How to Reform China’s SOEs

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By Spencer Sheehan

The IMF has clear guidelines for SOE reform, but results will be a long time coming. 

China’s state-owned-enterprises (SOEs) need reform. Currently, they take a disproportionate share of bank loans at cheaper than market interest rates, are less productive than the private sector, carry high levels of debt, and crowd out the growth of private businesses.

To reform China’s SOEs, the International Monetary Fund (IMF) has outlined four policy approaches. They break down as follows: 

Phase out loss-making SOEs: heavily indebted, loss-making SOEs should be closed and local government budgets should be increased to retrain and relocate laid-off workers. 

Reduce credit support: debt roll-overs and preferential access to credit for SOEs should be phased out to reduce support to loss-making, “zombie” companies and force them to operate more competitively. 

Reduce barriers to entry: SOEs shouldn’t be allowed to maintain monopolies in so-called “strategic” sectors, protected by government restrictions on private or foreign firms. 

Introduce supporting reforms: land market privatization would remove SOEs’ privileged access to land, while systems to manage SOE insolvency would speed up the phasing out of struggling companies. 

And China seems to be making progress: the government closed 2,730 SOEs in 2016 and recently pushed ahead with mergers between SOEs in the power, steel, and shipping sectors.

But Xi Jinping and Li Keqiang, China’s top leaders, acknowledge that there is still some way to go, and will continue to press on with reforms in the coming years.

Given the difficulties of delivering reform, progress is likely to be slow, however, because of factors like local-level countermeasures and a lack of enthusiasm from local government officials, to name but a few.

Also, because the Chinese government is obsessed with economic and political stability and taking a slow, gradual approach to policy reform, major change to the SOE sector is unlikely in the short term, particularly because SOEs account for an estimated 20 percent of total industrial output and 17 percent of total employment in urban areas.

So, despite the IMF’s clear set of policy goals, the reality of making sweeping changes to China’s SOEs, plus the Chinese government’s stability-first attitude to policy changes, means that reform will be a long time coming.