SOEs: Stifling the Nation's Vitality

In recent years, the enormous profits of state-owned enterprises (SOEs), once widely considered a good thing, have come under public scrutiny. The core of the problem is monopoly. SOE bigwigs are rapidly expanding their monopolies, relying on growing scale and rising prices to extract huge profits. But these companies bring little technical or organizational innovation to the table.

The vitality of the Chinese economy is being stifled by SOEs, especially central-level, or top, SOEs, and this is borne out by research. In October 2011, the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) released a breakdown of state-owned assets and earnings information for 102 for-profit SOEs. This showed that in 2010, the capital of 102 central-level SOEs was equivalent to 61.4 percent of GDP, and their earnings equaled 42.2 percent of GDP

This information is representative of only those central-level SOEs that can be published. There are actually 120 for-profit SOEs authorized by SASAC. Fifteen percent of them are legally prohibited from releasing this kind of information. If you include industries outside of those legal requirements, like the tobacco and finance industries, the scope of SOEs is even more alarming. The second national economic census taken in 2008 reported profits of nearly 900 billion yuan by finance industry central-level SOEs. Banks accounted for 64 percent of that profit.

These gargantuan SOEs have not only failed to lead us toward a new stage of development, but they have actually inhibited the vitality of the Chinese economy by distorting resource allocation.

China is a rising industrial nation. So logically the manufacturing industry should be our primary focus, but the banks, part of the service industry, have taken the lion's share. The scale of the banking industry has surpassed that of the United States, a post-industrial nation with a total economy much larger than China's.

Moreover, a staggering amount of banking capital allocation has been siphoned off by SOEs, especially the central-level SOEs. What's more, SOEs as great sponges of capital produce very few jobs. Yet employment is a matter of vital importance for a rapidly urbanizing nation. In fact, SOEs are exacerbating the problem. By crowding out private players, they make the employment situation even more unfair.

Next, the scale and reach of SOEs is holding back innovative industries. We require a great number of innovative businesses to make technological progress and economic restructuring possible. But most of the active innovators are small and medium-sized businesses, generally leaders in their own fields.