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Temasek model doesn’t offer necessary foundations for SOE reform in China


By Rakesh Gupta    Source: Global Times    Published: 2015-8-28


Moving from a centrally planned economy to a market-based economy has not been an easy journey for China. In an economy where everything was owned by the State and allocation of resources was based on the needs of society and not risk-adjusted returns, this move toward a market model in which reallocation of resources is based on best use has not been easy. Policymakers are trying to balance between the twin objectives of return from resources and control of resources and at times these two seem to be in conflict.

No matter how complex and difficult this process may be, President Xi Jinping is committed to the reform of State-owned enterprises (SOEs). And the interpretation of the objectives from the Third Plenum in November 2013 is that the reform is inspired partly by the Temasek model in Singapore.

Temasek, a holding company 100 percent owned by the Singapore government, invests in the equity of different projects mainly in Singapore and the rest of Asia. There are a number of different versions of the model being used to achieve the objective of the reform process. However, the basic idea is to have a centrally managed investment company and then a layer of State level investment companies that will make investments in the SOEs and their subsidiaries.

This plan has support from a large number of scholars and policymakers, primarily thanks to the success of the Singapore model. It is also attractive because it retains central control over all SOEs without the need for direct day-to-day involvement in the decision making process at individual SOEs.

However, sticking to a reform process based on the Temasek model is living in the past, and it seems that despite the reforms, the government and policymakers do not want to relinquish central control.

This could lead to reforms that are somewhat superficial, although supporters of the idea may argue that a market model can be achieved by way of an investment company (or wealth fund) functioning as an investment that will have to pay taxes and dividends to shareholders, just like any other company in a market-oriented business model.

Another important issue in this debate is corruption. The Temasek model has worked in Singapore, where the government and public systems are relatively clean and where the size of the bureaucracy is a fraction of that in China. Corruption and a significantly larger economy may pose problems in implementing the Temasek model in China.

Furthermore, historically, China has been a society with a strong acumen for business, as is evident in the success of the silk route and tea trade. Despite China`s success in entrepreneurship in recent times, much of the country`s growth has been based on government investment and massive infrastructure projects. Thus far, the growth of the private sector has been an outcome of economic success and not the other way around. In my view, the next phase of economic development in China will be driven by private sector growth, entrepreneurship and innovation and not the other way around. Policymakers have an opportunity to deal with the twin objectives of privatization of the SOEs and economic growth by way of dismantling the SOEs and letting them compete with the private sector. This would foster healthy competition in the market and force SOEs to work more efficiently in order to survive.

I realize that this could result in a short-term slowdown in economic growth, and some SOEs and private businesses may shut down, but that is part of normal economic processes in a competitive environment. Also, the process would result in the emergence of more robust business models and robust, albeit slower, growth.

Policymakers in China need to be clear in their mind about the objectives of the reform process. Reforms that are only meant to show people that the economy is moving toward a more market-based model, without there being any more substantial changes, are bound to fail.

China is at a crossroad and policymakers need to choose a clear path and send a message for the domestic and international markets.

Choosing the Temasek model for SOE reform appears to be in line with the current political philosophy of China, which is based on the view that communism and the market model can work together.

This view ignores the size of the Chinese economy, the extent of the assets held by SOEs and the political clout the managers and administrators of these SOEs enjoy in the economy and society at large. Sticking with a centralized system will not help in tackling corruption or the inefficiency of SOEs. The solution is to reduce the size of the SOE sector and not to try and create another monopoly out of a bad monopoly to fix the first problem.

The author is a visiting fellow at the Chongyang Institute for Financial Studies, Renmin University of China.

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