Martin Miszerak

The View | How China can reboot SOE reforms by following the Czech Republic growth story

China is paying a heavy economic price for its failed reform of state-owned enterprises. To reverse this, it can explore the successful Czech experience of tapping the expertise of private fund managers

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An employee on the production line at a factory of Chinese carmaker JAC Motors, one of the more successful state-owned enterprises, in Weifang, Shandong province. Photo: Reuters

Martin Miszerak

Published: 3:00am, 1 Aug 2019Updated: 4:10am, 1 Aug 2019

It is often forgotten that China’s thinking in the 1980s about economic reform, including of state-owned enterprises, was heavily influenced by leading “reformist” Central European economists of the so-called market socialism school.

However, serious reform of state-owned enterprises took off only in the mid-1990s under Zhu Rongji’s economic leadership, but this was much more radical than anything contemplated under market socialism. No doubt, this was influenced by the deep structural reforms undertaken by Central Europeans in the early 1990s as they embraced the Washington consensus, which prescribes an open economy, deregulation and fiscal discipline. In his book The State Strikes Back: The End of Economic Reform in China? Nicholas Lardy writes that Zhu’s reforms raised the average return on the assets of state-owned enterprises from about 1 per cent in 1997 to 6 per cent by 2007.

However, this changed with the Great Recession. Since 2007, state-owned enterprises’ return on assets have declined to 1.8 per cent in 2015 while their losses have grown to 2.5 per cent of China’s gross domestic product, from 1.4 per cent, as documented by Lardy. He estimates that China lost 2 per cent of its annual GDP on average between 2007 and 2015. China has been paying a heavy price for its failure to reform its state-owned enterprises since the Great Recession.

More recently, these have become a major bone of contention in the US-China trade dispute, with the Trump administration demanding a halt to subsidies for state-owned enterprises.

Clearly, further procrastination on meaningful reform of state-owned enterprises is not an option. To speed up reform, China should revisit some of the transition experiences of Central Europe, which has been infinitely more successful on this count.