The state-owned enterprise (SOE) reform plan issued recently by China’s State Council and Communist Party leadership has elicited mixed reactions. The consensus seems to be that this most recent proposal is little more than a reiteration of the same contradictory measures that have been in place for more than a decade, which largely failed to ameliorate the political interference and economic distortions that SOEs have spread throughout the Chinese economy. Rather than reducing political interference in China’s economy, as many hoped it would, this reform plan will likely strengthen and expand the state’s role in dictating economic outcomes.

These observations are certainly true regarding much of the plan. It largely involves tinkering with the qualifications and duties of SOE management and boards of directors, creating or improving state shareholding entities to separate politics from business, and pushing more SOEs and a more inclusive range of SOE assets towards publicly listed entities. These are essentially the same tools that China used in the 1990s and early 2000s to “corporatize” selected SOEs and transform them from administrative and bureaucratic bodies.

However, this plan is not simply a passive failure to push SOEs far enough from the status quo. Rather, two key proposals actively seek to expand the influence of SOEs in the Chinese economy and to amplify political influence over SOE operations.

  1. The plan seeks to draw a greater share of private assets into “mixed ownership structures” that are ultimately controlled by the state. In a prescient 2003 article, Professor Donald Clarke observed that mixed ownership would not only fail to diminish the state’s influence over SOEs, it would in fact have the opposite effect of allowing the state to exercise the same level of control over an even larger pool of assets. The most recent reform plan, however, not only intends to increase the number of SOEs with a minority share of private investment, it also encourages SOEs to actively pursue ownership shares in private companies in strategic and high-growth sectors. Rather than encouraging greater private influence over SOEs, then, the plan actually pursues the opposite goal of more directly asserting state influence over private enterprises.
  2. The plan seeks to formalize and expand the role of Communist Party groups within the management of SOEs. The plan calls for drafting “party building” requirements into SOE articles of incorporation to clarify the legal status of party groups in SOE corporate governance. It also calls for procedures allowing for the rotation of party group members into the management of the firm, and vice versa, while clarifying that the Secretary of the party committee and the chairman of the board should generally be the same person. It characterizes implementing these party building measures as a central prerequisite for expanding the mixed ownership reforms described above.