How SOEs Survive in a Market Economy with Fair Competition?

Zhang Siping, founder of Shenzhen Innovation and Development Institute, points out that a fair and competitive marketplace SOEs should transform and reform its rigid and inefficient internal management and operation systems.

Zhang traced the history of SOE reform in China. In the 1980s, SOEs were affiliated to government branches in planned economy, living to orders from the government. Their internal mechanisms were no difference from those of the government. SOEs in China have adopted a combined management mechanism that subject to both government planning and market regulation in the past few decades. Nevertheless, Zhang points out that while some SOEs now have established relatively independent internal operation mechanisms, further efforts to reform SOEs await. 1990s saw the boom of market economy, leading to the breakup of SOE’s internal operation mechanism and government administration management system. Today, SOEs have developed their own relatively independent internal operation mechanisms but are yet to establish the modern corporate system. Zhang believes that the reforms of internal operation system of the SOEs are visible in

 the abolition of designating administrative rankings to SOE executives

 an administration system that based on property relations

 introduction of professional managers

 the transfer of decision-making power on external affairs from different levels of governments to different levels of State Asset Management Commissions

 the transfer of decision-making power on internal affairs from the SOEs’ party committees to their stakeholders and board of directors

 gradual alignment of SOEs’ compensation mechanisms with those solely determined by the market

 establishment and development of a supervision system to oversee the state asset management system and the SOEs

 gradual alignment of SOEs’ recruitment system with those in the private sector

However, recent years have witnessed a U-turn in the SOE reform. In particular, Zhang observes reversed trends in a variety of fields, including

 politicization of SOE executives through the designation of administrative rankings to SOE executives

 diminishing the decision-making power of the board of directors while consolidating the power of party committees, which requires further discussion on a variety of issues including

 - how to ensure the legitimate interests of private and other stakeholders in SOEs

 - how to continue to adhere to the agreed direction to separate government from capital and corporates

 - how to form a mechanism of checks and balances in which each performs their duties and assumes their responsibilities

 making the salaries of SOE executives in line with those of party and government cadres through setting a salary ceiling

 strengthening inner-party supervision mechanism and weakening modern enterprise system supervision

 strengthening the corporate social responsibility of SOEs and consolidating the recruitment system

In order to further SOE reform, in particular, in the operation mechanism, Zhang suggests adhering to

 the reform of state-owned assets management system in charge of labor and assets

 the market-oriented reform of SOE executives

 goal of separating government from capital and corporates

 efforts to establish a modern enterprise system

 the principles and requirements of property rights system reform

 the principles and requirements of mixed ownership reform