Prof. Zheng Yongnian: SOEs driving force for China-U.S. trade, not an impediment
SOEs are deeply-rooted in history and can be reformed in future
This is based on the speech by Prof. Zheng Yongnian at an online roundtable meeting on China-U.S. economic and trade relations (Nov. 2, 2021) jointly organized by China Center for International Economic Exchanges and the Brookings Institution.
In the speech, Prof. Zheng talked about his view of the differences in the political economy between China and the United States, the pressure of reform faced by China’s state-owned enterprises (SOEs), the role that SOEs could play in rebalancing China-U.S. trade, the potential significance for China’s SOE reforms by way of joining the CPTPP, and China’s recent regulation of its Big Tech companies.
Prof. Zheng is currently the Presidential Chair Professor, Acting Dean of the School of Humanities and Social Science and the Founding Director of the Advanced Institute of Global and Contemporary China Studies (GCCS), the Chinese University of Hong Kong, Shenzhen (CUHK-SZ).
He previously served as the former Director of the East Asian Institute, National University of Singapore (2008-2019), and the former Research Director and Professor of the China Policy Institute, University of Nottingham (2005-2008).
Prof. Zheng has long been an influential voice in the Chinese mainland. For example, he was invited to speak at a meeting with the top leadership last year on China’s 14th Five Year Plan, as reported by the prime-time news program on China Central Television (CCTV) then.
The translation below has been reviewed and approved by Prof. Zheng.
SOEs is a driving force for – rather than an impediment to – China-U.S. economic and trade relations
Over the years, China’s state-owned enterprises (SOEs) and the state sector have become the main source of trade conflicts between China and the United States. In other words, it is a problem that we must face squarely even if it is not the most important source (of trade conflicts). From the perspective of a scholar, I think the West has many misunderstandings of Chinese SOEs. Political economy is my area of study, and I have been studying SOEs over the years. I, therefore, have some views to share with you.
China will not abandon the state-owned enterprises system
First, the state sector is in fact important for China’s macroeconomic stability. In China, the origins of SOEs can be traced back more than two thousand years ago. Since the Han Dynasty, there existed three types of capital in China according to classification in terms of capital and ownership.
Ranking at the top is the state-owned capital, and ranking third is mainly small and medium-sized and micro-enterprises, namely the private sector. Between the above two are public-private partnerships.
In China, there were four short periods in which the state completely dominated the economy. The first stage is the “Reform by Wang Mang” in between the Western Han and Eastern Han Dynasties. The second stage is the “reforms of Wang Anshi” in the Song Dynasty. The third stage is the reform under the reign of Zhu Yuanzhang, the first emperor of the Ming Dynasty. The last stage is the period before China’s Reform and Opening-up was initiated. Except for these four short periods, China has been a highly balanced economy, in which the state sector and non-state sector coexist and cooperate smoothly.
The Chinese philosophy of economics is actually different from the Western philosophy of economics. In China, the state has always regarded economic governance as its key function. However, since modern times, economy and politics have been separated in the West, where politics is not allowed to interfere with the economy. The two have become a contradiction. The economic systems of China and the West are built on different economic philosophical systems.
Therefore, I do not think that China will give up the state-owned enterprises system. China now is an economy of mixed ownership, where three levels of capital, three economic forms, or three forms of ownership coexist.
Since China initiated the Reform and Opening-up, we have also seen many economic crises, including the 1997-1998 Asian financial crisis, the 2007-2008 global financial crisis, and the COVID-19 crisis. The state sector has played an important role in the recovery of China’s economy, putting China’s economy back on track. At the same time, it is hard to say that China now operates what the West calls “state capitalism”, in that the private sector is far larger than the state sector in all areas, including the domestic product generated, income, innovations, jobs, etc. This is the first point I want to stress.
SOEs are a driving force for China-U.S. economic and trade relations
Second, the state sector now comes under huge pressure for reform. This pressure not only stems from the United States or the West, but also from within, and there are at least two sources.
The first source of pressure is the private sector. In China, there is always a discussion/debate over whether the state sector is too big. If we borrow the expression that Mao Zedong used to put it, there is a contradiction between the state sector and the private sector. The private sector is crucially important. If government policies exert an adverse effect on the private sector, there will be tremendous pressure (to the economy), and it will also cause pressure for the state sector.
The second source is attributed to the fact that the government and SOEs are different entities, and the government sometimes orders the SOEs to fulfill non-economic activities. For example, under the Belt and Road Initiative, SOEs are sometimes required to bear more responsibilities apart from economic functions, rather than merely considering their own profits. However, the state sector also needs to be profitable. Therefore, the heads of SOEs face great pressure, if you talk to them.
Third, SOEs can be reformed. Many Westerners think that China has no means and capability to reform the state sector, but I think otherwise.
This can be proved by previous practices. For example, after the Reform and Opening-up were initiated, former Premier Zhu Rongji pressed ahead with radical reforms and reformed the state sector and SOEs, with tremendous success.
China now needs new measures for the reform of SOEs.
Some scholars mentioned the issue of China’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). I also participated in many discussions about CPTPP, including with policymakers and economists. It is indeed necessary for China to join the CPTPP to advance domestic reforms, not merely to integrate into the world. China’s accession to the WTO brings great dynamism to the reform of the SOEs. China hopes or at least many Chinese scholars hope that accession to the CPTPP can bring about a new reform of state-owned enterprises in China.
Finally, I think that the state sector and SOEs should not become a barrier to China-U.S. economic relations. Instead, it shall be a driving force. From the perspective of empirical experience, over the past four decades, SOEs played a vital role in balancing China-U.S. economic and trade relations, especially trade. In economic and trade negotiations with China, the United States always requires Chinese SOEs to buy a wealth of American products, as in the oil deals. Were it not for the large state-owned enterprises, there was no way for the United States to require China to buy American goods on such a large scale. I hope that my American friends gain a new understanding of Chinese SOEs. The stronger the Chinese SOEs, the better they can balance the trade between China and the United States.
China enters a new stage in corporate reform
China has entered a new stage in enterprise reform. China’s current policies on private enterprises, for example, some regulatory policies introduced for the private sector, have fueled speculation and caused misunderstanding.
In this regard, this view is also shared among some people in China. Small and medium-sized enterprises (SMEs) are vital for any country, and China does this for the healthy development of SMEs.
A new policy adopted by the Chinese government is to create prosperity for all. Monopoly is not conducive to accomplishing this goal. The same is also true for the United States. In China, some private sectors, such as in the information technology sector, have excessively big corporate platform (companies), and there is unfair competition. The big platforms compete against SMEs but do not pursue high-tech development such as what Elon Musk does in the United States.
On the contrary, they are competing with SMEs’ for the “cake”. (How come) such big private enterprises compete with SMEs? Therefore, they are now under great pressure.
The same is true for China’s education sector. As we know, some unofficial private training institutions carry out excessive expansion because of a lack of rigorous regulation. This is detrimental to China’s long-term development. I personally very much applaud the government’s vigorous regulatory measures in this regard.
Of course, these measures are not targeted at the private sector, nor to destroy or damage the private sector. The aim is to lay a firm foundation for the long-term development of China’s real economy and build a more stable basis for the development of the private sector through regulation.
Also, SOEs need to be reformed. China’s accession to the CPTPP will have a profound impact on the SOEs. I think the government still hopes to take this opportunity to take bold measures to reform the state sector. In recent years, there have been discussions on learning from Singapore’s Temasek model in China’s state sector. In Shenzhen, state-owned assets organizations are drawing on the Singapore model, exploring how to manage SOEs as a market entity.
Today, the top priority for the Chinese leaders is domestic policy, because domestic stability is paramount. It is known that foreign policy is a continuation of domestic policy, and therefore Chinese leaders surely focus on the domestic landscape. In terms of domestic policy, Party governance is highly important, followed by common prosperity.
If we make a comparison between China and the United States, it can be seen that the political parties are wholly different between China and the United States. The Communist Party of China is the only governing party, while the West has a different understanding of political parties, such as the Democratic Party and the Republican Party in the United States.
Political parties are a political process in the context of China. The Chinese civilization regards political parties as a concept relating to culture, which is different from the concept of parties in the traditional Western democracy.
In China, the political party is the main body of politics and aims to seek common prosperity. Biden calls his own foreign policy the “foreign policy for the middle class.” Likewise, when considering policy orientation, Chinese leaders put domestic development and interests at center stage. In terms of external relations, China-U.S. relations are in the most important policy position. This has been the case since Chairman Mao. China-U.S. relations are important. If China-U.S. relations are properly handled, it is easy to handle other subordinate issues.
Therefore, if there is a ranking for the policy order for the Chinese leadership, domestic Party governance and sustainable development come first, followed by China-U.S. relations in international relations.