Anti-Corruption Campaign and Economic System Reform in China: Their relationship viewed in light of the reform of state-owned enterprises

TAMURA Akihiko
Senior Fellow, RIETI

The anti-corruption campaign of the Communist Party of China (CPC) reached a major milestone on July 29, 2014 when the investigation of Zhou Yongkang, a former member of the Politburo Standing Committee of the CPC, for a suspected "serious disciplinary violation" was announced. At the inaugural press conference of the General Secretary of the Communist Party of China at the 18th National Congress of the Communist Party of China in November 2012, Xi Jinping emphasized the eradication of corruption as the most important issue. Since then, more than 30 high-ranking party officials at the vice-ministerial level or above have been charged under the command of "taking down both tigers and flies alike." For example, tigers such as Jiang Jiemin, the former head of the State-Owned Assets Supervision and Administration Commission (SASAC) (a ministerial level position), and Xu Caihou, the former vice chairman of the Central Military Commission, began to be investigated on suspicion of serious disciplinary violations in early September 2013 and the end of June 2014, respectively.

Anti-corruption campaign is a tool for economic system reform

It is true that the anti-corruption campaign does much to strengthen the power base of Xi Jinping, but I don't think anybody now believes that it is part of some kind of political struggle, for example, the one between the Xi Jinping group and the Jiang Zemin camp. However, some say that it has a political motive or is a response to dissatisfaction among the people with corruption in the CPC, and the anti-corruption campaign must be continued even after Zhou Yongkang in order to please the public. In my view, however, it is correct to consider the anti-corruption campaign as being regarded by the Chinese leadership as a tool for economic system reform, rather than as simple behavior to meet the demand among ordinary people to eradicate corruption. The prime concern at the moment for the Chinese leadership is to make sure that China will avoid falling into the middle-income trap, and it aims to do this by accomplishing economic system reform and achieving the goal of celebrating the two centuries (realizing a well-off society across the board by 2020 when the Communist Party will celebrate its 100th anniversary and realizing a modern socialist society in harmony with a rich and powerful democratic culture by 2049 when the People's Republic of China will celebrate its centenary).

In governing China, the economy is the most important element. Of course, the Chinese leadership is sometimes sensitive to radical public opinions on the internet toward political issues such as diplomatic problems and political system reforms. Looking at the long history of China, however, the utmost concern for the general public has been whether they can feed themselves. As long as this need is satisfied, the CPC regime (or any other ruling regimes) generally will be secure. (So it should be understood, for example, that the Chinese leadership focuses most of its attention on managing diplomatic problems, including Japan-China relations, so as not to interfere with the execution of economic system reform.)

In fact, although the media is busy focusing on Zhou Yongkang, a former member of the Politburo Standing Committee, we should rather pay more attention to the fact that behind the scenes China has been quietly but steadily carrying out the economic reform programs laid out in the Decision at the Third Plenary Session of the 18th Central Committee of the Communist Party of China held in November 2013. The major battlefield for the Xi Jinping government is economic system reform, and the anti-corruption campaign is merely one weapon in that fight.

Therefore, the prime concern at the moment for the Chinese leadership including Xi Jinping is the various reforms determined at the recent Third Plenary Session of the Central Committee, including the direction of "the decisive role of the market in allocating resources." The greatest obstacle to this is the existence of state-owned enterprises (SOEs), which is referred to as "the state advances as the private sector retreats," and the vested-interest structure associated with SOEs. The purpose of the anti-corruption campaign is to break down this structure. Another obstacle is the economic downturn and employment insecurity that could arise in the process of the reforms and the possibility of reform-related fatigue felt by the general public who could lose their jobs due to the negative impact of the reform process. Regarding the latter, China's employment elasticity is said to be higher in recent years, compared with the time of the Hu Jintao government when economic growth of 8% was said to be necessary to ensure job security of the nine million people who newly entered its job market every year. According to one theory, the economic growth rate necessary to provide jobs for new workers has now fallen to the mid to high 6% range. Although widespread unemployment is quite likely to arise in the future in the process of reforming the SOEs and other aspects of the economy, as will be discussed below, I think that the Chinese leadership will manage these processes while fine tuning the scale and speed of reforms, taking into account of the value of elasticity of employment.

Moving ahead steadily with the reform of the SOEs

With respect to the reform of the SOEs, SASAC, which until recently had been headed by Jiang Jiemin, announced on July 15, 2014 that it selected six large central SOEs [State Development Investment Corporation (SDIC), National Cereals, Oils and Foodstuffs Corporation (COFCO) Group, China National Pharmaceutical Group Corporation, China National Building Materials Group Corporation (CNBM), Xinxing Cathay International Group Co., Ltd., and China Energy Conservation and Environmental Protection Group (CECEP)] as enterprises for a trial run of SOE reform based on four themes, namely 1) reorganization into a state-owned capital investment company, 2) development of a mixed ownership economy, 3) exercise of authority of the appointment, performance assessment, and compensation management of high-ranking management officials by the board of directors, and 4) ongoing presence of a discipline examination team at SOEs. This information reconfirmed that the Chinese leadership continue to regard the reform of the SOEs as an issue of the highest priority. (However, it is true that some question the impact and seriousness of the reform of SOEs in China, given that details of the future setup are not clearly defined and that the adoption of a model of the mixed ownership economy advocated in the Decision at the Third Plenary Session of the Central Committee was clearly stated only for the two companies, namely China National Pharmaceutical Group Corporation and CNBM, despite the fact that the return on assets (ROA) of SOEs is said to be half of that of private-sector companies. Given that it is said that for the future operation of these two companies, a scheme similar to the one for the listing of China International Trust and Investment Corporation (CITIC Group) in Hong Kong, which startled the world in March 2014, will be used, the following is likely: The two companies will list all of their group companies by consolidating shares and other group assets into their listed subsidiaries, and, in this process, these subsidiaries will raise funds from the private sector by issuing new shares to institutional investors.) Since the State Council's permission allowing for China Everbright Group to change its company form from an SOE to a stock company was reported on August 4, 2014 as the most recent move in the reform of SOEs, the market has been looking very closely at how the reform of SOEs will proceed hereafter.

The reform of SOEs owned by local governments also has been pursued since the Third Plenary Session of the Central Committee, and announcements on the reform of state-owned assets by major local governments such as Guangdong province, Beijing, Chongqing, and Sichuan province, which started with Shanghai in December 2013, have been put on the table, although the degree of maturity in their content varies. Since two-thirds of the 150,000 SOEs in China belong to local governments, and many of their industries are non-strategic sectors, meaning it is relatively easy to invite non-state capitals, the main targets for the promotion of the mixed ownership are local governments. However, as the Chinese proverb "Far away and unreachable by the central government" suggests, it is not uncommon for the policies of the central government to be ignored by the local governments. In addition, as many SOEs belonging to local governments are not competitive and are saddled with tremendous debt, local governments seem to have an agenda of using the reform of SOEs to resolve their debt problem. In any case, the specific execution of reforms will be set out through detailed rules to be announced in the future.

The main battlefield for the Xi Jinping government is neither political nor diplomatic, but economic system reform. While the reform of SOEs is the item on the reform agenda that is receiving the most attention at the moment, how SOE reform will unfold depends upon various elements such as defeating the vested interests involved in the operation of SOEs (through the anti-corruption campaign), eliminating the remaining opposition to mixed ownership economy, promoting understanding of corporate governance, and nailing down and addressing the negative effects brought by the shakeout that are to arise in the process of reform. In other words, the anti-corruption campaign is a tool for the economy system reform and will proceed if it is necessary to enable the reform and not proceed if it is not necessary. The most important consideration is not to look at the anti-corruption campaign by itself, but to watch it closely and organically together with progress in economic system reform, including the reform of SOEs.

August 19, 2014

August 19, 2014

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