China’s market Economy Takes Shape

There is a lot of comment about the progress of reform of State Owned Enterprises (soe) in China. Some see the right agenda for China as privatisation and the removal of government from the running of companies.


This is the Western approach but not the Chinese approach. The core of the thinking in China is contained in the Xinhua report on President Xi’s speech on the subject.


In the West failing companies or some key infrastructure companies – eg transport and health – are often soe’s. The motivation for the former is to protect employment or key services and supplies. The motivation for the latter is to provide the backbone of transportation systems which benefit from integrated structures and provide the sine qua non for efficiency of moving corporates goods cheaply, quickly and efficiently.


But in China the role of the soe is to manage the characteristics of the market economy – a phase China is now entering, and sometimes called managed capitalism.  This transitional phase is essential to the process of innovation. The key to this period, and process, is to ensure the volatility of market economies is controlled by a strong core structure of soe’s. It is a control mechanism for the whole economy. Adam Smith anticipated a need for regulation and China’s is planned, as opposed to most Western models, which respond to crises with regulations. Often the horse has bolted by then. In China the scientific method calls for experimentation, testing and then implementation. So the control of regulation is set up in advance and corrected from practice. The Soe structure is part of the control process.


Secondly, it also provides for China to be able to build major global companies in areas where companies and Governments might be theoretically distinct, but, in practice, are very close. The energy companies policies and those of its Governments are always very close. In China they are building bigger Soe’s by mergers to enable them to compete internationally.


Thirdly,  the dividend flows can address much of the funding crises experienced by Western nations on their state expenditure of Welfare. If a significant part of the Soe shares are owned by Welfare Funds it keeps much of that funding off the State Balance Sheet. It is a form of socialism to China, and to us , it would appear good common sense and learning from the West’s experience but not copying the West.


Fourthly, Soe’s in China are part of preparing for the initial stage of socialism to be reached by 2049. There is little understanding, in the West, of what these words mean, but they are direction of journey of China. This is not Xi’s personal dream. This is a continuation of the ideas first expressed by Deng in 1978, and trailed by Zhou Enlai in 1963. Sustainable economic development, motivated innovation rewarded reasonably, and a distribution of wealth that is fair. These are some of the characteristics of Socialism with Chinese Characteristics.


These goals are what have been driving China for almost 40 years, and the Soe reform should be seen in this context.


I am quite sure Chinese Soe’s could be more profitable faster if put into private sector hands. We can see how major private sector companies have done well since the Party first created them many years ago. But the private sector has many of the characteristics of the Western system, but Chinese private sector companies give lower priority to quarterly growth than in the West. And the Western experience has never been fully evaluated after costing the welfare costs of de-employing and rising prices to meet return targets.


The Soe approach will be to innovate and take China to a leading global position, be active globally to help China’s agendas, and be a stabilising and influencing part of developments of the Chinese economy.


Some are concerned with the role of the Party Secretary and Party Committee, which can act as an alternative centre of power controlling promotions and appointments and, through that power, the direction of the companies. Whilst that is a real concern, it is clear that some Soe’s have engaged in corruption on an unprecedented scale for the last 10-20 years. The Party discipline is now very tight and strong on corruption. So it produces an internal control for Soe’s. I think as a new cadre of officials develops over the next 20 years there will be a fusing between company leaders and Party leaders. But from this speech we can conclude that the evidence, in front of Xi and other leaders, does not argue for that now.


Are the reforms of now the right ones? Is it right to go down the road of Socialism with Chinese Characteristics?  Those are longer questions to answer but the success of the last 40 years suggests that they are goal driven , being successful, and second guessing them has not proved fruitful.


China is entirely different from us for historical, cultural and political reasons. So to judge them by our thinking is probably to be naive. See the path and it is easier to understand the moves, and then the judgements are more meaningful.


Chinese soe’s need to be understood by MNC’S and Government and Institutional leaders. How they are, why they are , and where they will go? Few get that.



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