The new leaders of the Chinese Communist party recently announced that the market would play an expanded and “decisive” role in allocating China’s resources. Yet the same announcement reaffirmed the continued “vitality” of the state-owned enterprises that dominate the country’s economy.
While these two goals appear to be in conflict, they could both be advanced by allocating substantial blocks of shares of such enterprises to the National Social Security Fund, a Chinese manager of pension assets. This approach would have the added virtue of strengthening the pension system by increasing pre-funding of retirement benefits.
In China, a small group of state-owned enterprises hold a near monopoly of power in key sectors – such as banking, energy and transportation – and pay little or no dividends. If China’s economy is to become more productive, they must become more responsive to market forces, with lower customer prices and lower operational costs than competitors. As a result, China has begun negotiations with Europe and the US on investment treaties, which would allow foreign companies to compete in some of the sectors dominated by state-owned businesses.