The latest update of China's reform plan for its bloated and mostly underperforming state- owned firms has disappointed many for not going far enough in letting the market facilitate an efficient allocation of resources, as called for by President Xi Jinping two years ago. To do so would have meant going the whole hog in reforms to allow outright privatisation of the 155,000 state- owned firms, 111 of them managed centrally. But it was clear from the landmark 2013 blueprint for reform that this was not going to happen. While calling for change to improve efficiency and competitiveness, it also stated that the state sector's dominant role would be preserved.
Western expectations of sweeping reforms are misplaced because China, like some other Asian nations, sees its state firms as not just market tools but also enablers of political and social policies. Quite apart from helping the state address market failures, these entities mitigate the harshness of capitalism by taking on socially responsible roles. The global financial crisis of 2008, in particular, made leftists and left-centrists wary of Western market models. They prefer a mixed economy with the private and state sectors complementing each other. China is also wary about making hasty reforms that could lead to the creation of an oligarchy, as evident in Russia.
Given these considerations, Mr Xi's reforms were always going to be gradual and incremental, as was borne out by the announcement last week. The reform plan called for mergers and acquisitions to improve state firms' competitiveness, and for the disposal of "zombie" enterprises or firms that have been making losses for a long time. These are steps in the right direction, particularly as executives of some state firms and their political patrons have grown rich as a result of easy credit, subsidies and protection from competition. The status quo would be intolerable.
The plan also advocated mixed ownership - through stock market listing and by encouraging non-state firms to buy minority stakes or convertible bonds, or to swap shares with state-owned enterprises. However, given the desire to prevent the loss of state assets, it is likely that a good proportion of the minority stakes would be sold to other state firms. Be that as it may, state firms can get a fillip if corporate governance is improved by adopting the following as envisaged: greater decision-making powers of boards, a market-based compensation system, and hiring of professional managers.
Premier Li Keqiang has described the need to change as "urgent". But just how much independence will be given ultimately remains to be seen, given Beijing's penchant for control. Against slowing growth, more leaders might yet come around to the view that the state sector can give the economy a boost if reforms are done properly.