Take China’s SOEs out of local government control to halt the zombie firm epidemic
Winston Mok says management of state-owned enterprises should never have been decentralised, as local bosses’ reckless pursuit of growth over profitability lies behind the malaise
While fiscal expansion in Japan created bridges to nowhere, it resulted in zombie SOEs in China. So state-owned enterprise reform may be back as a priority for Beijing. While the 100-odd central state-owned giants present problems for the overall economy, they are usually quite profitable, given their market power. The zombies are mostly among the 100,000 regional SOEs.
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This regional SOE problem is rooted in China’s decentralised economic governance, which sees local governments pitted against each other. Such rivalry is a double-edged sword. While interregional competition has been an engine of China’s economic dynamism, it has also caused much of its economic malaise – overcapacity, pollution and high local government debt, for example.
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China’s local governments are supposed to exercise oversight of SOEs in their care. But local cadres often hijack the firms for their own agendas – as they are primarily measured on economic growth, not SOE profitability – and often push for overinvestment, thus destroying economic value and creating zombie SOEs.
What is really needed is a transformation of the economic roles of local governments; they should not be entrusted with supervising SOEs. Their push for SOE expansion, regardless of economic returns, in a dysfunctional interregional competition, has created overcapacity in many industries.
More than local SOEs, it is their local bosses that need to be reined in. Local cadres have used SOEs as a key instrument in their rivalry. Yet, despite talk of separating SOEs from local governments, the two remain entangled.
SOEs and local governments should be under two separate chains of command, insulated from each other
Provincial or municipal state-asset management companies should not report to local cadres, but only to Beijing, to shield them from local interference. In this way, SOEs may perform much better – under a system like Singapore’s Temasek-style governance, free from local political influence. SOEs and local governments should be under two separate chains of command, insulated from each other.
