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2008-12-26 | All chapters

China's state sector urged to boost economy
Jamil Anderlini, Financial Times, 26th December 2008

Senior government officials have publicly called on China's state-owned sector to increase its dominance in the economy in response to rapidly cooling growth and plummeting profits.

Analysts say while no one in the Communist-controlled government favours a return to traditional central planning, advocates of continued state dominance of the economy are clearly ascendant in Beijing.

In comments reported by state media on Friday, Zhang Dejiang, vice-premier, "urged state-owned enterprises to further expand domestic and international markets . . . assume the responsibility and continue playing the leading role” in the economy in the face of the global crisis.

Li Rongrong, chairman of the state-owned Assets Supervision and Administration Commission, on Friday issued a decree to state-controlled holding companies telling them they must continue to "actively increase” their stakes in publicly listed subsidiaries.

China has moved from a centrally planned, wholly state-owned economy to a much more vibrant capitalist society over the past 30 years, but the Communist party has insisted on maintaining control over large parts of the economy it considers essential to keeping its grip on power.

"Technocratic ideology – the belief that for one reason or another the government is better suited to run the commanding heights of the economy – is very strong in China," said Huang Yasheng, a management professor at MIT and author of the recent book Capitalism with Chinese Characteristics.

Within the private sector, many are wondering whether the government is implementing an approach known as guo jin min tui or "the state advances as the private sector recedes".

Mr Li has denied that such a policy exists but government subsidies to state companies in the past two months have clearly put private enterprises at a disadvantage in many industries.

The state has handed out billions of renminbi to debt-ridden, lossmaking, state-controlled airlines while the country's first privately owned airline has been forced to halt services.

Li Yizhong, minister of industry and information technology, this month said the government would "encourage big steel companies to acquire small ones". Most big ones are state-owned while many of the small ones are private.

According to state media reports, the government had budgeted at least Rmb27bn ($4bn) in subsidies by the end of November to help state enterprises that are "important to national economic security" weather the economic crisis.

"The government is taking these measures to help these companies maintain employment growth and social stability," said Ha Jiming, chief economist at China International Capital Corp, the Chinese investment bank.

"If a more market-oriented economy at this moment could help grow employment then the government would go for that, but right now increased state involvement in the economy is a common phenomenon everywhere in the world, including the US and Europe."

If state-owned companies start playing an even bigger role in the economy, however, this will probably come at the expense of more profitable and efficient private companies.