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China's Economy - Reform

By 2020 state-owned enterprises (SOEs) were set to change radically. A new large-scale reorganization was begining, and it could revolutionize the efficiency of the sector and boost overall national growth. The quantity of administrative-guideline documents concerning the deepening of SOE reform, with the new theme of mixed-ownership restructuring (MOR), has been overwhelming. The high number of documents might indicate this is one of the most important initiatives in the history of Chinese SOE reform.

The recent economic slowdown has led to debates on whether China can continue its economic growth or if the country is heading toward stagflation. One thing which seems obvious is that China is currently facing more domestic and global challenges than it has at any other time in the past 40 years. Deepening the reform of SOEs is a clear signal that the Chinese government is dedicated to the improvement of its market economy. The MOR initiative aims to have shareholders from all backgrounds, including state, private and foreign shareholders, invest in SOEs to reach a balanced share-holding structure and board representation.

Such a magnitude will facilitate major socioeconomic transformation and drive change in the industrial competitive landscape. Productivity adjustments at many large companies over a short period of time will have a very positive impact on economic growth and the improvement of the economic environment. China's economic reform has been cautiously advancing in a gradual, long-term trial-and-error process.

MOR will refocus government responsibility from the management of people, businesses and assets to the management of capital. This will empower boards to make quicker decisions based on commercial principles and, as a result, will improve productivity and create better returns for state capital. More fundamental changes would come, particularly in competitive industries where the government woulf be more willing to give up control: consumer goods, food and beverages, pharmaceuticals and medical devices, TMT (telecom, media and technology), transportation and logistics, clean energy, retail and distribution, and business services.

China's export-dependent growth model has served it well, but that model has reached its limits. Domestic consumption could fuel future growth but it will take many years -- even decades -- to achieve the fundamental economic reforms necessary, including provision of a comprehensive social safety net, achieving increased rural incomes, developing a middle-class that extends beyond the major cities, and building a much larger services sector. Increasing productivity through competition and financial sector reform could help China avoid economic stagnation in the medium term. While Chinese policymakers are aware of the need for such reforms, there is some question as to whether they have the political ability and will necessary to realize such fundamental changes. When the US faced the need to devolve away from a heavy reliance on exports in the 1920s, the transition took twenty years and was not smooth.

All big Chinese companies owned by the central government will be registered as limited liability companies or joint-stock firms by the end of the year. Beijing says the move will make its state-owned giants more nimble, efficient and modern. About 90 percent of firms owned by the central government and local governments have already completed the process, the cabinet said in a statement 26 July 2017. However, the statement did not say whether private capital will be allowed to invest in the state giants or whether they will list shares.

The central government hoped its reforms will revive China's bloated and debt-ridden state-owned sector and create "bigger and stronger" conglomerates capable of competing on the global stage. Part of the reforms will involve shutting the most uncompetitive firms. The ownership structure of some state-owned enterprises or SOEs will also be modernised.

In 1978, two years after Mao Zedong's death, Deng Xiaoping announced the "opening up and reform" strategy that introduced principles of capitalistic economy into the Chinese system and allowed foreign investment to enter the Chinese market. In 1993, then premier Zhu Rongji endorsed the concept of "socialist market economy." The meeting created momentum for deeper liberalization of sectors that had previously been firmly in the hands of the state.

Since 1979, China has been engaged in an effort to reform its economy. The Chinese leadership has adopted a pragmatic perspective on many political and socioeconomic problems, and has sharply reduced the role of ideology in economic policy. Political and social stability, economic productivity, and public welfare are considered paramount. In these years, the government has emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government also has focused on foreign trade as a major vehicle for economic growth.

In the 1980s, China tried to combine central planning with market-oriented reforms to increase productivity, living standards, and technological quality without exacerbating inflation, unemployment, and budget deficits. China pursued agricultural reforms, dismantling the commune system and introducing a household-based system that provided peasants greater decisionmaking in agricultural activities. The government also encouraged nonagricultural activities such as village enterprises in rural areas, and promoted more self-management for state-owned enterprises, increased competition in the marketplace, and facilitated direct contact between Chinese and foreign trading enterprises. China also relied more upon foreign financing and imports.

During the 1980s, these reforms led to average annual rates of growth of 10% in agricultural and industrial output. Rural per capita real income doubled. China became self-sufficient in grain production; rural industries accounted for 23% of agricultural output, helping absorb surplus labor in the countryside. The variety of light industrial and consumer goods increased. Reforms began in the fiscal, financial, banking, price setting, and labor systems.

By the late 1980s, however, the economy had become overheated with increasing rates of inflation. At the end of 1988, in reaction to a surge of inflation caused by accelerated price reforms, the leadership introduced an austerity program.

China's economy regained momentum in the early 1990s. During a visit to southern China in early 1992, China's paramount leader at the time Deng Xiaoping made a series of political pronouncements designed to reinvigorate the process of economic reform. The 14th Party Congress later in the year backed Deng's renewed push for market reforms, stating that China's key task in the 1990s was to create a "socialist market economy." The 10-year development plan for the 1990s stressed continuity in the political system with bolder reform of the economic system.

During 1993, output and prices were accelerating, investment outside the state budget was soaring, and economic expansion was fueled by the introduction of more than 2,000 special economic zones (SEZs) and the influx of foreign capital that the SEZs facilitated. Fearing hyperinflation, Chinese authorities called in speculative loans, raised interest rates, and re-evaluated investment projects. The growth rate was thus tempered, and the inflation rate dropped from over 17% in 1995 to 8% in early 1996. In 1996, the Chinese economy continued to grow at a rapid pace, at about 9.5%, accompanied by low inflation. The economy slowed for the next 3 years, with official growth of 8.9% in 1997, 7.8% in 1998 and 7.1% for 1999. The year 2000 showed a modest reversal of this trend. Gross domestic product in 2000 grew officially at 8.0% that year. Despite China's impressive economic development during the previous two decades, reforming the state enterprise sector and modernizing the banking system remained major hurdles. During the 15th National Congress of the Chinese Communist Party that met in September 1997, President Jiang Zemin announced plans to sell, merge, or close the vast majority of SOEs in his call for increased "non-public ownership." The 9th National People's Congress endorsed the plans at its March 1998 session.

The November 2013 Third Plenary Session of the 18th CPC Central Committee, commonly referred to as the Third Plenum, was the third party meeting since Xi Jinping was named Communist Party secretary in November 2012. Third plenums are seen as important political gatherings where the new leadership can map out new policy directions, and set the pace for future reforms.

Chinese leaders are working on a combination of reform proposals that will help push China into the next phase of its economic growth: one less reliant on heavy industry, government investment and infrastructure projects. President Xi Jinping has talked about the need to realize China's rejuvenation, and China's dream. Analysts believe that together with financial and economic measures to rein in the power of vested interests within the state-owned sector, Chinese leaders will need to tackle issues of social justice and income inequality.

China announced a new wave of wide-ranging economic reforms that could put unprecedented pressure on the country’s state-owned enterprises and perhaps end decades of dominance in some sectors. Among the 60 objectives outlined in the report of the Third Plenum, economic reforms were the most prominent. Some of those provisions include a push for more transparency from state-run companies, more openness in their reports and budgets. The reform plan also addresses things such as the pay managers at state-owned companies make and the need to make them more market based. State-owned enterprises will also be asked to give more money from their revenues back to the government. According to the plan, the government will remove obstacles to foreign investment in the services sector, including banking and finance. The Chinese banking system is monopolized by large state-owned institutions that favor funding state-owned enterprises instead of smaller private businesses. Interest rates are kept low, which limits Chinese savers' options for investment and consumption. To spur more spending from consumers, Chinese leaders have talked about diversifying the banking sector and relaxing restrictions on deposit interest rates.

The taxation system in China was reorganized in the 1990s by then premier Zhu Rongji to redistribute tax revenues in favor of the central government. At the time, the move was seen as an attempt to avoid local corruption, but analysts agree that the system has now run its course. Local governments are strapped for cash. In recent years they have resorted to land sales and massive amounts of credit for their operational revenues. Tax reform will attempt to redistribute fiscal revenues to local governments.

Land collectivization in the 1950s took farmers' property rights to the land and transferred them to communes, managed by local party officials. Such a set-up largely still exists in the Chinese countryside, and allows local governments to arbitrarily sell farmers' land. Land reform would grant farmers more protection by allowing them to sell rural land and properties at market value.

Welfare reform includes the creation of a pension system, and the extension of health care and education benefits to rural areas and migrant workers. Improvement of the current welfare system is one of the most immediate demands of China's citizens. Analysts agree that by strengthening China's welfare safety net, the government would also be encouraging Chinese to consume more instead of saving.

Internal migration in China has often been dubbed the largest migration in history. Hundreds of millions decide to leave the countryside to look for jobs in cities every year. But once they leave their hometowns, migrants lose their rights to welfare coverage and are subjected to discriminatory policies, including restrictions on jobs, housing and education. Analysts say that an overhaul of the household registration system - or hukou - which links citizens to their place of origin, is a key step to adjust social inequality.

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Page last modified: 12-01-2020 19:08:42 ZULU