Why are SOEs so bad ? Because the "West knows Best" ? China has been "saddled" by "hugely inefficient" SOEs since before Deng Xiaoping's time. Why then China's economy has been growing at break neck speed yet to be matched by any post WW II economies ?
Below are my take on China's SOEs that most Western economists do not want to talk about.
Type 1 SOEs : China created certain SOEs for the main purpose of preserving employment. These are the genuine "inefficient" ones. Instead of laying off the people and pay them unemployment and other social hand outs like Western countries, it is the Chinese government's philosophy to offer them employment instead to preserve their dignity and Chinese's work ethics. You can see the same philosophy in China's foreign policy which rarely offers foreign aids like her Western counterparts. Instead, China helps other countries by offering investment in business and infrastructure projects with low interest loans. In doing so, Chinese treats them as equals. Back to those SOEs. Overtime, as China's per capita income improves, these type of SOEs will slowly disappear. But the priority is not on reforming them (i.e. make them profitable by laying off people), but on making people less dependent on them for employment (i.e. create other better paying job opportunities).
Type 2 SOEs : There are certain industries that will never be profitable, but are of great importance to China's economic development. A good example of those is the railroad. US's rail transport is essentially all privatized. At the other end of the spectrum, the Indian rail transport is part of the government's Ministry of Railways. How well both work is for all to see. China has chosen the middle approach via SOE and has the best result to show among the three. These SOEs are hardly "inefficient" and provide services to Chinese citizens that are the envy of the rest of the world.
Type 3 SOEs : There are certain industries that are strategic to China's survival as a nation. Example of these are the shipping, ship building, energy and energy services, defense and certain financial segments. These have to be state controlled and supported. Imagine a powerful foreign government put sanction on any company that ship goods for China and China has no strong shipping companies of her own. Like Type 2 SOEs, majority of Type 3 SOEs can hardly be called "inefficient" as Western media would want you to believe in.
Exactly, and excellent points. Just to add that western economic and political hectoring can never be trusted. Half of it is western internal ideological conflict spilling into the outside world, and the other half are malicious lies of sweetened poison pills. If you are stupid enough to follow their proscriptions, you will either end up robbing yourself to profit western oligarchs, and/or you end up wrecking your own economy.
If Chinese SOEs were half as bad as western talking heads would have you believe, why was getting China to scrap and break them up such a central part of Trump’s initial trade war demands?
Western main strain capitalist economics is a lie, but American and other western societies have become so focused on ideological purity rather than reality, anyone who dares to question this new orthodox is marginalised and discredited, while quacks who’s predictions are proven wrong time and again and given prominent positions of power and influence.
The free market model just doesn’t work very effectively to technological breakthroughs and true innovation.
If we look back at America’s golden age and the height of its powers from the 80s to early 2000s, we can see that the backbone and foundation of America economic success was its scientific dominance, which in term was underpinned by vast government (Usually military but also with significant contributions by the likes of NASA) funded and directed R&D.
Apple and the iPhone is perhaps the perfect case study in both earlier American success, and present day American stagnation.
Apple was just a mediocre bit player until the iPhone revolutionised its fortunes. What is remarkable but rarely reported is that of the 10 most central and revolutionary technologies that made iPhones and other smartphones possible, every single one was created through American government (read military) funded R&D programmes.
Apple was able to take the fruits of these government programmes (at almost no cost) and combine it to make the most successful and profitable product in human history.
While private enterprise obviously played a critical role in taking existing technologies to make this revolutionary product, what is always omitted (due to western ideological battles) is the equally if not more important role government played in researching the underlying technologies that made the smartphone possible.
It is no accident that as the Cold War ended and America massively scaled back its government R&D funding, American private tech companies went into its slump of stagnation and decline.
iPhones have stagnated and fallen increasingly behind its Asian rivals in terms of introducing new technologies and features because America stopped making the big, revolutionary scientific breakthroughs, and it is Asia (Specifically China) that is now taking the lead in terms technological innovation.
When I was working in the pharmaceutical industry, a global product development director gave a perfect illustration of why private, market driven R&D is ineffective and wasteful.
When private medical companies make investment decisions on what medicines to invest their R&D budget in, they look, above all else, at profitability.
That means the diseases that affect the most number of people, and treatments that are most likely to be successful, are the ones individual private companies would choose to invest in.
The problem is that every private company is independently making the same choices based on the same parameters and data, which means invariably, most private companies end up investing to develop the same kinds of medicines for the same most common diseases. You end up with massive duplication and waste with dozens or even hundreds of functionally identical treatments for some diseases while other, potentially more dangerous and lethal diseases are passed over altogether.
The frequent patent wars between Apply and Samsung is a good example of this happening. It’s pretty common for two completely independent teams to come up with the same solution if they were set the same task with similar budgets, deadlines and parts supplier. Consequently, many private companies are also increasingly wasting their R&D budgets on diversification rather than innovation, if a rival managed to get a key piece of technology patented first. Even if they completely independently developed their version, a patent court is likely to rule that they are in breach, so the loosing company would need to invest more resources and time to literally re-invent the wheel to avoid having to pay exorbitant licensing fees to a direct rival.
It is the central role of government that is the key different between the likes of Huawei and Apple now.
As such, I would say that the most fundamentally important role that Chinese SOEs perform is not employment support, but R&D investment. Closely followed by infrastructure building and only then social stability through employment.
The main reasons western think thanks have such an almighty hard-on for breaking up and privatising Chinese SOEs are twofold.
From a strategic POV, since America cannot easily go back to Cold War era state R&D funding levels due to internal ideological differences (incidentally, a key reason why many hawks in the US are pushing for a new Cold War with China is because they also privately recognise the Fundamentally important role of state lead R&D but cannot win the internal ideological battle without a new Big Bad to scare the free market purists with), the next best thing in terms of the Great Game competition with China is to try and trick China into giving up its own edge in this area.
The second reason is because privatisation is the biggest profiteering bonanza possible for oligarchs.
Privatisation has always been the biggest transfer of wealth from the state to extremely few, well connected private individuals in human history.
Oligarchs cherry pick the most profitable parts of public institutions and pay pennies on the pound to make them theirs while leaving all the unprofitable parts for the state to continue running.
Previously SOEs might be breaking even or even making small profits because they were able to cross subsidies to provide vital services to unprofitable areas, but after privatisation, the privatised parts start making record profits for their new private owners because they no longer need to subsidies for the unprofitable vital services, while the remaining publicly funded services make record losses that the taxpayer need to pick up because all their profitable parts have been sold off. This is then used to illustrate the ‘inefficiency’ of SOEs to justify more privatisation. It’s just one giant scam and works in the west because the rich oligarchs who stand to profit the most from privatisation also owns all the media and the politicians making the decisions.
It is the most disgusting kind of legalised corruption and robbery of state coffers in history, and is most certainly not something China wants to be learning from the west.