The Clash Of China's Two Economies

BEIJING: The problems of China's huge state-owned industries (SOEs) lie half-remembered on the edge of public and political concern. Given the robust growth of China's private economy over the past decade, this indifference may be somewhat justified. But how long China's two economies can continue to coexist is becoming a central question for policymakers.

Reform of SOEs around the world is polarized around two extremes. In Germany, restructuring of the SOEs of the former East Germany began soon after reunification and proceeded quickly, due to Chancellor Kohl's political will and the vast financial resources lavished on the problem. China provides the other extreme, postponing SOE reform for as long as possible even though the economy was growing fast, with the market taking root in most parts of Chinese life. This fact convinces many observers that the political will and financial muscle will never exist to tackle the SOEs.

Stealthy reform of SOEs, however, is now ongoing. The central government has given a "green light" to the sale of small SOEs run by local governments (counties and cities), which can be sold to private owners, individual, corporate, or foreign investors, as well as workers in the firms themselves. Although such restructuring so far often takes the form of mergers and bankruptcy, a great many SOEs have been converted into some kind of share-holding corporations, with the majority of shares held by workers in the firms.

These changes have been pursued in many localities since 1992. Many local governments, indeed, began these reforms without the official permission of Beijing administrators. Indeed, few local leaders reported what they were doing, one reason why few people are aware of how extensive this effort at SOE reform has been. This is not surprising. From the start of China's economic reform the saying "do it without saying it" has been the rule. Today's official recognition of this longstanding practice will only encourage a speedier pace to these reforms.