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Reform of China’s public companies to fuel economic growth

September 17, 2015, 18:59 UTC+3 Zamyatina Tamara
©  ITAR-TASS/Vladimir Smirnov

MOSCOW, September 17. /TASS/. China’s just-unveiled government plan for reforming large public companies is expected to raise their profitability and competitiveness, fuel economic growth and draw private investors, including foreign ones, polled experts have told TASS.

The public companies are focused on all key industries of the Chinese economy - aircraft-building, ship-building, energy, auto manufacturing, steel, chemistry, construction and coalmining industries. On Monday, China’s President Xi Jinping said it was the public sector that he saw as the key factor for national economic growth.

In accordance with Chinese government plans the watchdog supervising and managing the assets of more than 100 largest public companies will be reformed first thing. The public companies’ assets in 2008-2013 were up by 90% to 25.1 trillion yuans, while profitability was at a tiny 11.6%, in contrast to 25.7% profitability in the private sector. Promising public companies will be allowed to be more active in borrowing private capital and participating in public-private partnership schemes, the Central Committee of the Communist Party of China and the State Council said in a joint statement.

The deputy director of the Institute of World Economy and International Relations under the Russian Academy of Sciences, Yevgeny Gontmakher, said the Chinese authorities’ intention to reform state corporations was a natural mode of action for a country that really sought to achieve economic growth. "The Chinese economy has demonstrated stable growth of 6-7% a year, but now it has hit the ceiling and in an attempt to invigorate it the Chinese government made a decision to decontrol the public sector a little bit more to make it more effective," Gontmakher told TASS.

"China’s economic sector over years was related with the development of small businesses in agriculture, the light industry and trade. At the same time the state preferred to keep a tight grip on the strategic industries - oil, gas, and machine building. As a result they lost effectiveness. The same phenomenon had been observed in South Korea before. That country managed to turn itself into one of the most successful ‘Asian tigers’ only when Seoul abandoned the model of comprehensive state control of all industries," Gontmakher said.

He believes it is not accidental China keeps quiet about the details of the plans for reforming the public sector or the deadlines when they might be implemented. It merely states that certain results are to be achieved by 2020. "The point at issue is drawing investment, in particular, foreign; the public companies must be ‘streamlined’, their budget made transparent, and some managers replaced before investors can be invited. This process will take a while," Gontmakher said. "Besides, this is not the right time for selling stakes in public companies on the world market. The situation is poor. It would make sense to take a pause," he added.

"Should Russia follow in China’s footsteps to reform its own public corporations is a matter requiring further studies and public discussion. Russian public companies, just as their Chinese counterparts, are ineffective and need systematic budget subsidies. But each of them requires individual treatment. Even though 100% stakes in some Russian companies belong to the state, it should be analyzed first whether they should be privatized entirely or selling a 20% stake would be enough. There should be no time-serving considerations," Gontmakher believes.

The chairman of the VTB bank’s observer council, Sergey Dubinin, has said that until just recently the Chinese authorities had allowed private investors only into special zones and certain branches of the economy, while the state retained all commanding positions in the economy. "Western economists and bankers have long doubted China’s economic growth rates and the effectiveness of public companies with their high costs. ‘Who will ever need them?" some were asking. In the end China made a decision in favour of cutting spending on support for the public sector and raising its profitability and shareholder value. It should not be ruled out that the news of the forthcoming reforms was announced on the eve of the forthcoming state visit the Chinese leader is to pay to the United States on September 22-25. China keeps its main assets in US treasuries," Dubinin told TASS.

"However large China’s reserves may look, the country still lacks resources for social programs, science and education. The Chinese authorities may have now decided time is ripe to slash budget infusions into the economy, which is now expected to grow at the expense of private investment. It is quite possible the reforms of public companies will result in some sort of privatization of infrastructural branches and the banking sector. This will benefit China’s own economy, as well as the world and Russian markets," Sergey Dubinin said.

Vneshekonombank’s deputy president, Sergey Vasiliev, told TASS: "As a representative of a public corporation I find it much easier to do business with Chinese public companies, and not private ones. The main problems of cooperation with China stem not from different types of ownership, but from cultural dissimilarity and the language barrier."

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