Reforming China's SOEs

Once the backbone of the Chinese economy, state-owned enterprises are now facing criticism for monopolistic practices and inefficiency. The reform, which was initiated more than three decades ago, has proved to be no less formidable today. Starting today, we begin a series of reports that examine the further reforms to reinvent and reengineer the economic establishments. Zhang Nini starts it all.

State owned enterprises used to be the most important part of the economy.

SOE's accounted for 90% of the output in the 1980s and employed the majority of the urban work force.

But, their importance was reduced substantially after three decades of reform.

In 2010, while its assets in the industrial sector still accounted for more than 40%, the output substantially dropped to less than one third.

The state sector only provided about one fifth of the employment the same year.

They also face charges on benefiting from favors and crowding out the private sector.

Economists believed there's a bigger potential for the Chinese economy if these problems are addressed.

"The most important thing in the reform is to improve management and diversify the capital with private investment," said Ding Yifan, Dev't Research Center of State Council.

China's leaders have made it clear that reform of the state industry is one of their goals this year, in an effort to rebalance the economy and sustain growth over the long term.

Streamlining government functions is a step to bolster market functions and create a level-playing field.

While most have agreed that there's no return on reform, just how much reform is needed is still a matter of debate.

The ongoing discussion is likely to divide SOEs into different categories, and introduce separate arrangements.

"In natural monopoly sectors, the government will have a different criteria to judge the performance of the SOEs, not according to their profits. As the sponsor of SOEs, the government should pay attention to social justice, and equal distribution of wealth," said Ding Yifan, Dev't Research Center of State Council.

Different treatment will shield some sectors from market competition, for now. But opening up is a long term trend, albeit gradually. Ding Yifan believes, after telecommunication, healthcare, and railway, "energy" will be the next sector to open up for private investment.