By Christine Miles (Gide Beijing), French Foreign Trade Advisor for Mainland China, and Li Siyue (Gide Beijing)

Summary

Since the Third Plenary Session of the 18th Communist Party of China Central Committee in November 2013, several government announcements have indicated that a new wave of privatization is underway. This time, a greater number of large state-owned enterprises at the national level will be involved. Past privatizations were criticized both because of the way they were implemented and because of their consequences. This article analyzes how past waves of privatizations were implemented in China to identify room for improvement, notably through a comparison with other privatization methods. Recent announcements from Chinese authorities suggest that China is willing to address grievances with certain new measures for the latest wave of privatizations.

Past waves of privatizations

Privatizations of Chinese state-owned enterprises (“SOEs”) have been a part of China’s economic reform for decades now. Yet, the various texts, decisions, circulars, communiqués and publications on this subject rarely, if ever, uses the word or refers to SOE restructuring as such. In this area, as in other areas where China has implemented economic reforms, the government has used a cautious approach, best summed up with the famous idiom “crossing a river by feeling the stones” (摸着石头过河 — mōzhe shítou guòhé), whereby partial reforms were implemented in an experimental manner, often in a few regions, and expanded only upon proven success.

Since the mid-1990s, faced with a bloated public sector that was proving to be harder and harder to manage, the central government made a monumental decision to “grasp the big and let go of the small” (抓大放小 — zhuā dà, fàng xiăo). Tens of thousands of small and medium-sized SOEs were restructured, sold off, closed down and/or privatized.

However, for larger SOEs, the process has been somewhat different — namely, slower and carried out in a piecemeal fashion. Often, after an initial phase of restructuring, only a small amount of their equity would be sold to private investors, causing them to be caught in an intermediate state that came to be known as “one-third privatized”. As this process evolved, a large number of these SOEs have finally experienced a change of control, becoming “two-thirds privatized” or even entirely sold to private hands.

Still, many people criticize the way that privatizations have been implemented in China. Larger SOEs are still run either by state departments or by state-owned asset management companies. Experts warn that the government’s continued dominance in key sectors of the economy will be a constraint on productivity, innovation and creativity. In addition, these privatizations have not been accompanied by a balancing or normalization of conditions of entry for Chinese investors in their own market, with many privately owned companies suffering from difficulties such as access to financing, competition, and access to markets.

With these grievances in mind, Chinese authorities have announced plans for a new round of restructuring, led by an opening of key industries to private capital, modernization of SOEs, and support for the development of the private sector. This renewed enthusiasm for change presents a great opportunity for China to address the frustrations of its critics. Yet, given the framework for transfers of state-owned assets and equity in China, is there any room for change?

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