If Xi Jinping truly wants bold reform, he must allow private enterprise to drive China’s economic growth.
In his push to ensure China’s future development, incoming leader Xi Jinping recently called for “bold experiments and brave breakthroughs” to deepen the reform and opening up process. Without this spirit of reform, he stressed, there would be no China today or in the future.
If Mr. Xi is serious about such statements, then his party should direct reforms toward an outcome that, while inevitable in the long run, will nevertheless involve major institutional transformation. The present time provides the best opportunity to change the socialist economic system’s reliance on public ownership.
The difficulty of making such a change only underscores the need to start work now. The primacy of public ownership has long been a cornerstone of the Chinese system. China’s constitution clearly states that the state-owned economy is “the leading force in the national economy.”
The process of amending the constitution to alter this concept will be complex and difficult. But it should not dismissed as impossible or undesirable. Reformers should explain that the proportion of the state-owned economy in the national economy is not the only embodiment of the socialist economic system. Giving up public ownership as the mainstay of China’s economy need not lead to comprehensive privatization. Reform will simply help to establish a stronger, more market-oriented economic system.
Reformers should also remind their peers that earth-shaking changes have already taken place in China during the process of moving from a highly planned economic system to the socialist market-oriented economic system “with Chinese characteristics.” This shift has prompted a boom in economic development that has lasted for more than 30 years.
As China gradually advances its market-oriented economy and pursues more comprehensive development, the contradictions between public ownership and marketization have become increasingly obvious. Now that the goal of market-oriented reform has been further clarified, it is time to rethink whether China should still adhere to the economic foundation of public ownership.
In theory, public ownership refers to a model in which ownership belongs to all people. But this concept has proven to be incompatible with the basic principal-agent relationship in economics.
In China, citizens are the real shareholders of state-owned enterprises, but the people entrust the government to administer ownership. Enterprises are supposed to use reasonable care and skill in performing the duties to maximize shareholders’ benefits. But in reality, government officials supervise the enterprises, and the shareholders have no rights and don’t receive a fair return.
In other words, the government and enterprises are not in a true principal-agent relationship, but rather in an agent-agent relationship. This can lead the government to fail to exercise its oversight responsibilities as an owner, and is the root cause of severe corruption.
What’s more, the fact that state-owned enterprises have a monopoly in many industries is the main obstacle to sustainable economic development. The industries with the lowest efficiency and most economic contradictions are those with a high proportion of state ownership: health care, railways, energy, banking and education, for example.
In contrast, Chinese industries that are highly market-oriented are dynamic and develop rapidly. These include home appliances, textiles, automobiles, food and retail. Companies working in these areas will drive sustainable growth.
Look at regional development. The regions that have a well-developed private economy, such as the Yangtze River Delta and Pearl River Delta, have already become the heart of the Chinese economy. They have taken a leading role in national economic development over the years.
Nevertheless, today state-owned enterprises enjoy many privileges in the distribution of the means of production, market competition and legal protection. These advantages have created many inequalities in the country’s market economy. Private enterprises, which are expected to lead the way in the ongoing growth of China’s economy, struggle to survive and develop.
Based on recent speeches delivered by Xi Jinping, one can conclude that the new leaders have realized that if the country does not adhere to the process of deepening reform and opening up, sustainable development will face serious challenges. As Mr. Xi said himself, it is time to be bold and brave. It is time for China say good-bye to over-reliance on public ownership.