Privatization should occur ‘carefully’ in China

Privatization should occur ‘carefully’

Updated: 2013-11-12 02:53

By Mike Bastin ( China Daily)It’s been some 35 years since the late Chinese leader Deng Xiaoping and his followers held theParty meeting that set China’s reform and opening-up policy in motion and instigated China’seconomic miracle.

Since then, China’s spectacular economic growth has seemed unstoppable, with the nationexpected to replace the United States as the world’s largest economy.

However, many have argued for some time that the nation’s economic growth model isn’tsustainable, based as it is on low-cost production, foreign direct investment and exports.

Change, it is argued, toward domestic consumption and innovation must come sooner ratherthan later. So there’s much anticipation about the outcome of the Third Plenum of the 18thCentral Committee of the Communist Party of China, which ends on Tuesday.

It is not just Deng’s announcement at this time in 1978 that has proved pivotal to China’seconomic emancipation.

In 1993, former Chinese president Jiang Zemin used this session to cement the market reformsnecessary to facilitate the nation’s entry into the World Trade Organization in 2001.

So, what announcement should we expect this time? Perhaps major reform of State-ownedenterprises?

Those of a more liberal persuasion have long argued for a rather revolutionary approach toending the dominance still enjoyed by the SOEs. Although their numbers have declined, SOEsstill account for almost 50 percent of China’s GDP.

While certain SOEs will probably remain under tight government control for some time, don’t besurprised to see privatization accelerate in the banking and energy sectors.

But is the wholesale privatization of the SOEs, however gradual, really the answer to increasedefficiency and competition across Chinese industry?

Privatization of SOEs usually sparks a stock market frenzy among investors. But few look at thelong-term outcome.

For example, in the United Kingdom, energy prices charged by privatized utilities have risen farfaster than the cost of living in recent years. Yet these companies face scant competitivethreat.

China should note such examples carefully, despite rising criticism targeted at the SOEs.

The nation should instead opt for a partial privatization with sufficient government power toprevent excessive profits and artificially high costs for Chinese consumers.

Partial privatization should still go far enough to allow for an infusion of private-sector discipline,such as careful cost controls.

Let’s hope that the Chinese government can accept the evidence of Western utilityprivatizations over many years; which is that utility markets can never sustain anything like thecompetitiveness necessary to guarantee choice and affordable prices for consumers.

Over the past 35 years, the government has enacted numerous economic reforms with thecaveat “with Chinese characteristics”. Let’s hope that any privatization plans and policies areno different.

The author is a visiting professor at the University of International Business and Economics inBeijing and a researcher at Nottingham University’s School of Contemporary Chinese Studies.The views do not necessarily reflect those of China Daily.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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