Should China Abolish State Owned Enterprises?
In China, the state owns many companies both small and big ones in terms of their market share. Often, states or local government enterprises have a gigantic influence on a country’s economy. However, in China, most of the state-owned enterprises are small businesses with little economic impact and negligible contribution to the nation is political priorities. Most of the state-owned enterprises have had a run of difficult years and often losing the competitive ability to private sector rivals[1]. In the modern world where competition for service delivery and economic growth is a reality, China should abolish the state-owned enterprises to allow the thousands of business involved thrive in a more competitive manner.
Typically, there are two major problems that the state-owned enterprises face that calls for an urgent termination of the state’s influence on such businesses. Firstly, most of the SOE’s do not comply with the government’s directive of focusing on telecommunications, power, aviation and other strategic sectors of the economy. The communist party believes that those sectors of telecommunications, aviation among others are pertinent to maintaining control of the economy, a situation that explains their interests to dominate such industries. However, less than half of the state-owned enterprises invest in the strategic sectors. Instead, most of the businesses operate in less economic influential sectors such as running hotels, operating shopping malls, managing restaurants and building property developments across the country[2]. The state-owned enterprises, in addition, enjoy cheaper financing from state banks and favoritism from local authorities but still their returns and economic contributions are comparatively low. Approximately 80000 of the state-owned enterprises operate in the lowlands of the economy and fail to dominate the top heights of the strategic sectors development[3].
Secondly, the state-owned enterprises, besides there conducive economic environments, have meagre returns that have little meaning to the China’s economy and political priorities. The state-owned enterprises’ return on assets in 2012 rose by only 7%, a figure lesser than the private sector average[4]. The return on assets, is one of the gauges that measure the productivity of SOE’s, and in a situation where the private sector average is more than that of the state businesses, it calls for review of state policies. In fact, the profitability of the state-owned enterprises is progressively decreasing even when the private companies are achieving growth. The Chinese economy is complex, because, seemingly it slows as it matures, a situation that calls for privatization of state-owned companies to avoid a further drag on the economy.
To sum up, the move to sell state-owned companies especially by the local governments could be more rewarding for the country’s economy. Particularly, local SOE’s performance has been poorer than that of the businesses operating at the central government level. Essentially, even those state-owned enterprises by the central government are worse off that the private sector counterparts. Bolder moves towards privatization are preferably appealing, but the political reality is that the state never wants to lose grip of trains, banks among others. However, the country leadership must not allow ownership of the enterprises by the state even when the returns on assets are not economically justifiable. Therefore, China should abolish the state-owned enterprises to allow the thousands of business involved thrive in a more competitive manner.
Bibliography
Aharoni, Yair. The Evolution and Management of State Owned Enterprises. Melrose, MA: Ballinger Pub, 2010.
Holz, Carsten. China’s Industrial State-Owned Enterprises between Profitability and Bankruptcy. Singapore: World Scientific, 2013.
[1] Aharoni, Yair. The Evolution and Management of State Owned Enterprises. Melrose, MA: Ballinger Pub, 2010.
[2] Aharoni, Yair. The Evolution and Management of State Owned Enterprises. Melrose, MA: Ballinger Pub, 2010.
[3] Holz, Carsten. China’s Industrial State-Owned Enterprises between Profitability and Bankruptcy. Singapore: World Scientific, 2013.
[4] Holz, Carsten. China’s Industrial State-Owned Enterprises between Profitability and Bankruptcy. Singapore: World Scientific, 2013.
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