PRIVATE OWNERSHIP: Legally yours, at last

Stephen Green (Head of the Asia Programme at Chatham House in London)

(This article originally appeared in the October 6, 2003 issue of South China Morning Post in Hong Kong and is reproduced here with permission from the publisher)

China's Communist Party theorists may try to blur the definitions, but there are two things that clearly differentiate capitalism from communism. The first is prices. If the prices of goods and services are set by supply and demand, you are probably living in a capitalist country. If, by contrast, they are set by bureaucrats, chances are you are living under communism.

The second telltale sign is ownership. If individuals are the predominant owners of assets, then capitalism reigns. If the government is the major owner, then the communists are in charge. The magic of the former system - and one encapsulated in the stock market - is that, if all goes well, many people can gain a slice of ownership.

China's economy is caught somewhere between the two. All but a handful of goods and services are now priced by the market. The dozen-or-so goods whose prices remain controlled are basic items - grains, like rice and wheat; utilities, like gas and water; and money (since interest rates are fixed by the central bank).

Measuring the publicly and privately owned shares of China's economy is extremely tricky. Getting data from the companies themselves is difficult, and deciding whether each is private or public is often a huge challenge, given the mixed ownership structure that has developed.

Some brave economists have had a go. In 2000, the International Finance Corporation, the private equity arm of the World Bank, estimated that the private economy accounted for 33 per cent of industrial output - 62 per cent if agriculture and collective enterprises were included. More recently, Guy Liu Shaojia, an academic at Brunel University in Britain, found that 54 per cent of industrial output is accounted for by state-controlled firms.

China's private sector has grown in two ways. The first is organic: firms like Taitai Pharmaceuticals in Shenzhen were established by entrepreneurs. The second method is privatisation of state-owned enterprises (SOEs). Most of China's small and medium-sized SOEs have been sold, mostly to their own employees.

About 1,200 large SOEs have been restructured into shareholding companies and listed their shares publicly. However, China's stock market has not been a vehicle for privatisation. When SOEs issue shares, they usually sell only 20-25 per cent to the public.

A recent survey by the Shanghai Stock Exchange calculated that by the end of last year, 78 per cent of listed companies were still controlled by the government, via holdings of non-listed equities. However, with off-exchange sales of non-listed shares to private investors hotting up, it is likely that the figure is now closer to 70 per cent.

The government likes to call this ownership structure a "market socialist economy". And for the first two decades of reform, this wonderfully vague formulation was perfect. It gave the government the best of both worlds: the productivity of the private sector, and the power that came from retaining control of the most important parts of industry.

Now, however, some tough decisions have to be made. The fundamental issue is this: what amount of private ownership is the ruling party willing to accept?

Experience in the former Soviet bloc suggests SOEs perform best when they are sold off. Many officials, including those at the China Securities Regulatory Commission (CSRC), realise this and want to push ahead with the sale of state shares. A fully privatised stock market would do wonders for corporate performance.

But the forces ranged against such a measure are formidable. The issue is not really one of ideology. Clever party theorists an always be relied on to lend theoretical legitimacy to any strategy that top management adopts.

Rather, the issue is one of brute politics. Russia is again instructive. Its mass sale of state assets in the early 1990s served to weaken the politicians. This was, partially at least, the point: reformers wanted to burn the bridge that led back to communism.

But the sales also empowered a new band of super-rich owners, the oligarchs, and they went on to cause no end of trouble for president Boris Yeltsin. China's leadership would, of course, rather not have to deal with Chinese oligarchs.

For ordinary people, the issue is more personal. Workers worry about being sacked by new owners keen to cut costs. SOE managers fear losing their powers of patronage and ability to steal assets. This loose coalition has decided privatisation has gone far enough. Plans to sell off state shares in listed companies were lampooned in 2001 and no one who wants a future in politics dare touch the issue.

Privatisers and their opponents will slog it out over policy for the next five years. In March, the National People's Congress saw the establishment of the State Asset Management Commission, whose mandate is to tighten control of the 196 massive state firms run out of Beijing (bad news). But most smaller SOEs, run at the provincial level, look set to be sold off (better news).

It matters a lot how the conflict develops. In a recent International Monetary Fund publication, economists Paul Heytens and Harm Zebregs argue that continued 7 per cent annual economic growth is possible, but only if structural reforms are intensified. Of course, this is dangerous for the senior leadership, which risks making itself irrelevant by empowering the private sector.

It is a chance they will have to take, since retaining the present messy ownership structure will almost certainly lead to an economic malaise. And they certainly could not survive that.