Private and State Owned Enterprise – Business Dynamics in China

 

Swedish Entrepreneurship Forum CEO Johan Eklund, welcomed the audience to a seminar presenting new and controversial research on private and state owned enterprise in China. Christer Ljungwall, Head of Office of Science and Innovation, Swedish Agency for Growth Policy Analysis in Beijing gave a short introduction to the topic. He has authored a book on Chinese private enterprise and underlined the importance these companies hold in both number, regarding contribution to GDP, innovation and source of employment. However, being a private enterprise in China is not easy.

– If you have a private business you are operating the complex maze which is the Chinese economy. The private enterprises face systematic problems such as discrimination in favor of state owned companies as well as management issues and problems with access to liquidity. In real economic terms there are great limitations on private enterprises.

Christer Ljungwall

Ljungwall emphasized the need for policy to bring market forces in play.

– China needs to allow for competition.

 

The Political Economy of the Chinese Private Sector

Next on stage, Professor Feng Xingyuan, Chinese Academy of Social Sciences shared new research on the political economy of private sector development in China with the audience. Professor Feng started out setting the scene.

– China is the world’s second largest economic power in terms of GDP, but it’s still backward and poor. The Communist Party of China as grown more confident, almost arrogant, in domestic and international affairs, hoping to create a “new Chinese dream” – rejuvenation of China, economic prosperity and happiness for the people.

Feng is not very impressed with the Party’s “new dream” – it’s a world for losers, he said.  Only through reform can China make use of its potential and resources. Entrepreneurs are instrumental to that development, bringing innovation and efficiency into the system. He also discarded criticism from people like Paul Krugman who has written that the Chinese miracle doesn’t really exist. This is not true, if you look at the data you see that total factor productivity has increased dramatically and we’ve seen and enormous technical progress since the early 90’s, Feng said.

Xingyuan Feng

Feng also pointed out that businessmen/entrepreneurs historically have low status in China. But, he added, the Chinese culture is actually pro-business and it has become evident when Chinese society has opened up since 78.

-In the last decades, we’ve seen a re-emergence of enterprise in China and a huge raise in entrepreneurs.

According to Feng, the tax burden in China is too high. We’re at the top, second only to France on the “tax misery index” in the world, he said. Despite this, the professor was optimistic about the future. Given peace, China will continue to rise and the private sector will grow if some reform can happen, Feng said. Chinese business is becoming more sophisticated and competitive.

Kristina Sandklef, China expert, pointed out that it is not clear-cut what a private enterprise is in a Chinese context, Huawai, for example, has been criticized for not being transparent when it comes to its owner structure- they say that they are owned by their employees but they have not actually shown that that’s true. According to Sandklef, Chinese private enterprises face challenges with market access and capital as well as structural problems which hinder growth.

– An easy way for China to increase growth would be to get rid of the red tape.

Kristina Sandklef

Ultimately it’s in the Chinese government’s interest to make life easier for the private sector, Sandklef thought.

– The legitimacy of the Party rests on continuous growth so it’s likely they will continue to reform the market.

Birgitta Ed, partner and senior advisor Six Year Plan, shared her experience of running business in China as well as being an advisor to Chinese companies. She said that the Chinese system is going through huge changes and the question is whether it will end up being a “free market society”. She also thought it impossible to discuss private enterprise without discussing the political system; they are too closely connected and impossible to distinguish between.

Birgitta Ed

– What faces companies coming to China? They need people to make relations with the system in order to make business.

On a very practical level, Ed has faced problems such as complete internet failure the past six months, a serious problem for any foreign business trying to operate.

– It simply doesn’t work. China has serious problems with the free flow of information and the problem of transparency that entails. This is hugely problematic for business.

In the end, we don’t have a choice, Ed said. Welcome to the new world where business and politics are a melting pot. She stressed the need to figure out how to meet the Chinese business culture from a European and US point of view.

– EU and USA have been very vague on China and there is a huge discussion that hasn’t yet happened. It cannot be avoided; we need to figure out how to make business with China.

Panel 1 Privat sektor

State Owned Enterprise in China

Sheng Hong, Professor Unirule Institute of Economics, spoke about a growing tendency since 2007 in China known as ”guo jin min tui – the state advances, the private sector retreats”.

– There is a big controversy in China about state-owned enterprises. Some want the SOEs to get even more power while others want the SOE-monopoly to diminish to make way for private enterprises, Sheng said.

Sheng pointed out that the average return of equity between the years 2001-2009 by the SOEs was 8.2 percent while private enterprises had 12.9 percent. Moreover, Sheng revealed that the performance of SOEs is not the real performance because the SOEs receive privileges that the private enterprises do not. For example, the rent of industrial land is considerably lower for the SOEs as well as oil prices and the tax burden is lower. Also, the average wage for SOE employees is significantly higher. This shows that SOEs are not only inefficient, but the market is unfair. The monopolistic control in many different industries has risen since 2002, Sheng said.

Hong Sheng

– There is a constant exchange between high-level managers of SOEs and government officials, creating a ”revolving door” system of mixed loyalties which enables lobbying in government organisations. Government officials enter SOEs in pursuit of economic gain while SOE executives enter the government for policies and resources.

Sheng wants to design a short-term reform plan for SOEs with two major objectives, 1) break the SOE-monopoly over bureaucratic interests, 2) regulate the conducts of SOEs. These reforms would make it possible to create a more competitive playing field, improve economic efficiency and promote social justice.

– The ultimate goals of the reform are to transform SOEs into non-profit public enterprises and to establish a constitutional framework for state-owned assets. State-owned enterprises have to gradually retreat from profit-making activities, Sheng said.

 

Börje Ljunggren, former Swedish Ambassador to China, expressed gratitude for Sheng and Feng’s important work about Chinese private and state-owned enterprises. He said that profits made in the SOEs are not used to finance the public sector, hospitals and schools for example. Ljunggren thinks corruption is one of the biggest issues in the Chinese market and that competition between private enterprises and SOEs is far from just. The financial sector desperately needs reform.

Börje Ljunggren

– The private sector has more potential to develop innovations to lift the Chinese economy, than do the SOEs, Ljunggren thought.

According to Ljunggren, the ultimate goal of the Chinese government is to remain in power, and it is done by controlling and investing in state-owned enterprises. The involvement of the party in the business market has increased rather than decreased in the last couple of years. However, Ljunggren believes that the party will be in deep trouble if they don´t invest more in the private sector, given the downward pressure the Chinese economy is under.

 

Sylvia Schwaag Serger also thanked the authors for their courageous, daring and controversial work. She pointed out that China last two leaders, Xi Jinping and Hu Jintao, both have proclaimed that innovations lead to a great society. Schwaag Serger said that SOEs get 80 percent of the financial investments for high tech firms and that the state expects the SOEs to develop high tech innovations. This expectation was not shared by Schwaag Serger who thinks innovations are better generated in private enterprises. She took the Chinese equivalent to Uber, Yongche, as an example of a successful private enterprise without funding from the state.

Sylvia Schwaag Serger

– The Chinese government is channelling their funding into SOEs, they really should invest more in the private sector. It´s in private enterprises innovations happen.

 

Panel 2 SOE

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