already-dominant state groups and thus strengthening their positions at the commanding heights of the economy. Genuine reform would involve opening closed sectors to private capital. But private-sector firms are neither large nor rich enough to buy significant minority stakes in big SOEs and so would lack any real decision-making power. Domestic private entrepreneurs would feel more comfortable investing in small SOE subsidiaries or projects over which they have full control. Many private entrepreneurs still see the purchase of state assets as a high-risk, high-return business activity.

Though mixed ownership should produce more transparency, the strategic and managerial decisions will thus remain firmly in the hands of the state and the Communist Party. Promotion of senior management will continue to be driven largely by the un wieldy bureaucratic process under which appointments are made by Party’s Organization Department. The Party will maintain its cells in all companies and its discipline inspection teams will reinforce the current anti-corruption campaign.

The reform blueprint for the coming decade agreed by the Party Plenum last November said “the market will play a decisive role” but also that “the state sector remains dominant”. The first element was evident in the commitment to “actively develop mixed ownership” as a guiding principle for SOE reform, which has now been carried through in a pilot restructuring programme together with reform plans by big groups such as PetroChina, Sinopec and the China Everbright and by a dozen provincial governments of local SOEs.

That is an important breakthrough given the way in which SOE reform has been stalled this century after the modernisation undertaken by Premier Zhu Rongji in the 1990s. The massive fiscal stimulus launched at the end of 2008 used state firms as vehicles to translate the credit expansion into growth in the traditional manner of Chinese governments. But this intervention produces distortions, and the pervasive presence of government intervention compromised the allocative efficiency of capital and resources.

Without giving equal rights to private capital, SOE reform will not proceed quickly. Most SOEs have pursued capacity expansion at all costs based on a low-return high-leverage model, which had led to the industrial over-capacity that is one of China’s major weaknesses. They are widely believed to have gone into sectors in which the state has no natural comparative advantage, such as property, retail, home appliances and logistics, crowding out the private sector. This distorts the labour market and creates social disparities. We estimate the average income of SOE staff is 40-50 per cent higher than in the private-sector. Xi Jinping says executives should expect pay cuts and reduced perks.

SOE assets expanded by 512 per cent between. 2003 and 2013 to Rmb104tn ($16.9tn) – equivalent to more than 180 per cent of GDP. This expansion was funded mostly by debt: total equity for all SOEs stood at just Rmb37tn ($6tn) at the end of last year. Many still make profits, but average return on assets (ROA) fell in 2007 and has stagnated since, running at half the rate for private-sector firms and highlighting the need for change in companies that between them account for around three-quarters of capitalisation on the Shanghai A share index. (See chart).

Chart 1: Growth of ROA of industrial enterprises



Xi has become popular on the back of his wide-ranging anti-corruption campaign and with the arrest of highly-placed “big tigers”, but implementation of reform will require public support. People need to believe state-owned assets are being sold at a fair price – allegations of bargain basement disposals have been a powerful weapon deployed against reform in the past, with suspicions of profiteering by officials, well-connected wealthy people and SOE managers. The public does not seem to appreciate the added-value of improved management. Though the new team might turn losses into profit, the public questions asset pricing and has often accused the new owner of corruption. Such a blacklash could impede the whole process.

Take the cautionary tale of Gu Chujun and Kelong Electronics: Soon after Gu bought the loss-making company from the Shunde district government in Guangdong in 2002; a Hong Kong professor accused him of stealing state assets by pricing them too cheaply. Gu was investigated for alleged improper accounting and expropriating state assets. Detained in 2005, he was tried and in 2008 sentenced to 12 years in jail. Many experts see his story as a classic example of the ability of the government to violate the rights of private capitalists during the privatization of state-owned assets, especially if public opinion is aroused. The strongest catalyst for reform is likely to stem from a combination of heavier SOE losses and fiscal exhaustion of local governments which need funds from disposal of assets. This process will become apparent with sale of minority stakes, expanding to bigger holdings as fiscal pressure intensifies from 2016.

Success will require the various levels of government to refrain from economic intervention, and are ready to accept greater growth volatility with missed targets. That means shifting the overall governance structure to relax state control. Given Xi Jinping’s political stress on “Party Strengthening”, this involves an obvious top-level choice which runs through China’s reform agenda as a whole – and will confront politics and economics as the reform process moves ahead.

Bo Zhuang is Head of the Beijing Office of Trusted Sources, the emerging market research and analysis service. This is the first of a fortnightly series of guest posts by Trusted Sources on reform in emerging markets as outlined in Beyond the acronyms, EM reform is what really counts.

 

[LeveragedBuyout]

@Chinese-Dragon @Edison Chen

The following article presents a more modest, but probably more realistic road map for China's reform efforts compared to the previous post. As a supporter of capitalism, it seems like a reasonable interim step before full liberalization, but I have to ask a representative of the Marxist wing whether he views this recommendation favorably (@TaiShang )?
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Reforming China’s Commanding Heights by Michael Spence - Project Syndicate


BUSINESS & FINANCE

MICHAEL SPENCE
Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, Academic Board Chairman of the Fung Global Institute in Hong Kong, and Chair of the World Economic Forum Global Agenda Council on New Growth Models. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World.

NOV 17, 2014
Reforming China’s Commanding Heights
MILAN – Chinese President Xi Jinping’s massive anti-corruption campaign has advanced a number of key objectives: It has gone a long way toward restoring confidence in the Communist Party’s commitment to a merit-based system; countered a decades-old pattern of public-sector domination; reduced the power of vested interests to block reform; and bolstered Xi’s popularity among private-sector actors, if far less so with the bureaucracy. In short, Xi’s effort to root out corruption has empowered both the Party and the reformers. The question is how far they will take their reform ambitions.

Xi is certainly not finished yet, having outlined a set of legal reforms at last month’s Fourth Plenum of the Communist Party aimed at creating a more level playing field for the public and private sectors. If implemented properly, the reforms will create a more efficient system for the creation and enforcement of contracts, ease the path for market entrants, and strengthen the application of China’s competition laws.

Greater fidelity to the rule of law will also lead to the creation of a legal and financial infrastructure that reduces fraud in the private sector, including in financial reporting. That, together with increased access to capital, will help to accelerate the development of the services sector, which is needed to create urban employment.

Better management of China’s considerable public assets – which include $3.5-4 trillion of foreign-exchange reserves, substantial land holdings, and majority ownership of the state-owned enterprises that dominate the economy – would complement these efforts. Indeed, it could help to boost competition, encourage innovation, strengthen the financial system, and expand access to capital.

The question is how China could achieve this. As it stands, China’s economy follows, to some extent, the old Leninist “commanding heights” model, with the Party holding all political power and controlling major enterprises and sectors, even as the burgeoning private sector drives growth and employment. In this context, the kind of “meritocratic professionalism” that China is pursuing is important; but it is no substitute for genuine competition in the public or private sector – at least not if innovation and structural change are the goals.

Of course, Xi could simply declare that China’s version of state capitalism has worked well in the past, and will continue to do so. But experience with the microeconomic dynamics of advanced economies (where China is headed) makes this a weak stance – and, thus, one that Xi is unlikely to take.

The alternative would be to embark on a sustained program of privatization to shrink the asset side of the state’s huge balance sheet. But China’s balance sheet has served it well, enabling the extraordinarily high rates of investment that have fueled rapid growth. Meanwhile, many advanced economies have suffered considerably from their balance-sheet composition, with limited, poorly measured assets and outsize debt and non-debt liabilities.

In fact, given an increasingly unequal distribution of income between capital and labor (as well as across the income spectrum for labor) a larger store of public assets certainly has merit, as it equalizes the distribution of capital and wealth, albeit indirectly. Not only can public assets be used to cushion shocks and counter adverse trends; they can also help fund an expansion of social insurance.

The problem in China is not the volume of state-owned assets, but their concentration in a few companies and industries – a situation that poses risks to economic performance. Given this, the logical solution is not to dispose of the state’s asset holdings, but to diversify them over time.

Such an approach would have a number of benefits. First and foremost, it would reconcile a large state balance sheet with an expanding role for markets, bolstering employment, stimulating innovation, and advancing the economy’s structural transformation. To this end, public investment in infrastructure, human capital, and the economy’s knowledge and technology base would remain crucial.

Furthermore, the diversification of China’s asset holdings would deepen its financial markets considerably. Over the next several years, as the traded or tradable share of the state-owned sector’s market capitalization increased from today’s low base of 10-15%, more institutional investors, such as pension funds and insurance companies, would become involved in Chinese equity trading, which is currently dominated by retail investors. This would augment savings options for an increasingly affluent population and strengthen support for long-term investment and development.

Debt markets would also benefit from such an initiative. Blurring the line between the private and the state-owned sectors would, over time, reduce the latter’s privileged access to – and overuse of – bank financing, leading to the expansion of corporate bond markets.

With public entities like the social security system and sovereign-wealth funds holding more diversified asset portfolios, incentives would be substantially reduced for market intervention favoring incumbents in which the state owned a large share. This, along with enhanced enforcement of competition law, would go a long way toward leveling the playing field in markets.

Clearly specified fiduciary responsibilities and governance would help to ensure that publicly held assets were managed to maximize long-term risk-adjusted returns, with the state and citizens as beneficiaries and the market as the arbiter of efficiency and innovation. The best-managed state-owned enterprises could emerge – or remain – as successful and prominent players, adapting to expanded market competition and combining innovation with economies of scale.

Indeed, public-sector asset management could be “outsourced,” with private asset managers competing for the job. This would accelerate the development of the asset-management sector, with far-reaching benefits for savers and investors.

China does not have to give up the safety net provided by large asset holdings to allow markets to play a decisive microeconomic role. It can abandon the commanding heights model and develop its version of “state capitalism” to support the best of both worlds. All that is needed is a persistently strong government commitment to the public interest – and, of course, a skillfully executed reform strategy.

Reforming China’s Commanding Heights by Michael Spence - Project Syndicate

 

[TaiShang]

I love it when Western analysts talk about how Chinese government is infested with in fighting, a political Armageddon that will bring an end to the state tomorrow, if not today. Given that there are already too many ideas we are being fed on a daily basis, these analysts are on the safe side, because, most likely, we will be forgetting what was said yesterday and be concentrating on what is being told today. The truth of the whole professionalism is that they are mere speculations. As seen from where I am, Chinese state is no more based on power struggle than other forms of legitimate/accountable government, including the Western models.

I simply view the developments regarding China's economic and political model as natural and ordinary. There is nothing extraordinary or out of historical context. It is just that China happens to be a huge country and, with that, a plethora of opinions that inform the government through direct and indirect channels. It looks chaotic, but, chaos is not necessarily a bad thing.

I am still for maintaining the critical sectors as state-owned while reforming their decision-making structures and requiring more accountability. Reforms on this line have been going on for long, in fact. For example, China's state-owned energy corporations have been acting more like private-owned in terms of accountability and competition, which explains the difference, say, between the performance of Chinese and Indian energy firms. But still, they are owned by the state -- although decentralized and grouped together. State can be a good capitalist actor and, with the required oversight mechanism in place, care about public benefit --perhaps more than the private sector.

 

[LeveragedBuyout]

I love it when Western analysts talk about how Chinese government is infested with in fighting, a political Armageddon that will bring an end to the state tomorrow, if not today. Given that there are already too many ideas we are being fed on a daily basis, these analysts are on the safe side, because, most likely, we will be forgetting what was said yesterday and be concentrating on what is being told today. The truth of the whole professionalism is that they are mere speculations. As seen from where I am, Chinese state is no more based on power struggle than other forms of legitimate/accountable government, including the Western models.

Are you posting in the right thread? Where does the article discuss political infighting and the end of the state? Sometimes your comments seem a bit robotic, so it's difficult to understand where you're coming from with this. The article was hardly a Gordon Chang-style analysis, and if anything, was a very moderate attempt to work within the existing system rather than change it.

I simply view the developments regarding China's economic and political model as natural and ordinary. There is nothing extraordinary or out of historical context. It is just that China happens to be a huge country and, with that, a plethora of opinions that inform the government through direct and indirect channels. It looks chaotic, but, chaos is not necessarily a bad thing.

I am still for maintaining the critical sectors as state-owned while reforming their decision-making structures and requiring more accountability. Reforms on this line have been going on for long, in fact. For example, China's state-owned energy corporations have been acting more like private-owned in terms of accountability and competition, which explains the difference, say, between the performance of Chinese and Indian energy firms. But still, they are owned by the state -- although decentralized and grouped together. State can be a good capitalist actor and, with the required oversight mechanism in place, care about public benefit --perhaps more than the private sector.

It sounds like you agree with the author. I think his approach is quite reasonable, and can achieve the kind of reform that China needs on a gradual basis. The end result will be a simple step away from a full market economy, which China can choose to implement, or it can maintain a France- and Singapore-style state capitalistic model.

 

[TaiShang]

Are you posting in the right thread? Where does the article discuss political infighting and the end of the state? Sometimes your comments seem a bit robotic, so it's difficult to understand where you're coming from with this. The article was hardly a Gordon Chang-style analysis, and if anything, was a very moderate attempt to work within the existing system rather than change it.

That response was toward the first opinion/blog. I basically agree with the points made in the second analysis, as you pointed out.

This below interview also highlight certain aspects of reform and the larger society:

Country’s transition hangs in balance

Interview with Martin Jacques

GT: You recently said that China's governance system has been remarkably successful for more than three decades. Is your conclusion mainly based on China's economic achievements?

Jacques: No. It's true that China's economic transformation has been hugely successful with remarkable achievements. But that's the core of a much wider change in Chinese society. I regard this as being a very successful period for Chinese governance in general.

The economy does not exist in isolation from society. It's not something you can change on its own and everything else stays the same.

First of all, how do you transform the economy? The state in China has been extremely important in that process. Then, the impact of this huge change in the economy is to transform Chinese society: the shift of around 30 percent of the population from countryside into the city, the pressures of creating more modern education system, and the requirement for a new healthcare service. There are many aspects to it. You cannot have huge economic transformation like that without also having to reform, re-engineer and re-purpose the state.

GT: What do you think is the core of China's governance system? Is the "China model" replicable for other parts of the world?

Jacques: First of all, it's a very extraordinary relationship between the state and the society, which goes back an extremely long period of time, at least 2,000 years. For the Chinese, the state in some way is a fundamental expression of what China is and what being Chinese means, in a way that's not true for the US or Britain. My argument is that China is not primarily a nation state, but a civilizational state. You cannot really understand the way China works without understanding that.

Then, after 1949, it's a reinvention of the state in the context of the dominance of the Communist Party of China. That process has been through two main phases, the Mao and the Deng periods. But it requires constant reforms.

I don't think the Chinese governance system is one that can be transplanted. Things can be learnt from it by very different systems. But you cannot transplant them. The history and circumstances are so different.

The Chinese state is a pretty unique institution. The only countries that are close to the Chinese governance system are other Confucian-based societies, much more than communist ones.

GT: After your recent article on the Financial Times was published, have you got any feedback?

Jacques: It got quite a big response. Some people are relatively supporting, but other people are not so.

There are very clear views in the West that the great problem of China is the governance system. They believe that China is fundamentally unstable. Sooner or later, the economic rise will come to an end. Why? Because China doesn't have a democratic model in the Western style.

But China has been doing extremely well for 35 years. Some people just ignored this.

GT: US political scientist Francis Fukuyama recently published his new book Political Order and Political Decay, in which he argued that three building blocks are required for a well-ordered society: a strong state, the rule of law and democratic accountability. How do you evaluate Fukuyama's assertion that a strong state is needed in the first place?

Jacques: The strong state is very important, but the strong state should understand what needs to be done. There is a whole history of strong authoritarian states that were not good. The question is can they transform society? It depends on in what way it is strong, and how enlightened it is. It should be a state which enjoys a great deal of respect and that is also enlightened with a very clear set of progressive priorities.

GT: Do you think there is a trend among Western scholars of rethinking governance?

Jacques: I do. There is a growing recognition that there are some serious governance problems in the West now. This is going to grow for two reasons.

Firstly, I don't see any solution to the problems at the moment in the West. I don't see us escaping from stagnation in the near future.

Secondly, the fact is that the West is in relative decline in its global position. There is now a growing crisis of governance in the West. The ruling elite is not able to solve these problems in Europe. The US, being more successful, still has very big problems.

GT: China also faces a lot of problems and challenges on governance. What worries you most? What needs to be done to improve the governance?

Jacques: There are a lot of challenges facing China. Can you successfully make this transition from a very labor-intensive period of growth, to less rapid growth with a technology-based and consumer-based economy? It's a difficult transition. We shouldn't assume it can be achieved successfully.

Part of this transition is shifting to a situation where state has less control of the economy but the market has more. I see serious dangers with this. Can the Chinese government strike the right balance?

China also has to cope with a very difficult international environment, particularly a difficult economic environment. When the financial crisis came, China adopted a stimulus program to deal with the Western downturn. But some of the effects of the stimulus program have become big problems.

China is going to become more and more important politically. There will be growing pressure on China both internally and externally. It's very difficult for China because it is still in the process of modernization. How can China deal with the pressure? China will be forced to take this responsibility, which comes too early for it.

Above all, the most difficult question is stability and unity. It's extremely difficult for a country to hold together, but it's extremely important that it does hold together. If it starts being divisive, chaotic, everyone is going to suffer, not just China, everyone in the world is going to suffer.

 

[LeveragedBuyout]

That response was toward the first opinion/blog.

As far as I'm aware, Bo Zhuang is a Chinese citizen living in China, not a "Western analyst." Does a critique of the Chinese system automatically disqualify an analyst as a patriot?

Jacques: There are a lot of challenges facing China. Can you successfully make this transition from a very labor-intensive period of growth, to less rapid growth with a technology-based and consumer-based economy? It's a difficult transition. We shouldn't assume it can be achieved successfully.

Part of this transition is shifting to a situation where state has less control of the economy but the market has more. I see serious dangers with this. Can the Chinese government strike the right balance?

Above all, the most difficult question is stability and unity. It's extremely difficult for a country to hold together, but it's extremely important that it does hold together. If it starts being divisive, chaotic, everyone is going to suffer, not just China, everyone in the world is going to suffer.

I've always been interested in this part. Of course China has had periods in its history, as recently as WWII, where it was not unified. However, it's difficult to see such a challenge realistically confronting China today. I know that there is the problem of separatism, if we can call it that, in Xinjiang and Tibet, but as far as "core China," the CCP seems to have the polity firmly in hand. Can you explain this persistent concern? I doubt China is as politically fragile as some believe. Even the Umbrella Movement was a non-event, hardly a challenge to the current system.

 

[hans]

I think the west always underestimate the power of CCP.
Actually CCP root much deeper than west expect.
Even some conflict with government, the majority is deeply relying on CCP for the stability and development of this country.
The life of people is still improving fast.
The government still provide key public service at low cost in time.
The entire government system is still working at high efficiency
CCP is far from satisfying every one, yet it is the best choice at the moment..

As far as I'm aware, Bo Zhuang is a Chinese citizen living in China, not a "Western analyst." Does a critique of the Chinese system automatically disqualify an analyst as a patriot?

I've always been interested in this part. Of course China has had periods in its history, as recently as WWII, where it was not unified. However, it's difficult to see such a challenge realistically confronting China today. I know that there is the problem of separatism, if we can call it that, in Xinjiang and Tibet, but as far as "core China," the CCP seems to have the polity firmly in hand. Can you explain this persistent concern? I doubt China is as politically fragile as some believe. Even the Umbrella Movement was a non-event, hardly a challenge to the current system.

 

[TaiShang]

Does a critique of the Chinese system automatically disqualify an analyst as a patriot?

Of course not. I would encourage constructive criticism. But, at times, it comes closer to speculation especially when the discourse moves to the direction of very qualitative power-competition analysis. I tend to not to listen to them as I believe that certain competition and tension is in the nature of any entity. It is just stale when this kind of usual.natural things are taken out of context and exaggerated.

I've always been interested in this part. Of course China has had periods in its history, as recently as WWII, where it was not unified. However, it's difficult to see such a challenge realistically confronting China today. I know that there is the problem of separatism, if we can call it that, in Xinjiang and Tibet, but as far as "core China," the CCP seems to have the polity firmly in hand. Can you explain this persistent concern?

I guess it is a sense of agility and, at times, I admit, over-sensitiveness may be involved. It is probably because the country is still a developing one, with a lot of things going on. The same stability that, say, US or Japan enjoys today, is still not fully present in China yet, especially economically. But, I do not agree with the author on the issue of political unity. There is no such real concern and Xinjiang and Tibet are being managed pretty well and the dangers are there but not insurmountable.

I doubt China is as politically fragile as some believe. Even the Umbrella Movement was a non-event, hardly a challenge to the current system.

I guess the events in the Middle East and then in Ukraine have driven some analysts to become over-cautious. China's economic development (and reforms) is a strong asset to ensure stability and weather certain hiccups like the protests in HK, but there seems to be certain way to be taken to ensure a perfect stable society. The urbanization and transition to high-end manufacturing and service economy require deep systemic rearrangements. Also, there is the ongoing clean-up efforts of the system. Some may view these as potentially dangerous. I personally view them as shots into the system to reinvigorate it by selectively disturbing it.

 

[LeveragedBuyout]

@hans @TaiShang

To me, China's future looks fairly obvious. Just like Japan's LDP has effectively ruled Japan as a single party since inception, and Singapore's PAP has ruled as a single party since inception, it's fairly obvious that the CCP will enjoy a similarly long-lived mandate, even if China implements a light version of democracy (along the lines of Singapore).

I don't think the West underestimates the strength of the CCP; if anything, the West views the CCP grip on power as absolute. What the West (or at least my particular school of thought) fears is a broken CCP. What I mean by that is a CCP that selects incompetents or corrupt bureaucrats to lead it, or a CCP where the political wing loses control of the military arm. As long as the CCP remains united and in control, it is an entity we can do business with (which is why we'e been doing business for over 30 years, even through the various tensions we've endured). When that ends, we're looking at a very scary geopolitical situation, not to mention the severe economic damage that will be incurred.

It is in that spirit that I post about China's reforms. I can't speak for other Americans, but I'm interested in seeing China complete its reform process successfully so that China can remain stable. I have no desire to see China engulfed in flames, but in my personal opinion, the best way to achieve that stability is to continue the reform process. I fear that if reactionary forces prevail, and China does not reform, it will see the same kind of limbo that Japan has suffered ever since its asset bubble collapsed. That outcome hardly benefits the American economy (although I'm sure some in the defense industry will rub their hands in glee).

 

[hans]

I think the Singapore mode is preferred by CCP.
Also this could be a kind of good choice at near 10 years..
We still need a strong power to gain fast development.

In the long term, I would say a bad CCP leader is not likely to come into power.
You know so many guys want to be in this position.
Also public will strongly against him.
For separated CCP, it could be possible. But not sure how..
Current CCP is already divided into different politic wings.
Yet they show a very united image in front of public and army.
Also the economy will not be hurt. It is the root of their power.

@hans @TaiShang

To me, China's future looks fairly obvious. Just like Japan's LDP has effectively ruled Japan as a single party since inception, and Singapore's PAP has ruled as a single party since inception, it's fairly obvious that the CCP will enjoy a similarly long-lived mandate, even if China implements a light version of democracy (along the lines of Singapore).

I don't think the West underestimates the strength of the CCP; if anything, the West views the CCP grip on power as absolute. What the West (or at least my particular school of thought) fears is a broken CCP. What I mean by that is a CCP that selects incompetents or corrupt bureaucrats to lead it, or a CCP where the political wing loses control of the military arm. As long as the CCP remains united and in control, it is an entity we can do business with (which is why we'e been doing business for over 30 years, even through the various tensions we've endured). When that ends, we're looking at a very scary geopolitical situation, not to mention the severe economic damage that will be incurred.

It is in that spirit that I post about China's reforms. I can't speak for other Americans, but I'm interested in seeing China complete its reform process successfully so that China can remain stable. I have no desire to see China engulfed in flames, but in my personal opinion, the best way to achieve that stability is to continue the reform process. I fear that if reactionary forces prevail, and China does not reform, it will see the same kind of limbo that Japan has suffered ever since its asset bubble collapsed. That outcome hardly benefits the American economy (although I'm sure some in the defense industry will rub their hands in glee).

 

[Edison Chen]

Excellent article. We finally get some detail about the reform process, and the conflicting drives that are slowing the process down. If Xi succeeds, perhaps he should rename the CCP to the "Chinese Capitalist Party," but if the reactionary wing of the CCP succeeds, then we'll be in for a wild ride over the next few years.

---

Guest post: China’s state enterprise reform could strengthen state
Sep 5, 2014 1:00amby guest writer
00
By Bo Zhuang of Trusted Sources

Overhauling state-owned enterprises (SOEs) is key to the Chinese growth story for the next 10 years. But, while the approach being taken by the Xi Jinping leadership acknowledges the need for change, it also stresses the parallel need to strengthen the Communist Party State. This could mean reform will take a rather different form to the assumptions of markets, which have risen on the back of expectations of market-friendly change.

Some elements of the reforms are starting to take shape. The State Assets Supervisory and Administrative Commission (SASAC), the national SOE umbrella organization, has proposed two new ownership forms. One involves state asset-holding companies to manage state-owned capital on the lines of Singapore’s Temasek. The State Development and Investment Corporation (SDIC) and the China National Cereals, Oils and Foodstuffs Corporation (COFCO) will be the first two platforms for this. Meanwhile, Sinopharm Group and the China National Building Materials Group will participate in a pilot programme aimed at mixed-ownership to give private capital bigger equity stakes in SOEs.

The XinXing Cathay International Group, China Energy Conservation Investment Corporation, Sinopharm and China National Building Materials will be in a scheme to let directors decide the assignment, evaluation and remuneration of senior executives.

The chosen companies are, for the most part, attractive investment targets. But the programme does not address two fundamental issues: breaking up monopolies and equality of political and legal status for private enterprises and SOEs. In addition, two major questions run through what will be a long process – the extent to which the state will relinquish control and the nature of “mixed ownership”.

The result could be what is known as a “mixed ownership monopoly model” with private capital boosting the resources of already-dominant state groups and thus strengthening their positions at the commanding heights of the economy. Genuine reform would involve opening closed sectors to private capital. But private-sector firms are neither large nor rich enough to buy significant minority stakes in big SOEs and so would lack any real decision-making power. Domestic private entrepreneurs would feel more comfortable investing in small SOE subsidiaries or projects over which they have full control. Many private entrepreneurs still see the purchase of state assets as a high-risk, high-return business activity.

Though mixed ownership should produce more transparency, the strategic and managerial decisions will thus remain firmly in the hands of the state and the Communist Party. Promotion of senior management will continue to be driven largely by the un wieldy bureaucratic process under which appointments are made by Party’s Organization Department. The Party will maintain its cells in all companies and its discipline inspection teams will reinforce the current anti-corruption campaign.

The reform blueprint for the coming decade agreed by the Party Plenum last November said “the market will play a decisive role” but also that “the state sector remains dominant”. The first element was evident in the commitment to “actively develop mixed ownership” as a guiding principle for SOE reform, which has now been carried through in a pilot restructuring programme together with reform plans by big groups such as PetroChina, Sinopec and the China Everbright and by a dozen provincial governments of local SOEs.

That is an important breakthrough given the way in which SOE reform has been stalled this century after the modernisation undertaken by Premier Zhu Rongji in the 1990s. The massive fiscal stimulus launched at the end of 2008 used state firms as vehicles to translate the credit expansion into growth in the traditional manner of Chinese governments. But this intervention produces distortions, and the pervasive presence of government intervention compromised the allocative efficiency of capital and resources.

Without giving equal rights to private capital, SOE reform will not proceed quickly. Most SOEs have pursued capacity expansion at all costs based on a low-return high-leverage model, which had led to the industrial over-capacity that is one of China’s major weaknesses. They are widely believed to have gone into sectors in which the state has no natural comparative advantage, such as property, retail, home appliances and logistics, crowding out the private sector. This distorts the labour market and creates social disparities. We estimate the average income of SOE staff is 40-50 per cent higher than in the private-sector. Xi Jinping says executives should expect pay cuts and reduced perks.

SOE assets expanded by 512 per cent between. 2003 and 2013 to Rmb104tn ($16.9tn) – equivalent to more than 180 per cent of GDP. This expansion was funded mostly by debt: total equity for all SOEs stood at just Rmb37tn ($6tn) at the end of last year. Many still make profits, but average return on assets (ROA) fell in 2007 and has stagnated since, running at half the rate for private-sector firms and highlighting the need for change in companies that between them account for around three-quarters of capitalisation on the Shanghai A share index. (See chart).

Chart 1: Growth of ROA of industrial enterprises



Xi has become popular on the back of his wide-ranging anti-corruption campaign and with the arrest of highly-placed “big tigers”, but implementation of reform will require public support. People need to believe state-owned assets are being sold at a fair price – allegations of bargain basement disposals have been a powerful weapon deployed against reform in the past, with suspicions of profiteering by officials, well-connected wealthy people and SOE managers. The public does not seem to appreciate the added-value of improved management. Though the new team might turn losses into profit, the public questions asset pricing and has often accused the new owner of corruption. Such a blacklash could impede the whole process.

Take the cautionary tale of Gu Chujun and Kelong Electronics: Soon after Gu bought the loss-making company from the Shunde district government in Guangdong in 2002; a Hong Kong professor accused him of stealing state assets by pricing them too cheaply. Gu was investigated for alleged improper accounting and expropriating state assets. Detained in 2005, he was tried and in 2008 sentenced to 12 years in jail. Many experts see his story as a classic example of the ability of the government to violate the rights of private capitalists during the privatization of state-owned assets, especially if public opinion is aroused. The strongest catalyst for reform is likely to stem from a combination of heavier SOE losses and fiscal exhaustion of local governments which need funds from disposal of assets. This process will become apparent with sale of minority stakes, expanding to bigger holdings as fiscal pressure intensifies from 2016.

Success will require the various levels of government to refrain from economic intervention, and are ready to accept greater growth volatility with missed targets. That means shifting the overall governance structure to relax state control. Given Xi Jinping’s political stress on “Party Strengthening”, this involves an obvious top-level choice which runs through China’s reform agenda as a whole – and will confront politics and economics as the reform process moves ahead.

Bo Zhuang is Head of the Beijing Office of Trusted Sources, the emerging market research and analysis service. This is the first of a fortnightly series of guest posts by Trusted Sources on reform in emerging markets as outlined in Beyond the acronyms, EM reform is what really counts.

The graph about the ROAs of SOEs and Non SOEs, I think it's reasonable but not so persuasive. This is true when SOEs have larger denominator, the assets yet they yield smaller numerator, the net income. Because for a long time, the SOEs are the main and only players in many crucial industries like telecom, railway, finance and constructions with trillions of assets, unlike some high-tech companies with less assets but higher net income that recently emerged from new industries like the Internet or the big data or cloud computing. They don't overlap in many part, at least in last decades. They have different duties in China's development. But the SOEs really need to increase their profitable capabilities, do not always rely on government's subsidiary, this is unfair.

 

[Götterdämmerung]

For all the people who favour privatisation of public owned businesses, they also have to know what that word means. The word private derives from the Latin word privatus and it means to bereave, to rob, to set apart from. To privatise public owned properties means to rob, to bereave the public.

 

[ChineseTiger1986]

For all the people who favour privatisation of public owned businesses, they also have to know what that word means. The word private derives from the Latin word privatus and it means to bereave, to rob, to set apart from. To privatise public owned properties means to rob, to bereave the public.

Yep, and dunno why some people are still cheering for it, since they won't even get a dime from it.

 

[Chinese-Dragon]

For all the people who favour privatisation of public owned businesses, they also have to know what that word means. The word private derives from the Latin word privatus and it means to bereave, to rob, to set apart from. To privatise public owned properties means to rob, to bereave the public.

So I guess you disagree with the economic reforms being carried out by the Chinese government?

They are for example, allowing private banking soon. However the vast majority of the banking sector will still be under state control. The three largest companies in the world are state owned Chinese banks like ICBC.

 

[Götterdämmerung]

So I guess you disagree with the economic reforms being carried out by the Chinese government?

They are for example, allowing private banking soon. However the vast majority of the banking sector will still be under state control. The three largest companies in the world are state owned Chinese banks like ICBC.

I'm not entirely against privatisation per se, I just hope that China has learnt from the any criminal privatisation practices many countries in the EU countries have been experiencing in the last three decades.

Take the Deutsche Post as an example, it was a public owned company that got privatised. The mail service and the telephone service became two different companies, Deutsche Post and Deutsche Telekom. Since these two companies were indeed owned by all citizens of Germany, privatizing means that taking them away without proper any compensation, on top of that they were sold back to the general public. People who didn't by stocks of these companies were robbed once, people who bought stocks were robbed twice.

I have nothing against private companies but very much against privatization, particularly industries that are sensitive to our security and livelihood of the people, e.g. infrastructure, food security, water and health.