ANNUAL REPORT

dkrause on DSKHT7XVN1PROD with USCC
SECTION 2: STATE–OWNED ENTERPRISES,
OVERCAPACITY, AND CHINA’S MARKET
ECONOMY STATUS
Introduction
In China’s centralized, state-run economic system, the government’s
legitimacy is closely tied to its ability to deliver high levels
of economic growth. With China’s economy slowing down, the government
is facing a difficult choice between maintaining short-term
growth and undertaking economic restructuring. The Chinese Communist
Party (CCP) appears to have chosen the former path. Although
the CCP has repeatedly announced new policies to address
structural problems in the country’s economy, it has failed to implement
changes that meaningfully put the economy on a path to
becoming market led. This is because the CCP’s reform efforts are
aimed at managing its state-led system, not transitioning toward
a market-led economy.
In the reforms announced to date, Beijing has sought to take superficial
steps toward privatization and improved efficiency, while
increasing government control over the economy. The country’s
large and inefficient state-owned enterprises (SOEs) epitomize this
trend: SOEs contribute a sizable share of the country’s jobs and
revenue, but are in need of significant restructuring to reduce
mounting debt levels resulting from a legacy of imbalanced, government-led
growth. However, it is increasingly evident that the top
CCP leadership does not want to implement free market SOE reforms.
To date, the CCP has not demonstrated a commitment to a free
market economy as a matter of principle, and powerful practical
considerations mitigate against reform efforts. SOEs in strategic
sectors are the primary entities through which the CCP directs the
economy towards the regime’s strategic ends; real reform in these
sectors would mean giving up control and dramatically reducing
the government’s ability to achieve the goals identified in the 13th
Five-Year Plan (FYP). Reforms would also reduce the size of the
state sector, creating significant job losses at a time when economic
growth is already slowing. Finally, huge political obstacles in the
form of entrenched interests resist any substantial changes in
SOEs’ structure that might reduce the CCP’s control. For all of
these reasons, what passes for reforms of SOEs has taken the form
of consolidating state control and pressuring firms to act in line
with government interests. As a result, in response to CCP policies,
the Chinese government continues to subsidize the state sector despite
warnings from the International Monetary Fund (IMF) that
effects from a large wave of SOE defaults could ripple through the
global economy.
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