As numbers fade, SOEs still threaten private capital

According to data from the National Bureau of Statistics (NBS), it might seem that private capital is finally beginning to gain ground on China's State-owned enterprises (SOEs). As the nation's top statistical authority points out, the number of SOEs in China declined from 196 in 2003 to 117 in 2011; while at the same time, the number of private companies in the country grew by 81.4 percent and 20.8 percent year-on-year respectively in 2008 and 2010.

So why, as their numbers shrink, are public outcries against SOEs and calls for the government to open the markets they monopolize mounting?

I think this firstly has to do with the fact that SOEs - which, like any enterprise, are profit-driven and not necessarily concerned with the greater good of the public - are starting to bump up more against people's daily lives.

Currently, thanks to government-backed expansions in 2006, more than 80 percent of SOEs are involved in the petroleum, power, communications and transportation industries, according to the NBS. As SOEs seek to expand their profits, citizens will have to pay more to access the vital services that further their livelihoods.

Furthermore, the expansion of SOEs has led to a massive wave of closures for private companies in many areas. In recent decades, many SOEs have grown bigger through the acquisition of their private rivals with the support of government policies. For instance, in 2009, during the reconsolidation of the coal industry in Shanxi Province, private coal firms were booted from the industry, leaving a handful of SOEs in control of the area's coal resources.

Although their numbers are declining, SOEs are still holding on to, and arguably even strengthening, their monopolies in several of China's pillar industries. As powerful SOEs corner these sectors, profits will flow into fewer coffers and obstacles keeping out private capital will become more insurmountable.

In the long run, China's economic development may actually be harmed by the monopolistic positions of SOEs. Private capital holders may likely turn away from investing in sectors, such as manufacturing, for example, which are dominated by SOEs thanks to the preferential policies and the unfair business environment they create. It may also lead to bubbles in the country's high speculation markets, like real estate, as investment money floods into these areas.

Even if the government allows private capital to enter more of the industries largely controlled by SOEs, it will be hard to break their monopolies. SOEs can still rely on their scale advantages to crush their privately run competitors.

I suggest the government work to both split some of the country's largest SOEs into smaller companies, while forcing others to exit the market.

Published on Global Times | April 12, 2012