Only strategic sector

Theoretically, state-owned enterprises under market socialism should either relate to strategic industries vital to the country’s social and economic security, or link with a nation’s welfare system. Military companies or salt producers tick those boxes; property developers do not.

Also, with the market playing a bigger role in the economy, state-owned companies shouldn’t be allowed to operate on a privileged plane compared with other enterprises. It all sounds reasonable, but in reality, there are obstacles — visible and invisible, said Li Shuguang, a professor at China University of Political Science and Law.

The biggest hurdle for state-owned enterprises is to integrate themselves into the modern corporate structure of the real world, which most efficiently allocates resources, Li said.

Although many state-owned enterprises have been restructured into share holding companies, the change has been only skin deep and their governance style remains largely one of the market playing second fiddle to the whims of top bureaucrats.

Second, the method of selecting the corporate hierarchy in state-owned enterprises needs changing. It is not reasonable for important positions to be given to people with little or no background in a company’s core business.

Also, state-owned companies should establish an effective compensation system to stimulate productivity and creativity. That would address the common complaint that employees in state-owned companies earn high salaries for doing plodding, unimaginative work.

The final report of the third plenum said the market should play a “decisive” role in determining allocation of resources. Use of the word “decisive” could signal some sweeping changes if policies are seriously implemented.

Since 1986, when Shenyang Explosion-Proof Equipment Factory became the first state-owned enterprise in China allowed to go belly-up, change has been pretty dramatic.

Market players seem to be pinning their hopes on that continuing. Witness the positive reaction in China’s stock markets when details of the policy reforms were recently released. There is strong public sentiment for an end to the privilege and power of state-owned companies.

Time will tell whether this latest reform campaign, the boldest in nearly three decades, will produce the desired results. But after Party leaders also announced a relaxation of the nation’s one-child policy and the dismantling of labor camps, optimism about real reform is certainly on the upswing.