Between the market and the party, are China’s reforms moving in the right direction?

Michael Clauss says concerns about increasing Communist Party influence over state-owned enterprises, despite hopes of further liberalisation, raise questions about decision-making, bottom lines and stakeholders’ roles

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A couple carry bags along the main shopping street in Shanghai last November. More market rather than less is key to sustaining China’s economic growth in the long term. Photo: AFP

Published: 11:46am, 27 Sep 2017Updated: 7:03pm, 27 Sep 2017

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.

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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.

China's President Xi Jinping arrives at a ceremony to commemorate the 90th anniversary of the founding of the People's Liberation Army, at the Great Hall of the People in Beijing, on August 1. Amendments to the corporate constitution of state-owned enterprises leave little doubt that the party is retaking full control. Photo: AFP

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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.

A woman rides past a billboard featuring Deng Xiaoping calling for modern development in October 2003, in Harbin, Heilongjiang province. Economic reforms since 1978 have helped market forces take huge strides towards becoming the dominant factor in the Chinese economy. Photo: AFP

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.