For those who support state-owned firms, recent data must be encouraging; The National Resources Committee's latest statistics show that in the previous seven months, key state-owned firms saw 15.2 percent growth, with profits that totaled 496.75 billion yuan. Firms in the power, oil, and telecomm industries were the frontrunners. And Sinopec has won the distinction of being the most profitable Asian company with 80.6 billion yuan profit.
In contrast to the praise being lavished on these firms by some, we believe that their ballooning profits should not be taken as good news. Monopolies will always break profit records, as they essentially use their power to set prices in order to divert consumers' funds. They gain at the peoples’ expense, while restricting the opportunities for private firms to innovate and create wealth. In opposition to the market liberalization that China has experienced since joining the WTO, state-owned firms control society's resources.
Sinopec is an example. It was named Asia's most profitable company not because its output has increased, but essentially because oil prices increased 36 percent in the first half of this year. Thus Sinopec's windfall is due to its monopoly status combined with price increases. Power and telecommunications are also monopolized industries, and the core of their soaring profits lies in the price-fixing of their products as well.
One can also see that to a large degree, the profits realized by monopolies do not result in wealth being generated for society. Thus, we should not celebrate their being among the strongest 500 firms in the world or become excited by their profits' breaking historical records. The profits that they see are profits taken from other businesses and from consumers.
A quick survey of key state-owned businesses reveals that except for a tiny minority that are monopolies by nature due to their sensitivity (e.g. the aerospace and defense industries), the overwhelming majority of them are in steel, automobiles, aviation, pharmaceuticals, real estate, power, etc.-- all competitive industries. The capital and technology requirements for entrance in these industries are actually not high, and through 20 years of development, domestic private firms are already powerful enough to enter them.
Currently, when private firms start out they often face asymmetrical competition against considerably larger state-owned enterprises (SOE’s). This creates an artificial barrier of entry into the industry at the expense of the average citizen. The result? State-owned firms experience solid profits while private ones have dim prospects.
What's the purpose of our nation managing certain industries? When profit in key state-owned industries are bulging, very few people ask this question. And if this is the case, do they really need to reformed? This is what many think.
After joining the WTO, China's liberalizing economy has gone in a new direction, one where the nation should not control society's resources but instead let the market allocate them. From this angle, the better that SOE’s are doing, the more imperative reform is. The nation should thoroughly retreat from those competitive industries, let the market more effectively deploy resources, and reduce the distortions brought by monopolies. In this way the market share of state owned firms will decrease and the state-owned share of the economy will shrink, but along with the economy as a whole experiencing more efficient use of its resources, China's economy, and per-capita wealth, will grow.
