By Kevin Toda
Much of China’s rapid economic growth in the last several decades stems from the abandonment of a planned economy model and the retreat of government intervention in private business (increased integration into the world economy was also a major factor) (1). In 2013, at the 3rd Plenary Session of the 18th Central Committee, China’s leaders declared that markets would play a “decisive role” in the economy. Western experts praised the ambiguous announcement as a step towards a modern market economy.
Many of these experts were left deflated after China announced, this September, that reform of state owned enterprises (SOEs) would merely consist of promoting mixed ownership.
On November 13th, Dr. Deng Feng of Peking University’s Law School joined the NexGen Global Forum to discuss the evolution of legal regulations in China’s economy.
During the presentation Dr. Deng covered China’s transition in 1979 from a command to a mixed economy. He began with a brief explanation of the unit system that formed the basis of the Chinese planned economy during the Mao era.
Before 1984, all enterprises were state owned and organized by work units (单位/danwei). Every unit had a “superior unit in charge” who reported directly to the central Communist party. These units were inflexible, with fixed employment, little horizontal collaboration and strict administrative rules.
In 1984 the PRC government released major urban economic reforms, decentralizing control over SOEs. Further reform was promulgated in 1988 that provided a legal guarantee for the development of the private sector. A decade later, tens of thousands of SOEs were privatized, forcing the former state companies to streamline or fail. These changes shed massive amounts of excess weight and tremendously increased the efficiency of the Chinese economy.
The government, however, was not willing to relinquish control over its most prized SOEs and wanted to regulate the new private sector which, for the first time, included foreign investors.
One method of control that regulators have utilized is a quota system. In his discussion with NexGen Global Forum, Dr. Deng focused primarily on government control of the securities and land markets. All land in China is owned by the government which enables them to tightly control the market. The government determines to whom land will be sold, how much land will be sold for and generally how land is used.
The government entity that controls the securities market is the ministry level China Securities Regulatory Commission (CSRC), which, among other responsibilities, “supervises the issuance, listing, trading, custody and settlement of stocks, convertible bonds, bonds of securities companies, and bonds and other securities…” (2). This includes IPOs, the volume of shares allowed to be traded in the market and the distribution of employee stock options. Finance is an important sector that the government watches closely. This could be seen during this summer’s stock market crash when the CSRC suspended IPOs and barred shareholders, with stakes larger than 5% in a single listed firm, from selling.
As for the state owned sector, the Communist Party has maintained that certain industries are essential to China’s economic and national security and thus cannot be entrusted to any entities outside the central government. Industries SOEs play a dominant role in range from electronics to energy, to telecommunications and beyond. Further categorization of SOEs was included in September’s announcement with some deemed for-profit entities while others dedicated to public welfare. According to Xinhua News Agency, “the former will be market-based and stick to commercial operations and should aim to increase state-owned assets and boost the economy, while the latter will exist to improve people's quality of life and provide public goods and services.”
Dr. Deng argued that China’s capitalist development is markedly different from the Western experience. Dr. Deng referenced From Fiefs to Clans, Dr. John Child and Dr. Max Boisot’s article on China’s trajectory towards network capitalism as opposed to market capitalism.
The 1996 article describes China’s historical lack of a codified bureaucratic order and how that pushed the Chinese system to develop around “clans” or personal networks and not the market. This, explained Dr. Deng, is why Chinese reforms often protect patronage networks. Economic regulation reform in China is a constant balance between those networks who benefit from state protection and the reform-minded ideological camp. While growth and efficiency are certainly a priority for the PRC government, the ultimate aim is not to create a fully privatized market economy but to strengthen the state sector.
Given China’s recent economic history and the entrenched interests in the SOE structure, it is unrealistic to expect wholesale reforms of the Chinese market. Some experts, such as Tao Wang (chief economist at UBS), however, believe that the reforms are not insignificant; after all, mixed ownership is a divestment of state assets. Recently, Beijing has shown interest in importing the Temasek model from Singapore in order to avoid the potential problems of rapid privatization that plagued Russia in the 1990s. And yet, the central government has shown time and time again that it is reluctant to release control. We will see if President Xi Jinping’s reforms will indeed allow market forces to play a “decisive role” by 2020.
As per usual, we’re on a need-to-know basis.
Dr. Deng was the 4th speaker in the Tsinghua-SAIS dual degree program’s “Economic Transition in China” case study course. Prof. Deng specializes in corporate and enterprise law, as well as regulation and anti-trust litigation.
(1) Max Boisot and John Child. “From Fiefs to Clans and Network Capitalism: Explaining China’s Emerging Economic Order,” Administrative Science Quarterly, Vol. 41, No. 4 (Dec 1996), pp. 600-628.
(2) CSRC.gov.cn About page (http://www.csrc.gov.cn/pub/csrc_en/about/)
邓博士认为，中国的市场发展与西方的经验明显不同。邓博士引用John Child博士和Max Boisot博士的文章“From Fiefs to Clans”，对中国向“社会网络主义”而非“市场主义”发展作了说明。