CHINAMacroReporter

Why SOE Reform is So Tough

'...SOEs need to reform, because on one hand, many of them have achieved a lot for China. On the other hand, they've actually created quite a lot of harm, in particular in the areas of overcapacity but also in the areas of corruption we've talked about.'
by

|

CHINADebate

February 15, 2017
Why SOE Reform is So Tough

Malcolm Riddell: Okay. Ed, we were talking earlier about SOE reform, state-ownedenterprise reform. I was wondering if you could tell me what's happening now with that.

Ed Tse: As you know, Malcolm, the SOE was somewhat of a double-edged sword for the Chinese government for a long time. The SOEs have helped theChinese government drive a lot of changes in China, because as you know the SOEs are directly owned by the Chinese government.Essentially, each enterprise can carry out the orders from the Chinese government. For a long time, they have actually in a way created a lot of progress for China.

At the same time, the SOEs also have developed a number of major problems, all related to the governance or the lack of proper governance of these enterprises.Malcolm Riddell: What do you mean?

Ed Tse: What I mean is, in a "modern" enterprise, the governance usually carried out through a properly designed board of directors. That board, as you know, provides the checks and balance for the management, and to make sure that things are done in a proper way.

For many SOEs, certainly in the old days, there's no such concept.There's no such concept of a public board of directors, because the SOEs were directly owned by the state, either at the central level or at the local government level. Therefore, a lot of the directors were given directly from the SASAC, which is the state organization which is the caretaker of all the state assets. They could directly or command directions for theSOEs through the chairman, or the so-called general manager, or the CEOof the companies. From a governance standpoint, it took a long time for the SOEs to build proper governance.

Malcolm Riddell: If I understand correctly, the SOEs are also pretty independent of government orders. They're not quite as lockstep with government directives as they might be. Is that right?

Ed Tse: It depends on the sectors that the SOEs are in. If they're in more opensectors, open meaning less regulated, more competition, and so on, theSOEs need to compete with the competitors, and the competitors usually come from either the private sector and/or the multinationals. For those companies, they need to be very agile and to be very market-oriented. By definition, they are less interfered with the government.

On the other hand, as you know, in some other sectors where perhaps it's much more protected, much more monopolized, and in some casesSOEs are in sectors that are considered as national security sectors. In those sectors, certainly there is quite a bit of alignment, in fact in some cases significant alignment, between the enterprise behavior and the government policies.

Malcolm Riddell: I can certainly see that with national security, but let me give you an example. The local government officials don't always listen to the directives from Beijing. They go their own way a lot of times. My understanding is that an awful lot of SOEs do the same thing.

Ed Tse: That's true at the local levels. Certainly very true. In fact, as you know,Malcolm, that is a good cause for much of the overcapacity that we see across many sectors in China, is because many of the locally owned and locally controlled SOEs are trying to do their own things, and therefore there's a lot of repeated investment.

Malcolm Riddell: One of my favorite directives I ever saw from the NDRC was about copper smelting. I forget in which county. It was a directive to shut down a couple of underperforming copper smelters. The directive said specifically, "You can't just shut them down and then move them to another place and open them up again." I thought that gave the idea.

I understand at the local, but at the national level, can we really say that the heads of a lot of these SOEs, the ones that fall in between, not the ones that are competing hard and not the ones that are obviously a matter of national security, but do the ones that are in between sometimes thumb their noses at the directions from the center?

Ed Tse: Yeah, as you know, there's always the check and balance. How do you actually create the balance? On the one hand, the enterprise executives from these SOEs need to deliver value, deliver themselves, because they're measured by SASAC on commercial performance. At the sametime, in many cases, the government would also like them to deliver missions or certain things that is perhaps not entirely conversant.

Let's take, for example, companies in the construction industry. Ofcourse, companies need to create value by doing construction projects on a profitable basis, but nonetheless, as you also know, in some cases some of these infrastructure construction projects can be at least partially motivated by national priorities, for example, building a high speed rail. Does it make sense economically?

If you analyze this from a pure project-based feasibility standpoint, a lot 3of the high-speed rail links are not economically feasible, yet the Chinese government, in particular the SOEs who are involved in this effort,continue to build, and China is still building. It has high-speed rail across the entire country because the Chinese government think that actually beyond some simple analysis of the economic feasibility, there's a multiplier effect on the economic ramifications of having an expansive network of high-speed across all of China and even perhaps beyondChina. That's a state-level or government initiative together with some economic analysis. That's how some of the SOEs needed help.

Malcolm Riddell: We needed the same thing. President Eisenhower created the national highway system for the same kind of multiplier effect. I'm talking about something a little bit different. What I'm saying is, when you talk about governance, and if we consider that if we take the premise that SOEs just follow the directions from whatever area of central government they report to, then how and why is governance a problem at all?

Ed Tse: Governance is critical because on one hand the executives need to have a clear check and balance on the decisions that they make. Some of that has to be with respect to whether or not a certain investment is justified and is to the benefit of the enterprises. That's one function of the board.

The other function of the board is to make sure that there is enough,what's the word, transparency in the decision-making, because you don't want to end up with inappropriate behavior, and therefore inappropriate benefits for individuals, in particular for the senior people in the company. As you know, Malcolm, some of the SOEs are now known as a hotbed for corruption for the senior people. That's why [inaudible00:13:59] corporate governance are coming.

Malcolm Riddell: This is the point I'm getting at. This is the contradiction that I see. If we start with the idea that SOEs are controlled by the government, then we would assume that that means the executives in there take orders from the government and act accordingly. I don't think that's the way it works.We see resistance. We see corruption. We see all kinds of activities that are going on there. How can you put a system of governance in place if you're still taking orders from the central government?

Ed Tse: Right. When I said the government, the SOEs taking their orders from the government meaning if the government wanted to direct an enterprise ora bunch of enterprises in a certain direction, in theory the executives from the SOEs would need to follow or should follow. Indeed, I would say most if not all of them do follow, but in the process of these executives doing their everyday decisions, and perhaps in some cases if they need to make a couple of investments or engage in a certain kind of project and so on, at least in the past, many of the executives would probably get 4their hands into the [inaudible 00:15:35] and perhaps try to benefit through much of the incoming investment. All things happens. Following the direction of the government, from a policy standpoint, that happens.At the same time, corruption also happens.

Malcolm Riddell: Let me take this from a different point of view. Quite often, the CEO of a major state-owned enterprise will do that for a few years, and switch out to a ministry post, and then maybe do some provincial post, and back toan SOE. Really we've got the same crowd managing the SOEs as are in the government. They're all in the same pool. Is that accurate?

Ed Tse: That's pretty accurate, you're right. In a way, the people in government and the people who lead the SOEs are from the same pool, in a way theelites in the Communist Party. These are people who considered as pretty capable and actually have a way to manage their career through the Communist Party. Essentially, it's more or less the same pool of people, but as you know, there are some 800,000 members of the Communist Party, so it's a pretty big pool.

Malcolm Riddell: I'm not disagreeing with that. What I'm trying to clarify for our viewers is that what we have here is a very different system, very different structure,than what we have say in the West, where you have an independent enterprise that, if it's a public company, has public stock holders. It has responsibilities to them. It has a board that is meant to make independent decisions based on the best interest of the companies and the shareholders. Executives are beholden to the board, and when one of them leaves, he probably goes on to be an executive in another company,whereas in the system in China, we have a very deep pool of people,perhaps, who take on various roles in their careers both in government and in industry. It's a very different system than what we're used to here,and I think it's one of the things that makes the governance question particularly hard to understand.

Ed Tse: It is certainly very different than the so-called Western system. That's why the SOEs need to reform, because on one hand, many of them have achieved a lot for China. On the other hand, they've actually created quite a lot of harm, in particular in the areas of overcapacity but also in the areas of corruption we've talked about.

More

CHINAMacroReporter

February 20, 2021
‘UNDERSTANDING DECOUPLING: Macro Trends and Industry Impacts’
‘Comprehensive decoupling is no longer viewed as impossible: if the current trajectory of U.S. decoupling policies continues, a complete rupture would in fact be the most likely outcome. This prospect remains entirely plausible under the Biden administration.’
keep reading
February 20, 2021
‘Europe can’t stay neutral in US-China standoff’
‘China aims to create a world that is not safe for Europe — strategically, economically or ideologically. Xi is actively striving to undermine the stature of democracies in the global order. The more power China amasses, the less tolerant it will become with any government that won’t toe its line. China also represents a long-term economic threat to Europe — not merely because it is an advancing competitor in a global market economy, but because Beijing’s policies are designed to use and abuse that open world economy to eventually dominate it.
keep reading
February 20, 2021
‘Beat China: Targeted Decoupling and the Economic Long War'
‘The economy is the primary theater of our conflict with China. It is now clear that the U.S. and Chinese economies are too entangled, particularly in critical sectors such as medicine, defense, and technology.'
keep reading
February 18, 2021
'Like It Or Not, America Is Still A Superpower'
‘The twentieth century was littered with the carcasses of foreign leaders and governments that misjudged the United States, from Germany (twice) and Japan to the Soviet Union to Serbia to Iraq. Perhaps the Chinese, careful students of history that they are, will not make the mistake that others have made in misjudging the United States.’
keep reading
February 16, 2021
'Is China experiencing an advance of the state sector?'
‘The value-added produced by state-owned enterprises has usually been in the range of 25-30% of China’s GDP. And what’s really striking about those numbers is that they just haven’t changed very much over the past 25 years. The share of China’s economic output being produced by SOEs today, under Xi Jinping, is not significantly different than it was under Hu Jintao, or even in the later years of Jiang Zemin.’
keep reading
February 16, 2021
‘China Blocked Jack Ma’s Ant IPO After Investigation Revealed Likely Beneficiaries’
‘Behind layers of opaque investment vehicles that own stakes in Ant Financial are a coterie of well-connected Chinese power players, including some with links to political families that represent a potential challenge to President Xi and his inner circle. Those individuals, along with Mr. Ma and the company’s top managers, stood to pocket billions of dollars from a listing that would have valued the company at more than $300 billion.’
keep reading
February 14, 2021
How to Keep U.S.-Chinese Confrontation From Ending in Calamity
'The two countries need to consider something akin to the procedures and mechanisms that the United States and the Soviet Union put in place to govern their relations after the Cuban missile crisis—but in this case, without first going through the near-death experience of a barely avoided war.'
keep reading
February 14, 2021
The United States, China, and Taiwan: A Strategy to Prevent War
‘We believe that a crisis is building over Taiwan and that it is becoming the most dangerous flashpoint in the world for a possible war that involved the United States of America, China, and probably other major powers.'
keep reading
February 13, 2021
Why China Will Go Green - Really
‘To Communist Party leaders, greenery increasingly aligns with their economic and political interests. China, a populous country that is cruelly lacking in clean water and arable farmland, and which hates having to rely so heavily on imported energy, has a selfish interest in embracing what President Xi Jinping calls “ecological civilisation”.’
keep reading
February 11, 2021
'The Biden Team Wants to Transform the Economy. Really.'
‘Biden and his more activist advisers hope to modernize key industries and counter an economic threat from China, swiftly emerging as the world’s other superpower. “The package that they put together is the closest thing we’ve had to a broad industrial policy for generations, really,” says Scott Paul, the president of the Alliance for American Manufacturing.’
keep reading
February 10, 2021
‘What the ‘Hong Kong Narrative’ gets wrong'
‘For a significant cohort of the [“pro-democracy”] protesters, the more accurate label would be “anti-China activists.” The one thing that seems to unite them is not a love of democracy, but a hatred of China.'
keep reading
February 8, 2021
Why the Anglosphere sees eye to eye on China
‘Some of America’s European allies are very wary of what they fear will be a new cold war with China. By contrast, the US is getting more support from the UK, Australia and Canada.’
keep reading
February 7, 2021
' "Longer Telegram" | To Counter China’s Rise, the U.S. Should Focus on Xi'
A strategy that focuses more narrowly on Xi, rather than the CCP as a whole, presents a more achievable objective.'
keep reading
February 7, 2021
'The Sources of Soviet Conduct'
'The main element of any United States policy toward the Soviet Union must be that of a long-term, patient but firm and vigilant containment of Russian expansive tendencies.’
keep reading
February 7, 2021
'Remarks by President Biden on America's Place in the World'
“We’ll confront China’s economic abuses; counter its aggressive, coercive action; to push back on China’s attack on human rights, intellectual property, and global governance.”“But we are ready to work with Beijing when it’s in America’s interest to do so. We will compete from a position of strength by building back better at home, working with our allies and partners, renewing our role in international institutions, and reclaiming our credibility and moral authority, much of which has been lost.”“That’s why we’ve moved quickly to begin restoring American engagement internationally and earn back our leadership position, to catalyze global action on shared challenges.”
keep reading
February 7, 2021
'In Search of Today’s George Kennan'
‘Kennan provided a framework to break through the bitter divide between those who believed America should return to its prewar isolationism, and those who believed the USSR was itching for a dramatic showdown with the capitalist west.’
keep reading
February 7, 2021
' "Longer Telegram" Sets Off Fierce Global Debate'
'The fierce global debate set off this week by a thought-provoking paper - “TheLonger Telegram: Toward a New American China Strategy” – has underscored the urgency and difficulty of framing a durable and actionable U.S. approach to China as the country grows more authoritarian, more self-confident and more globally assertive.'
keep reading
February 7, 2021
The 'Longer Telegram' & Its Discontents
Why everyone wants to be George Kennan‘In 1947 X penned his history-changing “Sources of Soviet Conduct” in Foreign Affairs,’ wrote Edward Luce in the Financial Times in 2018.‘The piece, which crystallised America’s cold war containment strategy, was the making of George F Kennan’s life-long reputation as a master of geopolitics.’‘ As the architect of a doctrine that won the cold war.’
keep reading
February 7, 2021
'Brookings experts analyze President Biden’s first foreign policy speech: Focus China'
'To respond effectively, Biden argued, America will need to rebuild leverage, e.g., by pursuing domestic renewal, investing in alliances, reestablishing U.S. leadership on the world stage, and restoring American authority in advocating for universal values.'
keep reading
February 7, 2021
'Why the ‘Longer Telegram’ Won’t Solve the China Challenge'
‘Perhaps the most problematic aspect of the 'Longer Telegram's' emphasis on Xi—“All U.S. political and policy responses to China therefore should be focused through the principal lens of Xi himself”—is the author’s conclusion that Washington should be seeking to escape from, and even try to effect the removal of, Xi’s leadership because that could restore U.S.-China relations to a potentially constructive path: “its pre-2013 path—i.e., the pre-Xi strategic status quo.” ’
keep reading
February 4, 2021
Why Beijing Is Bringing Big Tech to Heel
‘Beijing’s recent antitrust efforts are motivated less by worries about the tyrannical nature of monopoly power than by the belief that China’s tech giants are insufficiently committed to promoting the goal advanced by the Chinese Communist Party (CCP) of transformative technological innovation—and thus may be undermining the effectiveness of Chinese industrial policy.’
keep reading
February 3, 2021
'Secretary of State Antony Blinken on U.S. Policy Toward China'
‘There’s no doubt that China poses the most significant challenge to us of any other country, but it’s a complicated one.’
keep reading
February 3, 2021
'Burma’s Coup and Biden’s Choice'
‘The top U.S. priority in Asia is limiting Beijing’s ability to control independent states like Burma, which is strategically situated in the Indo-Pacific. The U.S. response needs to take into account China’s regional designs.’
keep reading
February 3, 2021
'Myanmar, Burma and why the different names matter'
‘Unlike most of the world, the U.S. government still officially uses "Burma." '
keep reading
February 3, 2021
'Coup a further complication for tricky Myanmar-China ties'
‘Even if China played no role at all in ousting Suu Kyi, Beijing is likely to gain still greater sway over the country.’
keep reading
February 3, 2021
‘Beijing Won’t Let America “Compartmentalize” Climate Change'
‘‘You want China to take action on climate change?" asks Xi Jinping. "Let’s talk about what you’re going to give to get it.’’
keep reading
February 3, 2021
Burma: At the Center of the U.S.-China Competition
In today’s issue: 1. China Lays Out Its Position / 2. The U.S. Lays Out Its Position / 3. Burma: At the Center of the U.S.-China Competition / 4. Burma or Myanmar?
keep reading
February 3, 2021
'A Conversation with Politburo Member Yang Jiechi'
‘History and reality have shown time and again that these issues concern China's core interests, national dignity, as well as the sentiments of its 1.4 billion people. They constitute a red line that must not be crossed.’
keep reading
February 3, 2021
'National Security Advisor Jake Sullivan on U.S. Policy Toward China'
‘Being prepared to act as well to impose costs for what China is doing in Xinjiang, what it’s doing in Hong Kong, for the bellicosity of threats that it is projecting towards Taiwan.’
keep reading
February 3, 2021
'Coup Puts Myanmar at the Center of the U.S.-China Clash'
‘Chinese oil and gas pipelines snake across Myanmar from China’s landlocked Yunnan province to the Bay of Bengal—a route that Beijing wants to transform into a broader economic corridor with road and rail connections.’
keep reading
February 3, 2021
'Biden's whole-of-National Security Council China strategy'
'National security adviser Jake Sullivan is personally focused on China as a priority, building capacity across departments and agencies and running processes that break down old silos between foreign and domestic policy.'
keep reading
January 31, 2021
'Biden’s Nightmare May Be China'
‘The coming years represent the greatest risks since I began covering U.S.-China relations in the 1980s, partly because Xi is an overconfident, risk-taking bully who believes that the United States is in decline.’
keep reading
January 31, 2021
Opinion | Marco Rubio: 'China is exploiting U.S. capital markets and workers. Here's what Biden should do.'
‘China can finance its industrial ambitions with the deepest, most liquid capital markets in the world — our own.’
keep reading
January 31, 2021
The UK Stands Up, the U.S. Not So Much
“We have honored our profound ties of history and friendship with the people of Hong Kong, and we have stood up for freedom and autonomy—values both the U.K. and Hong Kong hold dear.” British Prime Minister Boris Johnson
keep reading
January 31, 2021
'U.S.-China Capital Flows Vastly Underestimated'
‘And yet, debates around US-China passive securities investment suffer from shortcomings similar to those inherent in the early debates about US-China bilateral FDI and VC: official data do not provide a clear picture for policymakers to understand the scope and patterns of two-way investment flows and stocks.’
keep reading
January 31, 2021
'Why U.S. Securities Investment in China is Vastly Underestimated'
‘The conduits of US securities investment in China that are obscured or ignored in the US Treasury International Capital (TIC) dataset constitute a majority of all holdings, so these figures vastly underestimate the true scope at the end of 2020.’
keep reading

Heading

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.