Illustration: Peter C. Espina/GT
The development of a mixed-ownership economy is an institutional project in China's overall economic reform which involves redesigning economic ownership, overhauling State-owned enterprises (SOEs) and innovating the regime governing State-owned assets. Mixed-ownership reform is tantamount to rebuilding the foundation of the economy, which is strategically important.
There are different understandings of what mixed-ownership reform specifically refers to and consequently how to push the reform. If this can't be clarified, some discrepancy might occur amid efforts to implement the reform.
Mixed-ownership is generally understood in two ways in the academic world: from a macro- and micro-scale point of view. The macro interpretation, also the mainstream view in Western economic circles, focuses on the ownership structure of the whole country which comprises of both the State-owned sector and the private sector and thus qualifies a country as having a mixed-ownership economy or a mixed economy. Many Western countries set up a large number of state-owned enterprises after World War II and certain state firms have been retained in various countries including Japan and the US in the wake of economic liberalization. A purely private economy is rarely seen and the majority of countries across the globe are mixed-ownership. Certainly, the ratio of state and private ownership varies among different countries. In this regard, China's economy is a mixed-ownership economy with the State sector accounting for roughly 70 percent of the overall economy and the private sector representing the remaining part.
It is also understood in the Chinese academic world that mixed-ownership refers to the coexistence of State-owned stakes and privately owned stakes within a company. The micro-scale interpretation is a far cry from its macro counterpart that is widely accepted in the West, but is nonetheless prevalent or even more popular among China's policymakers and those in the country's financial circles. This preference needs to be contemplated, given that in micro terms a company is an independent entity and its ownership composition is supposedly determined by the company's own conditions and the external constraints it faces. Whether or not capital under a different ownership structure should be introduced into a company, be it State-owned or privately owned, is therefore dependent on the company's policymaking based on its actual needs. It requires careful consideration for an SOE to introduce private capital and vice versa, as the company's internal management structure and policymaking mechanism will be profoundly changed after the move.
The preference toward the micro input is also directly related to the current economic situation which sees the country facing a pivotal period in overhauling its State sector. China's SOEs need urgent improvement and tougher regulation and it's hoped that this could be achieved through the introduction of private capital. However, it needs to be based on market rules rather than being a top-down command. For the introduction of private capital into an SOE to truly improve corporate management, the decision-making mechanism should be genuinely changed to give certain power to private capital.
The understanding of a mixed-ownership economy from both points of view coexists in China's academic world and also among policymakers, which accordingly leads to reform being pushed forward in two different manners. The macro interpretation puts an emphasis on fair competition between the State and private sectors, and as a consequence, the reform is mainly aimed at providing a level playground for both SOEs and privately owned enterprises. SOEs and their private counterparts are advisably treated equally in terms of intellectual property protection and market access for common development to be pursued. It shouldn't be the case that SOEs move ahead at the cost of privately owned enterprises stepping backward.
In the current context, mixed-ownership reform from a macro point of view should perhaps be more favored, as it breaks the monopoly of SOEs in competitive fields and offers private capital an equal opportunity to take part in market competition. By doing so, the country develops the private sector, sharpens the competitiveness of the State sector and shifts the economy toward being more market-oriented. As long as market monopoly is removed and SOEs and private companies are treated equally by the law, market competition will automatically enable the survival of the fittest and force SOEs to implement institutional reforms.
That is not to deny mixed-ownership reform from a micro point of view. The emergence and popularity of the micro interpretation is inevitable at the current growth stage. However, it should be kept in mind that reform in this fashion must adhere to the basic principle of showing respect to the company's independent policymaking. The introduction of private capital into SOEs shouldn't be considered just an expedient attempt, but should be a far-sighted effort to redesign the corporate governance structure to be market-based. Meanwhile, different regions and different enterprises should be encouraged to push forward mixed-ownership reform in differentiated and innovative ways to allow for a diversification of reformist drives.
The author is a professor of the School of Economics at Peking University. email@example.com