Global Policy Forum

By Philip P. Pan

China is accelerating the privatization of tens of thousands of state-owned businesses that once served as pillars of Communist Party rule, and has decided to let foreign and private investors buy majority stakes in large enterprises the government had previously refused to sell, according to Chinese officials and researchers.

A senior Chinese official confirmed the policy shift during a news conference on Tuesday, citing a decision by the party's powerful Central Committee last month that used stronger language to encourage the transfer of state-owned factories and other enterprises into private hands.

The official, Li Rongrong, director of the agency that manages state assets, said the government planned to remain in strategic industries critical to the Chinese economy and national security but added that it was no longer necessary for the state to hold a majority stake in a business to maintain a "controlling, influencing and driving force." He said "very, very few enterprises" would remain wholly state-owned and predicted the country would enter "a peak period of mergers and acquisitions" because local governments, which administer about 90 percent of the country's state firms, have been granted more authority to dispose of the businesses.

The new push to privatize China's vast and inefficient state industries represents another step by the Communist Party away from the socialist principles with which it took power in 1949 and toward the capitalist system it once condemned. In a sign of the political difficulties the reversal presents, officials refuse to use the word "privatization," preferring terms such as "ownership transformation." The privatization campaign also ushers in a new phase in China's fitful transition from a planned economy in which workers were guaranteed employment to a market economy in which they are forced to fend for themselves. More than 25 million state workers have already lost their jobs.

The government hopes private owners can help turn around money-losing companies that have been a drain on the nation's booming economy. In addition, some officials have said proceeds from the sales could be used to repair China's tattered social safety net, including under-funded health care, pension and welfare systems. China began experimenting with privatization in the early 1990s, but the process accelerated after 1997, when Jiang Zemin, then the president, endorsed the sale of all but the largest state enterprises. The policy was known by the slogan, "Grasp the Large, Release the Small." According to official statistics, the number of state enterprises fell from 262,000 in 1997 to 159,000 last year.

But a "powerful momentum was injected into the process" after China completed a leadership handover in November last year, Li said. And on Oct. 14, the Central Committee passed a resolution that quietly called on the party to push ahead with privatization and cleared the way for the sale of medium and large state-owned enterprises. For the first time, the party said it would "vigorously develop a mixed economy" with stock ownership playing a dominant role. "Before the policy was 'Grasp the Large, Release the Small,' but now the large enterprises can be released too," said Zhang Wenkui, a researcher at the State Council Development Research Center, which advises the leadership. He said the resolution also opened the door for the state to sell majority stakes in strategic industries.

"This is a major ideological breakthrough. It's essentially a declaration of mass privatization," said Fred Hu, a managing director of the Goldman Sachs investment bank. "In my own discussions with a lot of senior policymakers, my impression is they've made up their mind. The word strategic is becoming less and less meaningful, and the basic approach is, whatever the private sector can do better, the government should get out."

Many localities have moved faster than Beijing and sold large state enterprises under their control. In the southern city of Shenzhen, for example, the government is negotiating to sell a big stake in its water company to the French conglomerate Veolia, formerly known as Vivendi, and in September the city sold a majority stake in a major foodstuffs firm to a Hong Kong company. Privatization in China has been marked by local corruption and insider deals in which government officials and factory managers acquire the companies at low cost. Beijing has ordered all provinces to establish new agencies to monitor state assets and regulate the process, but some have rushed to sell enterprises before the regulations can be put in place.

Still, Zhang said the process is becoming more fair and transparent as bigger enterprises are being sold to private Chinese companies and foreign investors. He said the results in the localities have convinced the leadership to begin selling stakes in the 190 state conglomerates under the control of the central government, which have assets of more than $300 billion. "I think the center has looked at the local experiences and discovered that selling state enterprises doesn't affect the party's political power," Zhang said. Li said state enterprises must rank in the top three in their industry within two years or face restructuring. "Falling short of the goal will deprive them of the right to say that we need to maintain a controlling force," he said.

In a sign of the government's enthusiasm, China is scheduled to host an international conference on mergers and acquisitions with a U.N. agency next week inside Beijing's Great Hall of the People, long a symbol of socialist power. Li said the government hoped foreign investors would take stakes in state enterprises and bring technology and better management to the companies. But it's unclear whether businesses will be interested. "The question is what's worth buying amid all the junk," said one foreign banker in Beijing, who spoke on condition of anonymity. "This is a step forward, but it will depend on what happens in the implementation."

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