18
Oct
Q1: Recently, the official publicly expressed their views on the "competition-neutral principle" and caused great concern from the outside world. Is this related to the current China-US trade conflict?
Nie Huihua: First of all, there is no doubt that the trade conflict between China and the United States caused by trade friction has forced China to accelerate the pace of reform and opening up. But in general it should not be too optimistic, because it is only a commitment to a reform direction. For example, when China joined the WTO in 2001, it also made a lot of commitments, but achieving these goals requires time. Therefore, I can only say that I am cautiously optimistic about this direction of reform, and do not underestimate the arduousness of achieving the goal.
Q2: Why have we not seen Chinese officials have a clear statement on "competitive neutrality"?
Nie Huihua: This is related to our ideology and national conditions. Our ideology is dominated by public ownership and the state-owned economy is the dominant factor. Under this circumstance, it is almost impossible for state-owned enterprises and private enterprises to treat each other equally and compete equally. It can be said that this is determined by China's national conditions. Therefore, it is not appropriate to over-interpret this statement. It just indicates that we are improving in this direction. I think this is the right direction.
“Competitive neutrality” is not an academic term, and is not found in mainstream Western economics textbooks because Western economies do not have this problem. The West and scholars believe that under normal circumstances, the market economy should compete on an equal footing. In other words, this is a necessary premise and a prerequisite that everyone recognizes. There is another reason. In most of the developed countries' market economies, the proportion of state-owned enterprises is low, and their state-owned enterprises have almost no direct competition with private enterprises.
I have checked this term. It was the competition policy proposed by the Australian Government Council in 1994. It was implemented in 1996 and was promoted by the OECD around 2011. In fact, I think this is not a new economic term, in the past everyone did not use it. However, this does not mean that we do not pay attention to this issue. There are economists are calling for the equal treatment of state-owned enterprises and private enterprises all the time, and the elimination of discrimination on ownership. There has been a lot of research on ownership discrimination, especially in financing. So it’s not that China didn’t do it, just changed the way of saying. So I think everyone should not be too excited about this. First of all, it is just a new way of saying, and there is no new content. This is what the country has been doing. I mean, it is not the Chinese government that has realized this problem until now. Many scholars and officials in China are aware of this problem. They are all pushing in this direction. It is to push the state-owned enterprises and private enterprises to treat each other equally.
What is the meaning of public claims all of a sudden? It may indicate that the central government is determined to reform state-owned enterprises in this respect. I think this may be a positive signal.
Q3: China has clearly stated its support for the changes of the World Trade Organization. The Chinese official now expresses its acceptance of the principle of "competitive neutrality". Will it have a far-reaching impact on the current trade friction between China and the United States and the future WTO talks?
Nie Huihua: If the official is really implementing this principle, it is definitely a very important reform for the state-owned enterprises. I have been studying the reform of state-owned enterprises. After 1998, state-owned enterprises basically did not have major reforms. Of course, some people say that there is mixed ownership, but mixed ownership is not new. The listed companies of state-owned enterprises are mixed ownerships, so strictly speaking, there is no major reform of state-owned enterprises after 1998. Today, I saw the principle of "competitive neutrality" included in the state-owned enterprise reform agenda. I think this is big positive news for the reform of state-owned enterprises, because the reform of state-owned enterprises is the core of the economic reforms. Generally speaking, everyone said that economic reforms look at state-owned enterprises, state-owned enterprises do not change, and other things are difficult to change. So I can only say that this is a good signal, but I can't say that it will be realized soon or everyone will benefit.
As for some people expressing concern about the mixed ownership reform that is now being pushed forward, I think this is a bit of conspiracy. The reason is very simple. State-owned enterprises themselves are not as efficient as private enterprises in many fields. This is a natural fact and there is no need to evade. In terms of the current knowledge structure and personal experience of leaders, although they have extremely strong feelings of state-owned enterprises, I believe that they understand the history and current situation of state-owned enterprises, and understand why state-owned enterprises should be reformed in the past, and that reforms will not work.
Q4: It is generally believed that "competitive neutrality" is not just a general term of “favor one more than another”, but a detailed norm and meaning. The “competitive neutrality” connotations identified by the OECD include eight aspects: business operations, cost recognition, commercial return, public service obligations, tax neutrality, regulatory neutrality, debt neutrality and subsidy constraints, and government procurement. Can we analyze one by one, and will China have a convincing concrete performance in complying with these norms?
Nie Huihua: It is very easy to talk about one idea, but to be practical, "competitive neutrality" is very difficult at present. There is no one aspect can be achieved easily.
For example, in terms of return on investment (ROI), the principle of "competitive neutrality" is that state capital is invested in state-owned enterprises. It is necessary to take a normal ROI, which cannot be low or high, but it cannot be done. In 2008, central enterprises began to pay dividends, accounting for 3%-5% of net profit, which is too low. What does it mean? I checked, from 2011 to 2017, the return on assets (ROA) of state-owned enterprises is 7%-12%. In other words, if dividends are to be paid, this part should basically be paid to the state, because this is the income of state capital, it is shareholders should get a net asset. In other words, the denominator should be a net asset, not a profit, which means that almost one-third of the profits must be turned over. Do you think that state-owned enterprises may now pay 1/3 of their profits to the country? Also, if you get return after the payment, it will not be counted, which violates this principle. So this is very difficult to do.
Cost confirmation is also difficult. Many state-owned enterprises do not have market competitors as a control group, so there is no way to calculate real opportunity costs, such as Beijing Public Transport. If there are two operating companies, one state-owned enterprise and one private enterprise, this is a good comparison. If the cost is not well accounted for, the income, investment, and profit cannot be accounted for. In the control group, only industries with market competition can easily confirm the cost, because the real cost should be the opportunity cost. Take the Beijing Public Transport as an example. All the buses are operated by this state-owned company. What is the cost? It can't be said that it is how much it is reported. If we want to calculate the real cost, it can be calculated under competition. This is hard to calculate. As far as I know, most public transportation industries are hard to calculate costs. I have previously provided advises for a local development and reform commission, they have not known how much the real cost of local subway operations is. Why is that? First, there is no data. The operator will not easily hand over the real data; second, without a control group, it is difficult to calculate the cost in an accurate way. If you can't accurately calculate the cost, it means that your income is very problematic because the income is closely related to the cost.
As for the tax neutrality, China has done a good job. It is basically difficult for state-owned enterprises to evade taxes, and there is no incentive to evade taxes. What happens after escaping? Private enterprises have tax evasion. It is undeniable that it may be related to the high tax burden. Therefore, relatively speaking, the state-owned enterprises have done a good job in tax neutrality.
Regulatory neutrality, this cannot be guaranteed. In truth, all the companies that have gone wrong should be "the same rules apply to everyone", but this is actually impossible. In the past, when macro-control institution violated norms to approve programs, private enterprises were often punished, and state-owned enterprises were rarely punished. To give a simple example, the Tieben incident, so many companies have expanded on a large-scale, get land approval and do construction illegally, but finally private enterprises have been closed and taken over by state-owned enterprises, so that how can it make everyone believe in regulatory neutrality?
Debt neutrality is not possible either. Many debts of state-owned enterprises can be reduced, exempted, renewed. They can convert debts into shares. Have they heard of private enterprise debt-to-equity swaps? No.
Subsidy restrictions, many state-owned enterprises get subsidies, private enterprises will find it difficult to get subsidies.
In terms of refinancing, state-owned enterprises can obtain implicit guarantees from the government, and private enterprises cannot.
It is needless to say government procurement, why are Lenovo computers selling so much? Because it is the government procurement. And Lenovo is obviously not a private enterprise. What I mean is that none of the above eight aspects is easy to achieve "competitive neutrality". At present, it is only a concept that has suddenly been publicly declared. Never give it blind optimism and over-interpretation.
Q5: How many in-depth discussions or support did Chinese scholars, including you, have in the past on the principle of “competitive neutrality” and made suggestions?
Nie Huihua: Scholars rarely discuss this issue because it is not a strict economic issue at all. If you want to explore, it is only said that scholars have discussed it before. For example, private enterprises will encounter discrimination in ownership during the financing process, and many people have studied it. Because this is a policy issue, there are not many people studying, which is normal.
Q6: Regarding the issue of market competition, state-owned enterprises and private enterprises should be treated equally to ensure that state-owned enterprises and private enterprises compete in a “fair playing field” – historically, countries have truly done this. Did they have their own difficulties?
Nie Huihua: This is not difficult for a country with a relatively small proportion of state-owned enterprises and a relatively standardized market economy. The main reason is that, for example, US state-owned enterprises do not compete with private enterprises. There are state-owned enterprises in the United States, and the US Postal Service is a state-owned enterprise, but there is no competition. In this field, it mainly provides general business, not value-added business. The common business is to send a letter, no matter how far it is sent, this is a business that does not make money. What is value-added business? To earn money. State-owned enterprises in United States are almost impossible to make money, and the efficiency is not too high, but it seems that Americans like USPS very much. Although they are losing money, they still support it, so there is no such problem.
For example, in Japan, the Japanese railways are basically privatized, and basically there is no such problem.
The key is that state-owned enterprises should minimize competition with private enterprises. This is an important aspect. The government has not deeply intervened in the market economy, which is actually the most important prerequisite. Under the premise that a government deeply intervenes in the market economy, the government has its own enterprise. How can it achieve fair competition?
Western countries do not have this problem because they meet these two conditions: First, the government does not directly intervene in the micro-economy; second, state-owned enterprises basically do not directly compete with private enterprises.
Q7: What are the necessary and sufficient conditions for placing state-owned enterprises in a level playing field in China? What are the fundamental ways to put state-owned enterprises in a level playing field?
Nie Huihua: This is basically a passive adjustment process. There are no necessary and sufficient conditions. If you can not do it, I believe that no one is willing to promote this reform, mainly external pressure.
What are the ways?
First, we must truly make the market play a decisive role in resource allocation, which means that the government should intervene less in the economy. As long as the government intervenes in the economy, it is impossible to achieve fair competition.
Second, state-owned enterprises should become "special enterprises". They should not face-to-face competition with private enterprises in a wide range of fields. They should be kept in a minority, such as key areas related to national economy and people's livelihood, national strategy, national economic lifeline and major industries. But this thing has to be defined. It cannot be said that everything is a key area. Selling fritters is also a national economy and people's livelihood. We must shrink the front line of state-owned enterprises and try not to compete with private enterprises.
Third, our laws and regulations, many systems must be changed, and state-owned enterprises and private enterprises must face the same rules of the game. For example, the Anti-Monopoly Law applies only to private enterprises and does not apply to state-owned enterprises. The merger of state-owned enterprises is not subject to the "Anti-Monopoly Law", and private enterprises will not.
Fourth, we have both the Regulations on Industrial Enterprises under the Ownership of the Wholes and the Company Law. However, state-owned enterprises are often managed according to the former.
Q 8: how to make sure that SOE with the State as one of its stakeholders is treated as the same independent business entities as other enterprises in market competition?
Nie Huihua: as we can see from these examples, many of our systems are still not fine enough to make sure a fair competition between SOEs and private enterprises. For fair competition, at least three essential conditions should be considered: Firstly, reduce government intervention. Secondly, make SOEs focus on special business sectors to limit the possibility of face-to-face competition between SOEs and private enterprises. Thirdly, same playbook should be applied to both SOEs and private enterprises.
Q 9: Government acts should not bring any real or potential “improper competitive advantages” to any market actor, particularly SOE. But, is it possible to achieve that under current system? Or is it the moment to further push forward SOE reform?
Nie Huihua: is it possible to do that? It’s difficult actually and it’s hard to say. It has been years we calling for SOE reform, yet we didn’t make much progress. It’s a positive signal that many people are now showing their attitude, but I don’t think the competitive neutrality is the core of reform. The three conditions I just mentioned are indispensable to the reform.
Q 10: Since the inception of the State-owned Assets Supervision and Administration Commission (SASAC), two major challenges –integration of government administration with enterprise and integration of government administration with capital- have not been addressed. Some efforts have been made, but it seems that much more need to be done. What’s your suggestion?
Nie Huihua: I personally believe that the reason why we can’t address these challenges is that we don’t have a clear positioning of SOE. None of the documents identified what’s the role of SOEs, what should they do anyway? If SOEs are special business entities then they should have special purpose and special position; if not, they should be treated like other enterprises. The most important point is how private enterprises can compete fairly with SOEs. By positioning, I mean what’s the function of SOE, economically, socially or politically? If SOE must act both economically and politically, there will be no way to separate the government from the enterprise. The mix up of SOE’s political and social roles with economic role will inevitably incur government intervention, which will surely lead to the unfair competition between SOEs and private enterprises.
Singapore Temasek Model is an alternative solution. I spoke with one of Temasek executives once at a symposium held by NADS, RUC, and asked him how their government can be a pure financial investor, because they have no other purposes. Temasek only cares about return of investment and put no political or social responsibilities on it. Therefore, it can invest across the world, such as making investment to ICBC and many famous Chinese projects, with the sole purpose of making money. There are no other purposes like social obligation and political obligation. As long as the economic interests are mixed with social and political interests, it will be impossible to build a firewall between the government and enterprises. Then how can we separate them? The premise is that the government only cares about financial gains and ROI without meddling about enterprise running and operations. In this way can separation between government and enterprise be achieved. It is impossible to separate government and enterprise if government has to shoulder political obligation and social obligation.
Q 11: In essence, the competitive challenges faced by SOEs in international market lie in the incompatibility between State-led economic system and market economy. At present, with the increasing significance of SOEs and Chinese economy in global business and trade, will it form bigger challenges on global competitive order?
Nie Huihua: Yes. Some foreign investors are afraid of Chinese SOEs considering of their size and number, and the increasing position of Chinese economy as a whole. Many people abroad don’t understand what SASAC is and figure it as something like leviathan. Their concerns are well grounded as SASAC is so big yet not transparent, and playing by rules different from theirs. It’s like you have a strong and robust man who upholds complete different cultural and faith in your community, will you be afraid too? Thus, it is normal to face such challenges, and Chinese SOEs should initiate the reform so other international actors can believe you and accept you as a fair competitor in global market.
Q 12: Peng Huagang, Deputy Secretary General of SASAC, noted that China calls for “the neutrality of ownership system”, opposing that different rules should be set because of the ownership of enterprises and that SOEs are treated discriminately in international rule-making. How do you see it? Is it reasonable that only when Chinese government treat all the enterprises equally at home can it be fair to multinational incorporations?
Nie Huihua: Peng means that foreign players should not discriminate Chinese SOEs. However, the problem is in Chinese market, overseas enterprises or private enterprises are treated differently with state-owned enterprises. Their discrimination in global market is a payback, and mutual harms will be done to both Chinese and foreign enterprises.
If we really can realize “competitive neutrality”, it will benefit both sides. Our policymakers should be foresighted, don’t give some preference to SOEs in the domestic market. Preferences will lead to the discrimination by foreign companies on Chinese SOEs, which will not be allowed to purchase overseas as a result. Finally, Chinese SOEs will become the victims. So we can’t only see benefits but ignore cost.
Q 13: Back to the China-U.S. trade war, we see from American 301 investigation report that the Trump administration and the public are worried about and even hostile to China’s development on high-tech sector. So, in the future, will China possibly make some adjustments to its current industrial policies in some key aspects, for instance, the list of “strategic emerging industries” and all kinds of support provided by government to those industries?
Nie Huihua: In high-tech sector, it’s a zero game. China must develop high-end manufacturing, and the United States can’t stop it. In the process of development, Chinese will definitely support SOEs, therefore, leaving not much room for negotiation. Right now, “Made in China 2025” is just a plan, we are not in 2025 yet, so some adjustments might be made. Although there isn’t much to talk, it’s still possible for China to open some sectors to overseas enterprises and private enterprises. All I can say is that other things won’t be optimistic.
As for the trade conflicts and disputes with America, I think that we have own problems. Many of our domestic policies are disconnected with international rules. So many years we have been discussing about the SOE reform, whoever has thought about international reactions to SOEs? No. Normally, considering of the big size and great influence of SOEs, we should have taken international reactions into consideration while making policies, but we didn’t. So here we are, being caught in the middle of trade war. The same problem happens again in making 2025 manufacturing plan. Anyone thought our plan might be inconsistent with WTO rules? No. That’s the most important thing we shouldn’t overlook.
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