Private Enterprises Incorporated Into SOE Operation Mechanism: an Unfavorable Trend

Author: Fan Gang, President of CDI

Editor’s Note: After acquiring the shares of private enterprises, large state-owned capital tends to operate private enterprises with SOE management mechanisms. This practice undermines economic flexibility.

In recent years, state-owned enterprises have become less energetic. New regulations set up in the national anti-corruption campaign have put SOEs under more rigorous supervision, resulting in slower decision-making process and less capacity for risks. Thus the government shall consider how to further develop the private economy. The next round of economic growth needs to be underpinned by independent innovation, which inevitably comes with huge risks. Compared to SOEs, the private sector is energetic and more willing to take risks. A risk-taking spirit coupled with a good decision-making mechanism is prerequisites for fully realizing independent innovation and market flexibility to inject vigor into economic development.

Despite a lot of support given by the central government in legislation and policies to the private sector to protect their interest and create a more enabling business environment, the operation mechanisms of private enterprises are often incorporated into SOE management after their shares are acquired by state-owned capital. Although capital has remained unchanged in the short term, this practice represents an unfavorable trend in the long run as it undermines economic flexibility. To better utilize state-owned capital to serve the private sector, the preferred stocks are desirable as they allows SOEs to invest in private enterprises for profit without imposing their own management system on the latter. In this way, private enterprises can maintain their vigor while assuming risks by themselves.