Question

How state-owned enterprises performed as well as private firms in China?

Answer 1

State-owned enterprises :-

The Communist Party of China (CPC) has been striving to gradually allow the markets to play a decisive role in resource allocation. The situation with China’s state-owned enterprises (SOE), however, is more complex than with the general economic picture.

In light of the changing global landscape and the Fourth Industrial Revolution, China is transitioning from an investment-driven export economy to an innovation-driven economy reliant on domestic consumption. The role of SOEs has become all the more important in these circumstances, as they have traditionally assisted the government in reforms - even though the new consumption-oriented economy requires a level of flexibility and responsiveness that publicly owned bodies generally lack.

China is home to 109 corporations listed on the Fortune Global 500 - but only 15% of those are privately owned. China’s SOEs are enormously bulky and therefore lack flexibility when responding to market demands.Forty years have passed since Deng Xiaoping embarked on the liberal reforms which generated an average GDP growth of 10% and transformed China into a global manufacturing powerhouse with considerable political influence.

SOEs are highly over-leveraged and structurally less efficient than their private peers. Stagnating growth throughout China’s public sector has led to a shrinkage in its overall asset holdings. SOEs are often criticised for abusing their preferential access to loans, and for lobbying for regulations which drive out competitive private companies. It is widely argued that the SOEs would not survive in an innovation-driven market environment without the perks they currently enjoy.

The inefficient management of government corporations has also worsened, thanks to a high turnover rate among executives sparked by President Xi’s anti-corruption campaign. On one hand, the companies are relieved of corrupt executives - but on the other, SOEs are left with management who lack a coherent strategy.

Private Firms:-

While this has been happening, China’s private sector - which has been revving up since the global financial crisis - is now serving as the main driver of China’s economic growth. The combination of numbers 60/70/80/90 are frequently used to describe the private sector's contribution to the Chinese economy: they contribute 60% of China’s GDP, and are responsible for 70% of innovation, 80% of urban employment and provide 90% of new jobs. Private wealth is also responsible for 70% of investment and 90% of exports. The portion of exports from private enterprises might diminish as SOEs undertake more infrastructure projects in countries involved in the Belt and Road Initiative (BRI), increasing their public stakes in China’s exports.

The success of China’s private technology sector is also worth noting. Huawei is leading the global 5G revolution and the company is eager to spread its innovation globally.

Despite the above-mentioned factors, the Chinese government is still keen on supporting SOEs and is committed to making them bigger, stronger and more efficient. This is particularly relevant to certain strategic sectors where government oversight is essential - specifically in defense, energy, telecom, aviation and railway systems. Conversely the state is encouraged to divest from other industries by decreasing its ownership.