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Home arrow Political science arrow Dancing with the devil : the political economy of privatization in China
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Reversal or Moderation of Privatization?

To be sure, what has been stated in law should not be taken at its face value. Indeed, in the wake of the enactment of the Real Right Law there was a heated debate in Chinese mass media and academia about whether the massive privatization at the turn of the century was followed by a reversing trend.11 The debate revolved around the notion of guojin mintui, or “the state advances, the private sector retreats.”[1] [2] It was concerned with two major arguments by the proponents of the notion:[3] (a) the government increased its policy bias toward the remaining public sector in terms of regulation and investment; and (b) there were concrete attempts by the government to reclaim territories already ceded to private capital.

Despite a gradual lifting of entry restrictions on sectors that until recently were exclusively reserved for state-owned companies, private and foreign companies have continued to face formidable de facto barriers, especially in such forms as ad hoc restrictions on the scope of business,[4] granting of government contracts, and preferential regulatory treatment of the SOEs that have survived privatization (Naughton and Tsai 2015). During the 2008 global financial crisis, the central authority initiated a 4-trillion-yuan stimulation program of infrastructural investment. The bulk of the investment is widely claimed to have been channeled into state-owned companies.[5] A result of this and other types of financial transfusion is an expansion of many remaining state-owned companies not only in their traditional domains of operation but also in some sectors (such as real estate development) where competition between SOEs and private and foreign enterprises has been limited.

Indeed, a noticeable phenomenon in recent years is the rise of very large state- owned or controlled enterprise groups or multibusiness conglomerates. Mostly consolidated and reorganized under the purview of the State Assets Supervision and Administration Commission (SASAC) since 2003, many of these companies have experienced significant expansion through capital injection from the state and with funds raised from public listing on domestic and international stock markets. In 1997 only two mainland Chinese companies appeared on the list of the Fortune Global 500. Both of them were state-owned companies. In 2007 the number increased to eighteen, all of which had a 50% or higher equity share held by the state. In 2016 the number jumped to ninety-eight, eighty (or 82%) of which were state-owned or controlled.[6]

A concurrent development is that there have been several widely publicized incidences where privately owned companies were gobbled up by state- owned companies or lost their control rights to the state. Examples include the acquisition of Rizhao Steel Holding Group (a profitable privately owned company) by Shandong Iron and Steel Group (an SOE with operating losses) in 2009, the transfer of private controlling stake in Mengniu Dairy (then China’s largest private dairy company) to COFCO (a state-owned conglomerate) in 2009, and the closure of several hundred small, privately operated coal mines and the takeover of some larger ones by state-owned companies in Shanxi in 2009-2010.[7]

What these developments clearly show is that the state has by no means taken a passive attitude toward the decline of public ownership and, wherever possible, has indeed tried to retain, reinforce, or even expand it. While it is evident that the remaining SOEs have received massive regulatory and financial support from the state, incidences of the state’s reclaiming lost territories seem to have been limited. Some scholars have questioned the overall magnitude of the alleged reversal effect of recent state actions on China’s ownership structure. Based on a comprehensive analysis of official statistical data, for example, Hu Angang of the Chinese Academy of Sciences finds no evidence of any substantial change in the shares accounted for by public enterprises in

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terms of a variety of economic indicators in the industrial sector.[8] This finding is echoed in a data analysis on assets, GDP, and employment, conducted by Pei Changhong (2014), director of the Institute of Economics of the Chinese Academy of Social Sciences. An equally relevant question is whether the state has been able to rebuild and increase its ability to rely on the public sector for addressing the revenue and employment imperatives, which this book argues was fundamentally related to the massive ownership restructuring around the turn of the century.

In a recent study Lardy (2014) argues that the Chinese government’s highly publicized attempt during the Hu-Wen era (2002-2012) to create so- called national champions via the SASAC and various industrial policies has been unsuccessful. The return on assets among centrally owned/controlled SOEs has plummeted since 2007 (whenguojin mintui was about to become a contentious issue), raising questions about the sustainability of their further expansion.[9] As I will show later in this chapter and in chapter 3, the shares of public sector contribution to employment and government revenue have significantly declined since the mid-1990s. Although the pace of change has moderated in the past decade, the overall trend of erosion seems to have continued. A full analysis of what influences the relative significance between the public sector and the private sector in the postprivatization era is beyond the scope of this book. The focus of my study is instead on how and why the role of public enterprises in the economy experienced substantial shrinkage during the three post-Mao decades ending in 2007, when the enactment of the Real Right Law represented a pivotal landmark in the development of institutional protection for private ownership. This periodization notwithstanding, I will further argue and show in chapter 7 that the same analytic logic for explaining what led to the erosion of public ownership before 1997 as well as the massive privatization around the turn of the century also applies to the analysis of the behavior of political actors in the postprivatization era.

  • [1] A collection of contending views can be found at http://www.aisixiang.com/data/related-51767.html. Parallel to this debate is a growing Western literature on “state capitalism” in China (e.g., Hsueh2011, 2016; Naughton and Tsai 2015). See Lardy 2014 for a critique.
  • [2] According to an article published in a CCP-run magazine and reposted at the website of theSASAC (http://www.sasac.gov.cn/n1180/n1271/n20515/n2697206/15065063.html), this notion firstappeared in 2001, when massive privatization was still underway. It gained much wider currency duringand after the global financial crisis, especially in 2009-2010.
  • [3] A related (albeit less contentious) issue is whether government planning has made a comeback in thepostprivatization era and how it has affected the roles of SOEs and private business (Naughton 2013).
  • [4] Lardy (2014) argues that private enterprises face more restrictions in some service sectors (e.g.,financial services and telecommunications) than in industrial sectors.
  • [5] According to Wu Jinglian, a prominent Chinese economist, such bias led to an overflow of investment in SOEs (especially those under the SASAC) such that many of them channeled the funds to thereal estate sector (http://www.cfi.cn/p20140421000944.html).
  • [6] Annual information about the Fortune Global 500 is available at http://fortune.com/rankings/.
  • [7] A sample of Western media reports on these incidences can be found at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_ZaNgSyZNv8, http://online.wsj.com/news/articles/SB124684730489898749, and http://www.ft.com/cms/s/0/cibb90ce-7ic0-iie0-9adf-00i44feabdc0.html.
  • [8] It is interesting that Hu’s argument was presented in an article posted on the CCP’s official website(http ://theory.people.com.cn/n/20i 2/0716/c2i79 05-18 5279 67.html).
  • [9] A report produced by the Unirule Institute of Economics (UIE 2011), a private think tank, claimsthat, net of implicit subsidies, the profit of SOEs was negative during 2001-2009. It nonetheless opinesthat the concurrent reinforcement of the monopoly positions of SOEs in select economic sectors represents a structural form of guojin mintui.
 
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