• Bloomberg


When top leaders from China’s Communist Party made their annual pilgrimage to the seaside resort of Beidaihe last month, they turned to an old master for economic advice, according to people with knowledge of the matter.

The leadership, ensconced on the shores of the Yellow Sea, consulted former Premier Zhu Rongji, said the people, who asked not to be identified because the talks were private. Zhu, 86, has been hailed for his role in transforming China’s economy nearly two decades ago. Specifically, they wanted the retired leader’s thoughts on President Xi Jinping’s plan for overhauling the country’s $16 trillion state-run industrial sector, one of the people said.

The last time China launched such a shake-up, the charge was led by Zhu: Some 60,000 firms were closed and 40 million workers let go, according to government data. It remains to be seen whether today’s leaders will stomach such change given that the reform blueprint released Sunday still centers around state control.

“In the 1990s under Zhu Rongji, there was a clear vision that the state sector had to be radically downsized and focused on a relatively small number of truly strategic sectors; everything else could be let go,” said Arthur Kroeber, founding partner and managing director at Gavekal Dragonomics, a research firm. “Today, there is no apparent belief that the state has to give up anything.”

While it is not known what Zhu said when his advice was sought, it is clear his influence continues to loom large in Xi’s administration. Officials who worked under him are now in key positions: People’s Bank of China Gov. Zhou Xiaochuan was a deputy governor from 1996 to 1998 and Finance Minister Lou Jiwei was a vice minister from 1998 to 2007.

The Beidaihe meetings date back to the era of Mao Zedong. There, incumbent leaders discuss among themselves and with former senior officials the most pressing issues facing the party and nation. Under the new plans, the government aims to sell shares of some state-owned enterprises and consolidate others. Authorities want to reform unproductive “zombie enterprises” while encouraging a “blending” between state-owned capital and private investments, government agencies overseeing the plan said in statements Monday.

By overhauling bloated and debt-ridden companies, China hopes to remove a brake on growth in the world’s second-largest economy, which is set to expand this year at its slowest pace in 25 years. Underscoring the drag, the value added by SOEs declined in August from a year earlier for the first time since 2008, according to data compiled by Bloomberg.

State-owned firms in China do everything from running power plants and tourism kiosks to building spacecraft and trading silk. SOEs accounted for 40 percent of industrial assets and 18 percent of urban employment in 2013, down from 69 percent and 51 percent, respectively, in 1998, according to Bloomberg Intelligence.

The latest round of SOE reform could be a “game-changer” for the economy as the government is repositioned as a capital investor rather than operator of state businesses, Australia & New Zealand Banking Group Ltd. economists wrote in a report this month.

“By encouraging private sector participation and allowing market force to play a decisive role in resource allocation, the reform will unlock a massive amount of economic value,” the economists wrote. While they expect more mergers, acquisitions and privatizations, they said it will be a “gradual process.”

Others are more circumspect.

Han Meng, a senior researcher at the Institute of Economics of the Chinese Academy of Social Sciences in Beijing, said the reform plans don’t represent a major breakthrough.

“There are no major changes in the plan,” Han said. “There was expectation for bigger and stronger measures, but that hasn’t happened yet. True, the SOE reform is an extremely complex and painful process. But judging from the guideline, there seems no consensus on execution.”

The plan’s five “basic principles” make it clear that the Communist Party will remain firmly in control. Zhang Yi, a party disciplinarian who is chairman of State-owned Assets Supervision and Administration Commission (SASAC), which oversees more than 100 of the biggest SOEs, told the official news service Xinhua that the reforms would bolster the role of party units in selecting and promoting company managers.

So long as the state continues to maintain a controlling hand in the sector, it is hard to see how true reforms will be pushed through, said Paul Hubbard of the Australian National University, who studies Chinese SOEs.

“The reforms try to insulate state-owned enterprise management from state ownership, while strengthening the role of the party,” Hubbard said. “When the chairman of the board is also the party secretary, it’s hard to draw a bright line between business and politics.”


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