China issues blueprint for state industry overhaul that would retain ruling party dominance

By , on September 15, 2015


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BEIJING — China’s Communist Party has issued a long-awaited blueprint for overhauling bloated state industries that would retain the party’s dominance in the economy.

The plan comes at a time when the government of President Xi Jinping is under pressure to reverse an economic slowdown and reduce reliance on trade and investment to drive growth. Communist leaders have promised to give entrepreneurs and market forces a bigger role but insist state ownership will remain the core of the economy.

The plan issued late Sunday reflects the complex path the party walks in trying to develop the world’s second-largest economy while preserving its monopoly on power.

It calls for state companies to face more free-market competition, become financially self-supporting and be clearly divided between commercial competitors and those that serve social purposes. It gives no details of how individual companies will be treated and no timetable but promises a “decisive outcome” by 2020.

Rather than reducing the party’s role, the plan says Beijing will “strengthen party leadership” of state companies.

It also leaves key questions unanswered, such as whether unsuccessful state companies will be allowed to go bankrupt and how much their monopolies and other privileges will be cut back.

The plan promises to promote “mixed ownership,” the party’s term for allowing outside investors to buy stakes in state companies, but gives no indication whether they would be allowed any management control.

Despite three decades of market-oriented reform, most of China’s industries are dominated or entirely controlled by state companies. That includes banking, oil and gas, insurance, air travel, telecoms, steel production and coal mining.

Most lending by state banks goes to government companies while entrepreneurs who generate China’s new jobs and wealth rely mostly on an informal underground credit market.

Pressure for change has mounted as economic growth tumbled to a two-decade low of 7.4 per cent last year and is forecast to fall further to about 7 per cent this year. Some analysts say China will be unable to hit even that level without government stimulus after manufacturing and other activity were weaker than expected in July and August.

Regulators have announced a series of changes including eliminating a ban on outright foreign ownership of e-commerce companies. But Beijing has yet to reduce the privileges of state industry.

The latest changes have been years in the making.

Even before Xi took power in 2012 in a once-a-decade leadership succession, a Cabinet think-tank and the World Bank issued a report that warned China faced the threat of steadily declining growth if it failed to rein in state industry.

An economic plan issued by the ruling party in 2013 promised to give market forces a decisive role for the first time in allocating resources.

Still, reform proposals have faced opposition from party factions that benefit from their ties to politically favoured industries and regulators who don’t want to see their status diminished, according to businesspeople and economists.

Foreign businesspeople welcomed Xi’s rise because he had served as party secretary in Zhejiang province, a centre for private business south of Shanghai, and was seen as favourable toward entrepreneurs. Since taking power, Xi has focused on tightening centralized party control, suggesting he had limited interest in reducing state power over the economy and society.

State industry has gone through repeated upheavals as the ruling party tries to make the economy more productive while retaining tools needed to achieve its political goals.

In the late 1990s, an estimated 30 to 35 million workers were laid off as state enterprises were turned into profit-oriented companies, spun off to private ownership or shut down. The state withdrew from manufacturing and other competitive fields to focus on areas such as banking, oil and gas and electric power that control access to resources.

In the next stage, the party spent heavily over the past decade to build up “national champions” in energy, finance and other fields. They benefit from monopolies, low-cost credit and other favours.

The helped to propel the rise of companies such as PetroChina Ltd., China Mobile Ltd. and Industrial & Commercial Bank of China Ltd. that are among the largest in their global industries. But it also prompted public anger at the wealth of state companies and complaints their costly subsidies and other privileges were a drag on the economy.