November 15, 2013

China will be attempting major reform of State Enterprises

On Friday, more details emerged on what exactly Beijing’s top leaders approved during their conference, and the pledged reforms are much meatier and potentially more powerful than anything previously suggested, and tackle some of the worst ills of the economy.

Most notably, there is finally talk about reforming China’s dominant state-owned enterprises, or SOEs. These behemoths suck up the nation’s resources and crowd out the private sector, though they are bloated, inefficient and hamper the development of the economy. Now Xi is planning to do something about that. Beijing pledged to end some monopolies, improve SOE management and allow the private sector to invest in projects with SOEs. Such steps could make SOEs more competitive and allow greater scope for more productive private enterprise. Xi also plans to liberalize prices on commodities like water and natural gas, as well as in transport and telecom; speed deregulation of interest rates and capital flows; reduce curbs on foreign investment; and allow private investors to set up small banks. All of this will expand the role of the private sector in the economy and permit resources to be allocated more intelligently.

What remains to be seen is how quickly these announced reforms will become reality, and how far they will really go. Some of this stuff has been talked about for a while – such as financial deregulation and market opening – but the pace of actual change has been glacial. In other areas, such as SOE reform, it is uncertain right now how much power the state is really willing to cede to the market and private enterprise.

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