Below is my translation of an article by Qiu Feng, the head of research at the Unirule Institute of Economics. The article appeared in the Economic Observer (H/T Sinocism), and discusses how the recent corruption crackdown on PetroChina is really the first move in major economic reforms to come. Qiu gives a very harsh judgment on economic reforms under Hu-Wen (saying they stalled and then even regressed), but he seems optimistic about what Xi and Li will push at the 3rd Plenum and beyond.
As always, corrections and suggestions on the translation welcome (especially for 政商___).
New Round of Reforms has Already Begun with PetroChina Corruption Crackdown
In terms of scope and depth, the storm surrounding PetroChina has been a rare sight, and one that is not only about fighting corruption. The PetroChina storm also has a deeper political significance: it’s clearing the way for reform, or at least economic reform.
Since around the time that China entered the WTO, reform has stagnated and even been reversed. This has been most famously characterized by the widely-recognized phenomenon of “the state advances, the private sector retreats.” Taking some of the major examples, we’ve seen private oil producers in northern Shaanxi driven out by the government, and private coal producers in Shanxi forced into mergers by state-owned enterprises (SOEs). Land that originally belonged to urban residents and farmers has become a government asset operated by municipal investment corporations. In all this we see the broadened scope of “the state advances, the private sector retreats”.
In general, for the past ten years SOEs have established, consolidated and even expanded their monopoly position in the crucial areas of the national economy. These SOEs have worked closely with foreign capital and seriously squeezed the space in which private enterprises can exist. On the whole, for the past ten years China’s private sector has been going through tough times, and scope has been shrinking. This is all to say that China hasn’t just failed to make progress on marketization, it’s actually been regressing.
The example of PetroChina has shown that these monopoly SOEs have sufficient strength to block any reforms to the system. For example, in these past ten years the oil industry has completely ossified and no progress has been made on marketization. Monopoly enterprises like PetroChina can even block industrial restructuring. Looking at the development of shale gas, PetroChina has adopted a strategy of obstruction and become a major roadblock to the industry’s development.
The current system allows PetroChina to have this kind of strength. It is a corporation, but one enormous in scale and with deep pockets. It can wantonly use it’s financial power to pursue the economic goals it sets as well as political goals. PetroChina is also a quasi-political organization: it’s top management either were once officials, will go on to become officials or have close relationships with officials. Because of this, the organization is half-political. In the current political structure, there isn’t anyone who is able to supervise it. Having Jiang Jiemin serve as the director of the State-owned Assets Supervision and Administration Commission (SASAC) means that SASAC will act as the protector, not regulator, of these SOEs. One can imagine, if Jiang Jiemin hadn’t been unmasked, PetroChina’s monopoly position would have continued to grow stronger.
This is all to say that PetroChina and other monopoly SOEs are still a kind of business-government hybrid super corporation. It enjoys government powers but has the flexibility of a corporation. In the economic realm it can do what it wants, and it can pin down government departments such that they can only protect its interests and are powerless to regulate it. It rides atop the government and runs free in the markets (它凌驾于政府之上，活跃于市场之中), feasting on market profits and government privileges. The environment that these enterprises operate in is different from the pre-reform environment for SOEs in the 1990s. At that time, SOEs were central to economic activity and economic plans were the main mechanism driving the economy. These enterprises couldn’t avoid falling on hard times. But after undergoing the SOE reform in the 1990s, the whole economic environment experienced major changes: the market became the mechanism driving the economy and private enterprises were central to economic activity. The remaining SOEs like PetroChina were concentrated in resource industries, and there they enjoyed the surplus from private enterprises and obtained monopoly profits (通过分享民营企业的剩余而获得垄断利润). The good days for these companies derive from market mechanisms, but their super-sized scope seriously hinders marketization.
If China wants to take the next steps for reform and to push forward marketization, it must break the stronghold of these super corporations. The storm surrounding the corruption crackdown at PetroChina is different from the Chen Tonghai case of years past: the ripples are wider and the digging deeper. The Chen Tonghai case was merely an anti-corruption effort, but the meaning of the PetroChina case is clearly not limited to anti-corruption. Of course it’s important to catch a few corrupt officials, but the deeper meaning lies in striking these monopoly enterprises, in clearing the way for systemic reforms. Included in this is destroying the monopolies in related industries.
After the storm had passed, on September 6th Premier Li Keqiang chaired an executive meeting of the State Council in order to hear a third party report on the implementation of policies regarding private investment. The research discussed measures to effectively guide and stimulate dynamic and healthy development. Li Keqiang pointed out that the primary task in stimulating dynamic private investment is the deepening of reform. This requires eliminating the systemic conditions and obstacles that shackle private capital and limit its dynamism. Reform has two dimensions: first is the effective breaking of monopolized industries, second is the creation of an environment that allows for fair competition by private capital.
However, at the present moment the difficulty in breaking these monopolies will be extremely difficult. First, the benefits enjoyed by these monopolies are huge, and every monopolized state industry has a firmly established political network. During the systemic reforms of the 1980s that broke up monopolies, the main obstacles came from outdated ideologies. From the 1990s through today, opposition to reforms is completely based in entrenched interests. Corruption and other economic crimes are the produced by these entrenched interests (就是利益生产、输送和转移的表征).
Because of this, anti-corruption efforts are a necessary prerequisite to pushing forward reform. Corruption is abhorrent in itself, but behind corruption lie greedy desires and business-government networks that seek to grab these benefits and to protect their monopolies (腐败的背后则是为了攫取利益而维护垄断的贪婪欲望和政商网络). Only high-intensity anti-corruption efforts have a chance of tearing down these enmeshed business-government networks, and thus creating an opening for reforms.
From this angle, we can better understand the agenda of the late August meeting of the Party’s political bureau. The meeting considered and approved “Building a robust corruption prevention and punishment system, work plan for 2013-2017”. At the same time it decided that at the 18th session’s third plenum the main agenda item would be researching the far-reaching deepening of reform. That is to say, this round of anti-corruption efforts will keep the pressure on over the ong term, and will also open the way for long-term, far-reaching and deep reforms. You could say that the anti-corruption storm surround PetroChina has already pulled open the curtain on a new round of systemic reform.
(The author is Chairman of research at the Unirule Institute of Economics)