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China in their hands

12 December 2014

The article at a glance

The annual Sanya Forum starts this week, and a Cambridge Judge Business School delegation will lead discussions aimed at informing the future …

Category: Insight

The annual Sanya Forum starts this week, and a Cambridge Judge Business School delegation will lead discussions aimed at informing the future of the Chinese economy.

Overview of Sanya city, Hainan Province, China

Dr Simon Taylor
Dr Simon Taylor

China is at a crossroads – again. It’s been just over 35 years since the country embarked on its major programme of economic reform, during which time the country’s private sector has grown at an impressive rate. The slowdown in recent years has prompted President Xi Jinping to announce reforms to further expand the role of the private sector, including an end to monopolies. But what does that mean for the future of the market economy in China?

“The Chinese want to create a larger role for the market,” says Dr Simon Taylor, director of Cambridge Judge’s Master of Finance programme. “But the government doesn’t give up control willingly. Some industries, such as manufacturing, are subject to market forces whether in public or private hands. But they are less likely to give up natural monopolies such as utilities and telecommunications, which are more suitable as an instrument of government.”

Before the first set of reforms in 1978, state firms produced 80% of industrial output – now it’s less than a quarter. In the same period the percentage of workers employed by state and collective firms has fallen from 100% to less than one in five. The result had been unprecedented growth, with private companies outperforming state owned enterprises (companies listed by on the stock exchange and having foreign investment, but run by the government) by a factor of two to one. And then came the slowdown.

Now, Chinese and other international business experts are gathering at the annual Sanya Forum in China’s Hainan Province, to focus on this year’s theme: “New economy, new balance”. And one particular session at the event, chaired by Dr Taylor and comprising Chinese and University of Cambridge experts, will discuss the implications of economic reform aimed at diversified and mixed ownership, taking the British model of privatisation, and specifically the sell-off of its major industries in the 1980s, and asking how it can inform the debate.

The UK experience is now 30 years old and it is useful to look at how it happened, what worked and what didn’t,” says Dr Taylor. “In the UK there were some industries so obviously suited to a competitive market, such as British Airways, that it is hard to believe they were ever in public ownership. But the UK then privatised everything, including industries of strategic importance – steel, oil, energy; the commanding heights of the economy.

Such industries in China – including the banks which, although almost all being listed on the stock exchange, are state owned and dominate the financial services industry – are likely to stay in government hands. “They’re a source of patronage,” says Dr Taylor. “You can appoint people to senior jobs. The Chinese Communist Party has often been referred to as a giant human resources department – a lot of industry appointments have party approval so they could keep that.

“Or there are other models – in France many firms are part-private, part-state owned and the government doesn’t interfere, but the appointment of the CEO is a political gift – which largely seems to work.”

And the combination of state and private ownership is a key factor of the Chinese success, says Dr Taylor. “The top-down government influence and the bottom-up rise of the private enterprise have both been responsible for the growth,” he adds. “Now with China becoming more of a value-added service economy the move towards further reform is inevitable.”

Chinese Premier Li Keqiang recently said: “We need to ensure the market plays the decisive role in allocating resources”, and the government is also very keen to tap into the international expertise gathered at such events such as Sanya. Keynote speakers this year include former Jose Manuel Barroso, the former President of the European Commission, and Huang Mengfu, Honorary Chairman of the All-China Federation of Industry and Commerce. The Cambridge delegation will include Emeritus Professor of Political Economy and Nobel Prize winner Sir James Mirrlees, and energy economy expert Professor Jon Stern.

The Chinese have a lot of think-tanks, many affiliated to the government,” says Dr Taylor. “These groups are diligent and professional and their ideas will be listened to. Most economists will say competition is key because it encourages discipline. The government’s goal is for a greater role for the market – which is not the same as privatisation. But the Chinese seem committed to mixed ownership. The future will be very interesting.

The Sanya Forum is a high-level, international business conference organised by the China Association for International Friendly Contact.