Running head: SOE REFORM AND FOREIGN LEARNING

SOE Reform and Foreign Learning In China

​ Robert John Williamson 105265509 威廉森
​
Running head: SOE REFORM AND FOREIGN LEARNING
SOE REFORM AND FOREIGN LEARNING 3

SOE Reform and Foreign Learning In China

Introduction

Since the death of Mao, successive Chinese leaderships and policy makers have
come and gone, but all have looked abroad for policies to solve domestic problems.
This paper begins by reviewing relevant policy transfer literature, and this is followed by
an outline of the dominant trend of policy transfer since the 1980s: voluntary policy
transfer from the West. This has typically been in the form of neo-liberal policies and
NPM inspired downsizing of the public sector, and was seen in China from the 1980s
onwards. This isn’t, however, the only form of policy transfer that has occurred in China,
there has also been significant learning from the Japanese, especially in terms of
Industrial Policy. The final sections outline the major reforms implemented in the
Chinese SOE sector, and conclude with a discussion regarding the relative strengths of
the two strands of policy transfer in China during this period.

Policy transfer literature

Dolowitz and Marsh (2000) define policy transfer as: “The process in which
knowledge about policies, administrative arrangements, institutions and ideas in one
political setting (past or present) is used in the development of policies, administrative
arrangements, institutions and ideas in another political setting.” According to the same
authors, policy makers have looked overseas more and more for policy solutions to their
domestic problems. They attribute this increase in recent decades to a number of
factors, for a start, increased communication between policy makers has been
facilitated by advances in technology. In addition, they also highlight global economic
pressures, increased bilateral/multilateral meetings between politicians and civil
servants, and the rise of international organisations promoting or enforcing particular
SOE REFORM AND FOREIGN LEARNING 4

types of policies. Finally, there are international policy networks, advocacy coalitions or
epistemic communities who play an important role in the promotion and development of
new ideas.

Types of Policy Transfer

Policy transfer isn’t necessarily ‘voluntaristic lesson-drawing’ as the paragraph
above suggests; there can also be structural diffusion as well, as well as coercive
transfer of policy. Stone (1999) divides policy transfer into three broad categories. Firstly
there is voluntary transfer; this involves policy makers or government importing a policy
from overseas, believing that it will work just as well in their situation. Fact-finding
delegations are sent to collect information, or foreign representatives are invited to the
home country to discuss policy. The information collected is used to formulate and
shape new domestic policy. Secondly, there is involuntary (coercive) transfer. This
“...entails a compulsion to conform...it is not a co-operative or voluntary arrangement.”
Here it is representatives of another country, or perhaps members of an international
organisation, recommend policies that cannot, realistically, be refused. Often quoted
examples are IMF structural adjustment programmes. Technically countries could
refuse, but, if they wish to obtain the IMF’s financial assistance, there isn’t much choice.
Finally, there may be structural forces at work. The terms ‘policy convergence' and
‘policy diffusion' are often used when emphasising the role of structural forces,
commonly referred to a ‘globalisation’. Here, policy makers themselves are seen to
have a much less active role in the process.
These divisions are a useful conceptual tool, but Dolowitz and Marsh (2000)
argue that the process is much more complicated real life; neat categories don’t
accurately describe the policy transfer process. They suggest that transfer is best
conceptualised as sitting on a kind of continuum “...that runs from lesson-drawing to the
direct imposition of a program, policy or institutional arrangement on one political
system by another.”
Policy transfer is more likely to occur when there has been a process of regime
transformation, for example the shift from a communist system towards a market-based
SOE REFORM AND FOREIGN LEARNING 5

system in the former Soviet Union. Here new institutions and regulations need to be
built from scratch. Policy transfer is also more likely to happen during periods of
uncertainty.
Stone (1999) identifies important constraints and opportunities for transfer,
noting that both “...agency and structural factors will condition the degree of transfer and
the character of implementation.” If you wish to investigate/demonstrate policy transfer,
agency needs to be emphasised. If you wish to see how policy has diffused structurally,
“... it is necessary to look at the opportunities or constraints to transfer shaped by forces
such as time, institutional architecture, political culture, and state structures.” Marsh and
Sharman (2010) write that IR diffusion literature privileges structure and focuses
methodologically on pattern-finding. Policy transfer literature privileges agency and
concentrates on process-tracing. To get a full picture of the process of transfer/diffusion,
an ideal study should combine both. Lee and Strang (2006) talk further about the
distinction between process-tracing and pattern-finding strategies. “Process tracing
research follows the spread of a policy or practice from one location to another.” This
approach “...permits inspection of the role played by external models, and inquiry into
why and how a concrete instance of learning or mimicry occurs.” This is quite different
from pattern finding literature; in contrast, this “...tests a priori hypotheses about
diffusion channels...whether structures of covariance and temporal ordering are
generally consistent with a theoretically specified model of influence.’
This paper follows the process-tracing approach – looking at China’s active
searching for policies from abroad in their transition from a planned economy to a
‘Socialist Market Economy.’

Actors and Mechanisms in the Transfer Process

According to Stone (1999) Those involved in the transfer process can either be
individuals, networks or organisations. The role of the actors is to “...set the parameters
of policy, legitimate the character of public discourse, and endorse the adoption of new
programmes.” Dolowitz and Marsh (2000) p10 further subdivide these into nine main
categories of political actors involved “...elected officials, political parties,
SOE REFORM AND FOREIGN LEARNING 6

bureaucrats/civil servants, pressure groups, policy entrepreneurs and experts,

transnational corporations, think tanks, supra-national governmental and
non-governmental institutions and consultants.” They also identify eight different
categories of policy transfer. These are “...policy goals, policy content, policy
instruments, policy programs, institutions, ideologies, ideas and attitudes and negative
lessons” Stone (1999) “Regulatory, administrative or judicial tools can be adopted
across countries to tackle common problems or achieve certain ends.”
As far as explaining diffusion/transfer is concerned (the literature) generally
identifies four major mechanisms: learning, competition, coercion and mimicry – Marsh
and Sharman (2010). Learning is the main mechanism identified in the transfer
literature; this paper primarily concerned with policy Learning, but also acknowledges
the role that and Coercion has played in policy transfer to China.
Learning
Simmons et al (2008) write that ‘learning’ is a “...change in beliefs, or a change in
the strength of one’s confidence in existing beliefs, resulting either from observation and
interpretation or from acquisition of new theories or behavioural repertoires.” The
important point is that you can learn from others as well as just from your own direct
experience. Marsh and Sharman – (2010) write that learning is the result of rational
decisions by governments to find foreign policy outcomes and apply them at home. The
expectation is “... more efficient and effective policy outcomes than the alternatives.” As
noted above, this can be through a variety of channels, and may be complete or partial.
Rationality in decision making can be relaxed somewhat by viewing it as bounded
rationality. Simmons et al (2008) If a policy is successful, or at least viewed as a
success, in another country, this strongly influences the probability of is being adopted
overseas and vice versa – if a policy or set of policies are seen as a complete disaster
this “...should put the brakes on foreign policy adoptions.” Unsurprisingly, policies also
tend to flow more readily between more similar countries.

Coercion
SOE REFORM AND FOREIGN LEARNING 7

According to Simmons et al (2008) there is certainly the acknowledgement in

policy transfer literature that different kinds of coercion are relevant. This coercion can
come from international organisations such as the WTO or IMF through conditions on
lending or membership. It can also come from powerful states such as the US or China.
They feel that coercive policy transfer is most relevant when looking at the developing
world. This is supported by Stone (1999) “...exporting lessons can be interpreted in a
negative sense by recipients as imperialistic or neo-colonialist. Certain governments
might want to enforce lessons – possibly via conditionality in overseas aid.”
Stone (1999) writes that we know when it has occurred because of four factors:
We can show that domestic factors aren’t responsible by themselves for policy transfer;
such policies aren’t the result of a separate, external modernising force; policy makers
can be shown to be aware of these policies being adopted elsewhere; and there was
domestic debate regarding the adoption of foreign policies. Policies don’t need to be
copied in their entireties or be exact copies for us to be able to say that policy transfer
has taken place; sometimes it is more a case of emulation or particular parts of policies
copied. Marsh and Sharman (2010) “complete ‘cut and paste’ transfers are allowed for,
they are seen as the exceptions, with hybridized combinations of outside and local
knowledge much more common.

Trends in Policy Transfer - Learning from the West

The dominant trend in policy transfer from the 1980s onwards has been the
adoption of policies that originated in Reagan’s USA and Thatcher’s United Kingdom.
As Simmons and Elkins (2004) put it “...one of the most important developments over
the past three decades has been the spread of liberal economic ideas and policies
throughout the world.” Governments around the globe have been increasingly willing to
open up their national economies to the forces of international trade and markets. In
brief, this has taken the form of deregulation and the removal of impediments to
international trade and investment. The free movement of capital and goods has
SOE REFORM AND FOREIGN LEARNING 8

fundamentally altered domestic as well as the international economies. Kamarck (2000)

writes that in the 1980s, the reforms concentrated on liberalisation and privatising state
owned industries. In the 1990s, the focus was “...less on privatisation and more towards
the administrative reform of core government functions” - cutting the size of
government, streamlining of bureaucracies, making government more responsive,
efficient, modern. These kinds of reforms have had far reaching effects on the size and
shape of states themselves, and are often referred to as New Public Management; Kim
and Strang (2008) write that these “...organizational theories of the time contended that
all enterprises, public and private, should become leaner and more decentralized.” The
public sector was viewed (and often still is) as wasteful and inefficient and that
market-based systems could be extended further and further into the public sector.
According to Kamarck’s (2000) study of 123 countries, a key reform in 40% of then was
devolution or decentralisation of central government powers or authorities.
Accompanying this was privatisation of enterprises that had been owned by the
government, these policies were seen particularly in former socialist or communist
states.

This spread of neo-liberal policies has had far-reaching implications for State
Owned Enterprises (SOEs). According to Zhang and Freestone (2013) the rationale for
SOEs’ privatisation is that they generally operate less efficiently than private firms,
identifying softer budget constraints that governments provide, agency issues, lack of
competition as well as the policy burden from social goals as the culprits. They outline
three major options open to policy makers when undertaking SOE reforms: changing
ownership; introducing competition; and through managerial or institutional reform.
Kamarck (2000) outlines these kinds of SOE reforms; “SOEs are sold off to non-state
owners, state monopolies are broken through increased market-based competition,
barriers are removed for non-state players and input prices are set by the market.”
Incentives to produce profit are introduced though transforming the structure of
governance, as well as improving the accountability of decision making. The structure
of governance is transformed to introduce incentives to pursue profit as well as decision
SOE REFORM AND FOREIGN LEARNING 9

making accountability. “Corporatisation and corporate governance reforms include the

setting up of internal governance structure... so that management will have incentives to
pursue profit and be accountable for their business decisions.”
The adoption of these policy reforms was influenced by the experiences of
others; Kamarck (2000) writes that these kinds of reforms were viewed as successful
overseas and this influenced the likelihood of adoption. Other factors that may have had
an influence were American cultural dominance and the forces of the global economy –
by this is it is meant that spending and government intervention used to be seen as
‘solutions’ - now seen as problems.
It is these policies outlined above that I mean when referring to ‘Learning from the West’
or ‘Western-style policies’: privatisation, liberalisation, as well as NPM-type reforms.
SOE REFORM AND FOREIGN LEARNING 10

Early Policy Learning in China

Marsh and Sharman – (2010) write that learning is the result of rational decisions
by governments to find foreign policy outcomes and apply them at home. Following the
insights of Stone (1999) there must be evidence that these were not the result of some
other modernising force and that there was a degree of domestic debate. On these
grounds, there is clear evidence that China engaged in extensive learning from abroad.
At the end of the 1970s, the Chinese government was facing what Zhang (2014)
describes as “...a profound internal economic and governance crisis.” After the Eleventh
Congress Third Plenary Session in 1978, CCP Leader Deng Xiaoping’s administration
decided to end China’s isolation on the world stage, and to adopt a new economic
strategy after the economic and social disaster that was the Cultural Revolution. As
Zhang and Marsh (2016) put it “China needed to enhance its international
communication and relationships, drawing on the advanced experience and
technological achievements of developed countries.” Vogel (2011) writes that “Deng
believed that for China to modernize quickly, it had to learn about and adapt ideas that
were working overseas.” In order to achieve this, Chinese officials were sent on study
tours overseas, foreign information was translated in to Chinese for officials to study,
and foreign specialists were invited to China. He goes on to say that Deng “...would
encourage other officials to expand their horizons, to go everywhere to learn what
brings success, to bring back promising technology and management practices, and to
experiment to see what would work at home. He would help pave the way by
developing good relations with other countries so they would be receptive to working
with China.” Zhang (2014) notes that Deng Xiaoping himself undertook a number of
overseas trips in the late 1970s, visiting eight countries in all: Burma; Nepal; North
Korea; Japan; Thailand; Malaysia; Singapore and the USA. Furthermore, “...Deputy
Prime Ministers went to 51 countries on official visits in 1978. The places which were
most frequently visited were the USA, Canada and a number of Western European
countries.”
SOE REFORM AND FOREIGN LEARNING 11

Special Economic Zones (SEZs) are an important example of early policy

transfer. After several visits to Hong Kong and Macao by officials of various rank, Zhang
and Marsh (2016) note that a report was written advocating the establishment of a
Chinese equivalent. In 1980 “...Shenzhen SEZ was established...as a pilot programme,
with seven other zones subsequently established.” These were followed in 1984 by the
opening of fourteen cities on the West coast to overseas investment.

Western learning in China

This following section focuses on the literature that emphasises the role
Western-style policies and its influence on the reform of Chinese SOEs. These policies
are liberalising reforms to the Chinese economy, significant changes to management
practices and major reforms to the SOE sector. In Post-Mao China – planners looked
overseas for policies to reorganise the economy. Party leaders and advisers were sent
overseas to learn from more industrially advanced countries. The trips that Deputy
Prime ministers took in 1978 are argued by Zhang (2014) to be highly influential
“...these officials brought Western lessons back to China. In interviews, a number of
these officials talked broadly about drawing lessons from the West and adapting them to
Chinese circumstances.”
Heilmann and Shih (2013) note the influence of the Economic Structural Reform
Institute (ESRI) founded in 1982 as a think tank to reformist Premier Zhao Ziyang. This
was affiliated with the State Structural Reform Commission and proposed a
market-oriented approach to industry.
An example of a text that particularly emphasises the Western effects on China’s
economic reform is ‘Growing Out of the Plan’ (Naughton, 1995) – the main argument of
this text is that in the 1980s and 1990s, the state-led planned sector stagnated at the
same time that the non-planned economy grew rapidly. This facilitated the growth of the
market-dominated economy in China and, at the same time, decreased the importance
of the state-led planned sector of the economy. Other authors such Brandt and Rawski
SOE REFORM AND FOREIGN LEARNING 12

(2008) and Huang (2008) also focus on ‘Western-style’ policies when discussing reform
within China. In these papers, the influence of the state is minimised and the multi-year
planning of the Chinese state are viewed as inefficient and a drag on the economy.
Efforts at industrial policy are largely viewed as futile and a distraction from the
important business of neo-liberal reform. Unsurprisingly, the focus in this line of
literature is regulatory reform, privatisation of SOEs, liberalisation of markets and
property rights. Brandt and Rawski (2008) - “...it is increasingly evident that state
ownership acts as a major drag on China's economy. Both national and provincial data
link state ownership with retarded growth, low capital productivity, slow transfer of labour
out of farming, and many other undesirable phenomena.”
Brandt and Rawski (2008) highlight China’s newly-found engagement with world
markets and the abandonment of its former isolationist stance. Imports and exports
grew massively; figures from the Chinese Statistical Yearbook put imports to China at
US$9.75bn and exports at US$10.89bn in 1978. These figures had risen to US$23.5bn
and US$42.2 in 1985, US$148.7bn and US$132bn by 1995 respectively. Current figures
are given as US$2.27tn and US$1.68tn respectively. China has also been a massive
recipient of global foreign direct investment; figures from the Chinese Statistical
Yearbook put FDI inflows in 1984 at USD$5.9bn, this figure rising to USD$91.3bn in
1995, and in 2015 the figure stood at USD$126.2bn. From the 2000s onwards, China
has also become in increasingly important source of outward foreign investment.
They go on to say that planning has been in slow retreat and that this has led to
the prominence of market-based outcomes in the economy. Supply and demand are
given a leading role in determining prices (rather than set by the state), and markets for
materials, products and labour are much more competitive. Overall “… the impact of
market forces continues to deepen.”
Chinese management reforms are outlined by Zhang (2014), writing that Chinese
policy-makers “...actively sought to transfer NPM strategies through international
cooperation programmes.” The public sector was introduced to private sector
management techniques and “...public choice precepts in the management and delivery
of public goods.” This administrative reform, naturally involved a reduction in the role of
SOE REFORM AND FOREIGN LEARNING 13

the government in the economy and dismantling some of the planning institutions of the
planned economy. Zhang and Marsh (2016) write that the focus was particularly on
economic management redesign. The long-term aim was to integrate the modern
qualities of Western economic management with more traditional features of Chinese
administration. In other words, NPM ideas were transferred from the West, but there
was a certain amount of adaption to make them fit in a Chinese context.
Eaton (2013) notes that by1992 China had designated itself to be a ‘Socialist
Market Economy’. The common view of this meaning a steady privatisation of state
assets, significant restructuring of enterprises, plus hopes that “that exposure to the
stock market would invigorate SOEs and compel them to adapt to the rules of the
market economy” Zhang (2014) agrees that at this stage “...the central goals of the
reform in this regard were to liberate the market, foster private enterprise and improve
productivity”
These reforms and their effects on Chinese SOE are analysed in more detail in a later
section.
SOE REFORM AND FOREIGN LEARNING 14

Japanese-style policies

‘Western-style’ reforms are, however, not the only way to deal with SOEs. The

East Asian economies were long looked upon as a kind of ‘economic miracle’ (see, for
example, Chalmers Johnston (1982), Amsden (2000), Wade (1990)), and their policies
towards, in particular, state ownership of companies are divergent from the Western
model. In the countries of East Asia – South Korea, Taiwan, and Japan in particular –
during the post-WWII period, SOEs played leading role in the economy, and there was
an important role for the government/bureaucracy in guiding and shaping these
enterprises. This contrasts strongly with neo-liberal policies and NPM management
reforms. This developmental state, or Japanese, model is briefly outlined below. In the
Japanese model,
“...the firm, with its given constellation of assets, precedes the market and, in some sense,
enjoys a privileged position over the market . In particular, the modern firm...is envisioned not only
as a repository of vast tacit knowledge and innovative capacity, but also as the key nexus for extended
supplier networks and local economies.” Dittmer and Liu (2006)
Steinfeld (2004) calls this the ‘market as salvation’ viewpoint. In other words, if you
wish to drive innovation and development, this is achieved through the fostering and
evolution of existing enterprises, rather than the introduction of new upstart competitors
to the market. It is the large firms that drive the market. Pearson (2005) describes this
model in some detail. She writes that this model of development “...tolerates substantial
government intervention to structure markets, often in favour of particular firms whose
failure would impose unacceptable social costs.” The government concerns itself with
creating ‘national champions’ by enhancing international competitiveness of domestic
firms in targeted sectors. This is commonly referred to as Industrial Strategy. According
to Ashcroft (2017) “Industrial strategy is about coordinating a wide range of economic
policies to achieve particular objectives, which need not be purely economic.” The
number of competitors for these firms in the market is limited so that they don’t suffer
from ‘excess competition’ that might otherwise impact stability and profitability. Pearson
SOE REFORM AND FOREIGN LEARNING 15

(2005) goes on to outline the kinds of strategies that the Japanese government
employed to ensure the success of certain firms. Firstly, stronger and weaker firms were
merged on order to sustain the weaker firms. Increases in competition were all
structured to avoid unnecessary shocks, limited entry to markets as well as introducing
price and service regulations.
There is centralised regulation as well as the presence of cross-industry
comprehensive agencies who play a powerful role in designing industry strategy.
Regulation differs in the sense that in this system there is little transparency or public
accountability and little legislative/political oversight of the bureaucracy. Heilmann and
Shih (2013) point out that government avoidance of direct intervention into firm-level
decisions, as well as preserving a degree of market competition and enterprise
autonomy, were what distinguished this Japanese-style industrial policy from that of a
socialist planned economy. Chan and Unger (2008) note that Japanese enterprises
were also fairly insulated from the influence of the stock market; that this allowed them
to focus more on long-term goals rather than on short-term return to shareholders.
Japanese enterprises relied more on bank-based finance; this meant that they were
“...less beholden to stock market sentiment than in the American or British systems,
they have a greater tendency to retain and reinvest profits, rather than distribute
substantial dividends.”
The parts of the Japanese economic bureaucracy that are highlighted by
Chalmers Johnson (1982) are the Ministry of International Trade and Industry (MITI)
and the Ministry of Finance (MOF).
“The particular speed, form, and consequences of Japanese economic growth are not intelligible without
reference to the contributions of MITI. Collaboration between the state and big business has long been
acknowledged as the defining characteristic of the Japanese economic system.” Johnson (1982)

MITI was responsible for coordination trade policy with other groups in the bureaucracy
and major Japanese banks. MITI’s responsibilities went beyond imports and exports
and is credited with being the ‘architect of Japanese industrial policy’ after WWII, an
arbiter in industrial disputes, providing industries with both formal and informal
administrative guidance.
SOE REFORM AND FOREIGN LEARNING 16

These ‘Japanese-style’ policies with respect to industry are significantly different

to neo-liberal policies on many levels. When referring to Japanese-style reforms, it is
policies such as centralised regulation and comprehensive agencies that operate across
industries; the role for the government/bureaucracy in guiding and shaping enterprises,
a focus on long-term development goals; and manipulation of market conditions to
produce ‘champion’ industries.

Learning from the Japanese

In contrast to the literature that emphasises the importance of liberalising

reforms, there are also authors who emphasise the role of industrial policy and planning
by the Chinese government. Authors include Heilmann and Shih (2013), Pearson (2007,
2009) Eaton (2013). Industrial Policy know-how was transferred from Japan to China
through policy officials studying Asian large enterprise groups, Japanese economic
planners being invited to China to set up advisory groups, exchange fora between
Chinese and Japanese officials, as well as synchronisation of Japanese aid with
Chinese 5 year plans.
Vogel (2011) writes that Deng Xiaoping realised that the countries of East Asia
had been growing abnormally fast. “He realized what some free-market economists did
not, that one could not solve problems simply by opening markets; one had to build
institutions gradually.” According to Eaton (2013) Chinese officials “...carefully studied a
number of Asian countries' experience with large enterprise groups.” She notes that an
issue of ‘Jingji Yanjiu Cankao Ziliao’ from 1995, “...compared the experience of various
Asian countries' with large enterprise groups at close range and presented
policy-relevant conclusions for China.” Although China was clearly interested in learning
SOE REFORM AND FOREIGN LEARNING 17

from the experiences of Taiwan and Korea, their role in shaping the policies of China
was minimal due to the absence of direct relations with one another until the late 1980s.
Former Chinese Premier Zhao Ziyang is of great importance in the early days of
Chinese learning from abroad. Deng allowed Zhao to meet Japanese economists and
advisors involved with economic planning, figures such as Okita Saburo and Shimokabe
Atsushi. Saburo arrived in China in January 1979 with the plan to discuss the idea of
establishing a Japanese ‘advisory group’ as well as the role which Japan may play in
the economic development of China. Vogel (2011) notes that this advisory group
continued to meet with Japanese economic officials until 1992, as well as how
impressed Chinese officials were with MITI. Soon “...The Japan External Trade
Organization (JETRO) under MITI had several offices in China...and provided training to
Chinese managers and technicians in various industrial sectors.”
Heilmann and Shih (2013) note that privileged access to high-level Chinese
officials was allowed to Japanese policy advisors. In some cases, they “...became
official advisers who met with State Council leaders on a regular basis between 1979
and 1985.” There were informal ties between the two countries that has developed
since the 1950s as well as through formal bilateral exchanges. These were used as the
basis for the exchange fora between Chinese and Japanese and Chinese officials and
economists that were established in the early 1980s. A large number of Japan’s
economic bureaucracies and their associated services organisations began to
disseminate models of standard Japanese practice.
In addition, Heilmann and Shih (2013) highlight the importance of the fact that
“...Japan's approach to financial assistance was marked by an unusual degree of
synchronization of loan facilities with China's five-year plans.” Their point is that the
ability to implement important policy projects in China was directly influenced by
Japanese aid. The Japanese MOFA state that Japanese Official Development
Assistance (ODA) to China started in 1979. In the period from 1979 to 2017 they quote
a figure of approximately 3.3164 trillion yen (US$297bn) in loan aid (yen loans), 157.2
billion yen (US1.41bn) in grant aid, and 181.7 billion yen (US$1.63bn in technical
cooperation. “Assistance includes more than infrastructure projects. In the area of
SOE REFORM AND FOREIGN LEARNING 18

technical cooperation the Japan International Cooperation Agency (JICA) has accepted
trainees from China for the purpose of providing assistance to cultivate administrative
personnel. As of FY2013 JICA had accepted a cumulative total of over 35,000 trainees
to nurture the human resources required for industrial promotion. JICA has also
dispatched 9,027 experts to China.”
As a result, Heilmann and Shih (2013) describe Chinese planners as “...eager
protagonists of Japanese-style cross-sectoral indicative planning ("guidance planning")
and sectoral industrial policies.” This view is reflected by Chan and Unger (2008) who
write that during the 1980s and 1990s, Chinese scholars of industrial policy were more
interested in the Japanese system than Western corporate models.
Cases of Chinese learning are not restricted to the 1980s and 1990s. Yoshimatsu
(2010), writes that cooperation between China and Japan was ‘revitalised in the
mid-2000s; “...mechanisms advancing mutual interests, intergovernmental networks
became substantial and policy networks involving business actors have gradually
developed.” Yoshimatsu highlights a case in the mid-2000s where Japan and China
cooperated regarding energy saving. An energy conservation forum was held and
“...China and Japan set up tight policy networks to advance cooperation. While the
governments established a committee to supervise the model projects, business actors
and sub-national governments formed cross-border linkages to substantiate
cooperation.” Although not directly relevant to the reform of SOEs, this is further
evidence of policy cooperation and opportunities for the Chinese to learn from Japan.

Why Was Japan a Role Model?

The Japanese-style developmental approach was popular with Chinese for a

number of reasons. Japan at the time was still an ‘economic miracle’, and seen to be
more compatible with China. Close involvement of government guidance was also
attractive to Chinese policy-makers. The Japanese approach appeared to allow
macro-control of economy – how to dynamize and upgrade Chinese industry without
SOE REFORM AND FOREIGN LEARNING 19

relinquishing government control. There was also a very different Marxist flavoured
interpretation of success of capitalism to prevailing western ideas at that time. Of
course, there were not just economic objectives; there was also a significant political
dimension to it.
During the early stages of China’s economic reform, and even well into the
1990s, Japan was still considered as a kind of economic miracle. Its remarkable
industrial surge in the post-war period made it famous around the globe. Chan and
Unger (2008) write that it seemed like the Japanese model offered “...a means to
achieve efficient production and technological progress while avoiding what were
considered to be undesirable aspects of market capitalist organization.” There was a lot
of discussion about how to create a Japanese style ‘enterprise culture.’
Japan was, in the words of Heilmann and Shih (2013) “...widely seen as being
closer and more compatible to the Chinese setting than most Western economies.” The
idea that the government could take a guiding role in bringing about China’s economic
rise was attractive. The Japanese state was perceived to have brought about the
economic miracle through their use of industrial policy and “...non-imperative, indicative
planning” and Chinese planners wished to emulate this. It seemed plausible to use
economic incentives to guide industry and was acceptable to a range of across within
the Chinese government. In addition, the period from the early 1980s until the early
1990s is widely held to be the highpoint of Sino-Japanese relations in recent history.
This favourable political made exchanges a great deal easier between the two
countries, before rising nationalism on both sides put the relationship between them
under serious strain once more.
Eaton (2013) writes that early contributions to arguments for large enterprise
groups and Japanese-style industrial strategy “...drew from the Marxian concept of
'monopoly capitalism' in characterizing large enterprises as the 'inevitable product'
(biran chanwu 必然产物) of capitalist development.” In the Chinese interpretation, large
enterprises were inevitable; Marxian economics: the capitalist road leads towards
monopoly. East Asian Economies provided “...ready models and benchmarks with which
to guide their own use of industrial policy to hasten the process of large enterprise
SOE REFORM AND FOREIGN LEARNING 20

formation and development.” The Japanese post-WWII experience was particularly

important because their development had been led by large enterprise groups and also
that industrial concentration hadn’t lead to stagnation. They had also ‘centralised capital’
through state guidance to ensure that there was as little cronyism as possible and to
steer enterprises towards favoured development objectives. Of course, there were not
just economic objectives – there was also also a significant political dimension to it. “In
the context of a rapidly growing non-state sector and a teetering state sector,
policy-makers thought of state-owned large enterprises as key elements of the
market-conforming model of state control.” She also also writes that the potential ability
to have effective ‘macro-control’ of the economy was appealing to Chinese policy
makers. It was though that Japanese enterprise groups would be “...faithful servants to
the cause of development...” as opposed to being a drain on government resources –
as Heilmann and Shih (2013) phrase it “...Japanese experiences offered many clues on
how to dynamize and upgrade Chinese industry without relinquishing government
control.”
SOE REFORM AND FOREIGN LEARNING 21

SOE reform

The section below splits SOE reform in China from the 1980s until the late 2000s
into two rough halves – the liberalising reforms of the 1980s which were accelerated
under Zhu Rongji, and the period of Industrial Policy which began from around 2003.

SOE reform under Deng Xiaoping and Zhu Rongji

Zhu Rongji was appointed deputy prime minister in charge of China’s economic
reform in 1991 and, according to Naughton (2007), established himself the ‘dominant
voice’ in policy making from 1993 onwards. “Zhu presided over much of the second
period of economic reform, until he stepped down as premier in 2003.” Zheng and Chen
(2009) write that, in the mid-1990s, he formulated a new strategy for SOE reform known
as zhuada fangxiao (grasping the big and letting go of the small). This approach
became China’s official economic policy at the Fifteenth National Congress of the CCP
in 1997. The new strategy gave the SOE restructuring a clear direction, which was
especially needed for the large SOEs. After Zhu became prime minister in 1998, the
strategy was implemented as broadly as possible.” ‘Grasping the big’ meant cultivating
strong, competitive large enterprises and enterprise groups and developing them into
large cross-regional, cross-sectional, multi-owner, multi-national big firms. “Letting go
the small” implies that the government allows small and medium-size SOEs to face
market forces. Small and Medium Enterprises (SMEs) were by and large inefficient and
unprofitable, and the lack of property rights caused managerial problems. Policy makers
looked abroad; privatisation seemed to be the answer, the state retaining control only
over a limited number of large national and local SOEs.
During the 1990s, the Chinese began a “...large-scale de facto privatisation
program of loss making or less strategically important businesses and withdrew SOEs
from more labour-intensive sectors” Zhang and Freestone (2013). This was
accompanied by the Chinese government giving equal political status to private and
public enterprises. The result was rapid growth in the private sector. Brand and Rawski
SOE REFORM AND FOREIGN LEARNING 22

(2008) In 1992, regulations were issued that increased the authority of SOE managers
to hire/fire workers, set wages and use asset enterprises. By 1993, after China was
designated a ‘Socialist Market Economy’, they “...began to identify "competitive"
industries where the state had no strategic interest, so that market processes could be
allowed free rein.”
Naughton (2007) writes that post-1993, the links between the government and
SOEs were gradually severed. The amount of competition that they faced increased
and, significantly there was a reduction in the funding that they could obtain from
state-owned banks. “Between 1978 and about 1993, although the state sector had
shrunk in relative importance, it had continued to grow in absolute terms, both in output
and in employment.” After the mid-1990s state-enterprise employment began to
dramatically decline. Xu (2012) ‘Between 1995 and 2001 the number of state-owned
and state-controlled enterprises fell by nearly two-thirds, from 1.2 million to 468,000.’
SOEs shrank from about 40% to 2.6% of all industrial enterprises; 40% of SOE
employees were laid off between 1998 and 2003.
Figures from the Chinese Statistical Yearbook show a fall in urban employment in SOEs
from 78% in 1978 to 21% in 2009, and value added by SOEs and SHEs (enterprises
where the state is the majority shareholder) decreased from 57% to 34% between 1998
and 2008.
McGregor (2012) notes the decrease in size of SOEs versus Town and Village
Enterprises (TVEs) in industrial output. In 1978, SOEs accounted for 77% and TVEs
9%. By 1996, SOEs had fallen to to 33% TVEs increased to 36 percent. Zhang and
Freestone (2013) From the mid-1990s to the mid-2000s, the state sold about 65% of
SOEs and state assets to non-state owned firms, and, from 1998 to 2004, 60% SOE
employees lost their jobs. According to Brandt and Rawski (2008) The state sector in
China accounted for 77.6% of industrial production and 51.8% of non-farm employment
in 1978. They quote figures of 15.2 and 13.1 percent respectively for the state sector's
share in industrial output and non-farm employment by 2004/5. In addition, there was a
reduction of 177,700 in the overall number of state enterprises between 2001 and 2004.
SOE REFORM AND FOREIGN LEARNING 23

Stock exchanges were established in Shenzhen and Shanghai in 1990/91,

according to McGregor (2012) “The government decided that the stock markets would
be useful to “corporatise” SOEs by selling small stakes to raise money while keeping
the bulk of the shares in government hands.” Tsingtao Brewery was the first Chinese
SOE to be listed on the Hong Kong Stock Exchange, in June 1993.

Post-2003 Industrial policy

Under the Hu-Wen administration, there came a shift in policy orientation. Instead
of short-term sectoral policies, multi-year programmes that combined different sectors of
the economy took centre stage. Technology upgrading and productivity were prioritised,
and ‘strategic industries’ created and fostered.

Hu-Wen The Large Enterprise Strategy: Aims

In 2002 Hu Jintao and Wen Jiabao come into power and brought further reforms
– the idea was to only run a limited number of SOEs; the rest would have a diversified
ownership structure and the government would only have a say in the most important
‘strategic’ enterprises. This further cemented the move away from labour intensive
industries. Pearson (2005) writes that the Chinese government wished to achieve
“...several overlapping financial/strategic and social/political imperatives through these
industries.” These industries are of critical importance to reaching the goals of creating
‘national champions’ - internationally competitive companies that are able to compete
on the world stage. After entry to the WTO, the fears of domestic industries being
crushed by foreign competition intensified, and added extra importance to these kinds of
goal. Leutert (2016) “Beijing’s win-win vision for reforming SOEs, especially those
classified as commercial—market competitiveness with party control. This aspiration is
embodied most clearly in China’s “national champions” strategy: a long-term
government initiative to build large, globally competitive state firms.” The privatization of
SOEs is not the end goal for new reforms and never has been. To achieve this there
SOE REFORM AND FOREIGN LEARNING 24

was the need to improve productive capacity – strategic industries comprise productive
assets; it is important to control and manage these well to maintain their productivity
levels.
A key policy direction was towards technological upgrading. Chen and Naughton
(2013) note that in this period, there was an increased focus on domestic technological
capabilities “...there was a steady ratcheting up of the commitment to ‘indigenous
innovation’ and ultimately to techno-industrial policies.” Foreign direct investment in
China hadn’t brought about technological upgrading by itself; China was integrated into
the global systems of production for hi-tech goods, but this was almost exclusively at
the lower-end assembly stages. The high-end stages were run by foreign companies
themselves and allowed them to maintain “...control over proprietary technology.”
Secondly they wished to reduce industrial fragmentation and promote regional
balancing; to guide and coordinate industry. In addition, large enterprises could also
take advantage of economies of scale and coordinated supply chains. Other
enterprises, such as state-owned banks were not especially profitable, but are seen as
crucial to China’s economic security.
Regarding the social and political goals of the large industrial strategy, Pearson (2005)
writes that it was central to maintaining social stability. In particular, strategic enterprises
remain an important source of employment.

Hu-Wen The Large Enterprise Strategy: Policies

Although the total number of SOEs may have shrunk, the ones that remain are
bigger and more powerful and they still have a significant role in the Chinese economy;
strategic sectors being chosen and fostered. Leutert (2016) estimates the contribution of
SOEs to industrial output to be around 25-30%. For the 106 companies controlled by
the central government, she quotes a figure of $5.6 trillion in assets, of which $690
billion is invested abroad. Morrison (2016) writes that China’s SOEs may account for up
of 50% of non-agriculture GDP. Figures on the Chinese State Council website attribute
strategic emerging industries with about 8 percent of China’s gross domestic product in
2015; China hopes to increase that to 15 percent by 2020. According to Leutert (2016),
SOE REFORM AND FOREIGN LEARNING 25

consolidation of SOEs is now the preferred method reform instead of straightforward

privatisation. Between 2003 and 2016, 83 of 189 state-administered non-financial
SOEs disappeared; the vast majority of these were combined with existing central
SOEs. Leutert (2016) writes that there both political and economic factors behind this
consolidation strategy. Economically, it avoids overseas price wars between competitors
and also combines complementary resources. Politically, it avoids privatisation of state
assets – a thorny issue in recent times due to high levels of corruption.
SOEs are now “...heavily concentrated in the production and distribution of
natural resources, materials, and energy, with a large presence in transport equipment
and machinery production – Zhang and Freestone (2013). These SOEs are the key
players in the utility and infrastructure sectors. Examples listed are electricity, aviation,
telecommunications, banking, railway and shipping. Morrison (2016) adds the petroleum
industry to this list. “They are shielded from competition; are the main sectors
encouraged to invest overseas; and dominate the listings on China’s stock indexes.”
These strategic industries, however, are not fixed and may change over time, Heilmann
and Shih (2013) quote the 12th 5 year plan for the period 2011-15. On this are listed
“new-generation information technology, energy-saving and environment protection,
new energy, biology, high-end equipment manufacturing, new materials and new-energy
cars.” This is mirrored by information from the State Council website from the end of
2016 which lists five new pillar industries; information technology, high-end
manufacturing, biology, green and low carbon and digital creation.
Zhang and Freestone (2013) write that plans are written for the strategic
emerging industries by ‘inter-ministerial coordination groups’ - these set development
targets and development pathways for specific industries. They emphasise the role of
these plans and regulations in facilitating SOEs to reach the ‘strategic heights’ that they
have been set in the economy.
Leutert – (2016) writes that these firms have significant advantages when it comes to
getting bank loans or gaining approval from regulatory authorities. According to Zheng
and Chen (2009) he government has created profitable enterprises through
SOE REFORM AND FOREIGN LEARNING 26

administrative monopolies, but this has come at the expense of efficiency and has had
negative effects on SME industries in China.
SOE REFORM AND FOREIGN LEARNING 27

Analysis

There is a certain dichotomy in policies that have been employed in the reform of
SOEs in China since the beginning of the reform period in where the policy learning has
come from. On the one hand there has been privatisation of state-owed assets, opening
up to the global economy through trade (including entry to the WTO), and organisational
reform of the public sector; the policies that China learnt from the West. Yet, over the
same period there has been extensive use of industrial policy, including directing of
capital to specific industries, targeting and protecting particular sectors for development,
bailouts of failing banks and setting up of various planning units within the bureaucracy.
Here we see the importance of the role of the state and Chinese industrial policy; there
was significant influence from the Japanese here and strong evidence of learning from
the Japanese experience of development. It is clear that the narrative that the market
has prevailed over planning in China, or that Western-style learning is the only show in
town is certainly an over-simplification.
Both, supposedly opposing, forces were in place simultaneously in the reform
process; of shrinking the size of the state, yet increasing the role of the state in
economic planning. As Eaton (2013) argues, whilst market reforms were under way
“...senior policy-makers were engaged in vigorous discussion and planning for
establishment of a market-conforming model of state control in an open economy. And
large enterprise groups, particularly the 'pilot' enterprises, had pride of place in these
plans.” How can we account for this seemingly contradictory state of affairs?
Firstly, and most obviously, one major set of Chinese reforms explicitly contained
both kinds of policy – industrial policy combined with extensive privatisation; these were
the ‘zhuada fangxiao’ reforms begun under Zhu Rongji, which came after the first wave
of liberalisation. As noted earlier ‘grasping the big’ meant cultivating strong, competitive
large enterprises and enterprise groups and developing them into large cross-regional,
cross-sectional, multi-owner, multi-national big firms. “Letting go the small” implies that
the government allows small and medium-size SOEs to face market forces.
SOE REFORM AND FOREIGN LEARNING 28

In addition to this, politicians, governments and prevailing economic logic come

and go; over such an extended period of time it isn’t too surprising to see policies reflect
these changes. Policy-making in China, despite the rhetoric, has been much more
pragmatic and changeable than many would care to believe. In the early stages, there
was a focus on privatisation of SOEs and there were consequent effects on
unemployment, poverty and inequality in China. There was then a tangible shift during
the 2000s towards industrial planning in China; some of this might be attributable to
‘reform fatigue.’ Liberalising policies in SOEs, and in general, had resulted in increased
income inequality, corruption, unemployment. The Chinese government sensed that a
change of direction was needed to avoid increased social unrest. Chen and Naughton
(2013) argue that the large-scale unemployment caused by early SOE reforms was an
important factor, in combination with the collapse of social services that traditionally
been provided by state-owed enterprises and collectives. There was broad debate
between those who wanted to ‘complete’ the marketisation project and those who
wished to have a re-think of such policies. “Under these conditions, an unmistakable
slowdown in the pace of economic reform was not surprising; public opinion shifted; and
policy-makers preferences also seemed to reflect this.” Zheng and Chen (2009) agree
that the privatisation process was botched. Vast numbers of jobs were lost, yet there
was no systematic plan in place for their transfer to the private sector. In addition, poor
administration and inadequate regulation led to social unrest. Privatisation of SOEs,
they argue, benefited the owners of capital rather than deliver more efficient services for
the consumer and improve the efficiency of the economy.
As hinted in the above paragraph, there have also been significant differences of
opinion within bureaucracy and government itself about content and direction of
policies. Much of the literature about China treats the party-state as unitary, ‘top-down’
and with the ability to shape and control every aspect of political and economic life.
Other literature, much of it stimulated by Lieberthal and Rosenberg’s ‘fragmented
authoritarianism’ framework, highlights the inter- and intra-bureaucracy bargaining that
goes on in China to find the appropriate policy outcomes. Policy-making in China, as
Chen and Naughton (2013) phrase it is “...protracted, disjointed, and incremental.”
SOE REFORM AND FOREIGN LEARNING 29

There are different factions or coalitions that struggle amongst themselves to push their
own policy agendas. Some of these are more market-friendly, others favour state
planning. It is the shifting influence of these bodies that influences the dominant line of
policy that is followed. As Heilmann and Shih (2013) describe the Hu-Wen period,
“...many previously influential protagonists and brokers of economic liberalization were
sidelined, whereas indicative planners and industrial policy protagonists merged into a
‘centrist’ or ‘statist’ advocacy coalition that became the dominant force in economic
policy-making.” They also go on to say that Chinese economists who advocate
market-based solutions have remained popular with the business community and
finance sector. This leaves the door open somewhat for the pendulum to swing back
towards ‘Western-style’ policies in the future, although under the current leadership of Xi
Jinping, this appears unlikely in the immediate future.
Zheng and Chen’s (2009) paper, for example seems to treat Chinese state power
as absolute, and that they have the power to implement policies at will. There is little
divergence of opinion within the Chinese government or between the government and
the SOEs themselves. There is truth in this – the government is able to retain a degree
influence of influence over SOEs through a variety of tools, such as the appointment of
board members through the State Asset Supervision Administration Commission
(SASAC), or the approval of loans from state-owned banks. There is, however, a line of
literature that stresses the agency that SOE managers have over the policies that they
adopt, as well as their input into the decision-making process itself. Scholars such as Xu
Yi-chong write that the CCP control is relatively weak; SOEs themselves have a certain
degree of autonomy in choosing and shaping decisions that affect them. Other authors
such as Zhang and Freestone (2013) talk about how SOEs shape government policy
priorities, noting, in many cases, little effective supervision of SOEs which allows them
to pursue their own interests. Chen (2010) writes in detail about political struggles over
reforms between bureaucrats who wish to introduce market incentives to improve
competitiveness and those whose interests would be compromised by such reforms.
Downs (2007) uses the example of the Oil Industry in China which has been able to
resist government attempts to introduce increased competition in the sector. “China’s oil
SOE REFORM AND FOREIGN LEARNING 30

majors—with their subsidiaries listed on foreign stock exchanges, global business

portfolios, and vast profits earned from the high oil prices of recent years—are powerful
and relatively autonomous actors with their own domestic and international interests
that do not always coincide with those of the party-state.” SASAC or other regulatory
bodies can be selectively ignored, circumvented, or manipulated.
Finally, although the focus of the essay has been upon policy learning from
abroad, and its consequent effects on SOEs, there was also a certain degree of
coercive policy transfer to China. Zhang and Marsh (2016) write that when China
became a member of the World Trade Organization in December 2001, a whole range
of institutional reforms needed to be implemented for them to meet convergence
requirements. Chow (2001) lists some of the reforms necessary as the lowering of tariffs
for imports, letting foreign firms to sell directly in the Chinese domestic markets, and
opening up of the finance and telecommunication sectors to foreign competition. Chen
and Naughton (2013) agree that these forced the Chinese bureaucracy to adapt to
impending WTO membership “...bureaucrats had their hands full in terms of adapting
regulations and policies to be WTO compliant, while also worrying about the impact of
WTO-driven market opening on Chinese firms.” These kinds of liberalising reforms may
not have been domestically palatable to the Chinese, but they had no choice if they
wanted to take advantage of the trade-based benefits the WTO entry would bring.
SOE REFORM AND FOREIGN LEARNING 31

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http://www.mofa.go.jp/policy/oda/region/e_asia/china/index.html

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http://www.stats.gov.cn/tjsj/ndsj/2016/indexeh.htm