His was a deceptively simple question. â€œWhat exactly is the purpose of a Chinese SOE?â€
I had just finished speaking to the Asian management committee of one of the larger and more successful Fortune 500 companies operating in China. They have for years done profitable business with large SOEs in China. That business has begun to evaporate. Having just heard me summarize the deteriorating situation at many SOEs, and the decision last month by the Chinese government to quietly shelve plans for a root-and-branch restructuring, one senior executive wanted to know what Chinese SOEs are now in business to do. Make money? Provide and protect jobs? Project national power?
I reminded him Chairman Mao was a keen student and devoted follower of Lenin. He fully embraced the Leninist concept of the state and party controlling the â€œcommanding heightsâ€ of the economy. Chinaâ€™s SOEs are still very much in that business: owning most, sometimes all, of Chinaâ€™s large-scale assets in petroleum, gas, electricity generation and distribution, coal, banking and finance, transport, steel, aluminum and a wide range industrial chemicals.
The executive then reminded me that Mao had been gone a long time and anyway hadnâ€™t Deng Xiaoping begun 35 years ago dismantling state power to create the conditions where todayâ€™s vibrant Chinese private sector could emerge. The private sector is the source of all net new job creation in China and contribute far more to GDP than the SOE segment. The countryâ€™s best companies are private sector firms, not SOEs. What, he insisted, were SOEs in business to do?
It was obvious he wasnâ€™t going to accept an answer based on Leninist political economic theory. â€œWhy donâ€™t they just privatize the state-owned sector?”, he pushed back. That, I told him, was out of the question, at least for now. â€œWhy?â€ he wanted to know.
Looking for an opening to collect my thoughts, I steered him toward the coffee machine.
Above allâ€ I started in again, â€œan SOE is an instrument to achieve Chinese government and party policy goals. This is as true today as it was at their origin. Sometimes those policies, at least originally, were quite high-minded, even socialistic, like providing sufficient energy at an affordable price to everyone in the country.
Energy is today plentiful in China, but cheap itâ€™s not. Subsidies have been eliminated and prices hiked to levels generally well above those in the US. The money paid to the petroleum and power monopolies are a transfer of private wealth to state-owned coffers, in other words, a mechanism for hidden tax collection.