Sheng Hong

Why do we need a second round of reforms of State-owned enterprises (SOEs)? Recent incidents, such as SOEs winning prime real estate auctions and avoiding turning their profits over to the government, have shown a disturbing trend: The State advances and the people retreat. So how can we reposition SOEs to avoid this?

The goal of the reforms in the 1980s was very different. Back then, the reform focused on turning SOEs into real enterprises rather than reform itself as all enterprises around the country were basically State-owned at that time.

Thirty years later, we have successfully carried out market reforms and privatization. More than 70 percent of business in China is now private. So what should the role of SOEs be in a modern market economy?

Their role should be to provide products that are halfway between private goods and public ones. The first should be provided by the market, the second by the government, and SOEs can cover those in-between. Some of these can be outsourced to private firms by the government, such as road construction. SOEs are needed, therefore, for two types of industries: Those that require some State control of the process, such as military development which demands information security, and those which integrate public and private products.

But today the role of SOEs goes far beyond this. There are still many unfair competitors in the market. SOEs, especially those owned by the central government, are given many monopolies and other privileges.

They often evade paying land taxes, a loss of approximately 1 trillion yuan ($149 billion) a year for the government. They also avoid paying taxes on natural resources, such as one SOE which avoided paying 23 billion yuan in mining tax in 2009. They refuse to turn over their profits to the State, instead keeping them for themselves, and the government even bears huge losses for some SOEs.

Studies have found that the average income tax rate paid by SOEs is 10 percent, compared to 24 percent for public enterprises. Their monopolies allow them to charge unfair rates.

For example, pre-tax petrol prices in China, have been found to be higher than in other major developed countries, especially after the hike in 2008.

Even with all these advantages, SOEs are markedly less efficient than private enterprises. Given similar assets, private enterprises outperform SOEs by 96 percent in terms of industrial added value, and their profits exceed those of SOEs by 39 percent.

The advance of the State is also damaging the market economy and the system of property rights. There's the problem of expanded monopolies, such as in the oil industry. Oligopolies have even carried out improper mergers. For instance, the telecommunication giants merged in 2008 without undergoing the proper checks required under the new Anti-Monopoly Law, which was issued at the same time. They exclude competitors at the expense of public interests, like the Beijing subway forbidding newsstands.

SOEs also directly pressure legislators, introduce policies, or use their executive powers to exclude competitors, as the public utilities firms have done. They use their existing monopolies to extend their reach and drive out competition, such as by threatening cities with the withdrawal of services in order to obtain new franchises. Altogether, these actions pose a severe danger to the market economy and property rights.[Page]

Our goal in a second round of reforms should be to standardize the role of SOEs, as has been outlined above.

Monopoly industries are opportunities for profit, which will only make the problems worse.  SOEs must withdraw from all profitable areas and define themselves as "non-profit institutions." At the same time, we should turn "State-owned" into "public," making them closer to government institutions rather than businesses.

SOE reform needs to break the monopolies, force SOEs to pay their taxes in full, oppose the control of industry by insiders and special interests, closely monitor the wages and bonuses paid within SOEs, reshape the management system of national assets and establish a proper governance system for SOEs, and ensure that the State retreats and the people advance.

This can continue the great cause of reform and opening-up.