STRINGER / REUTERS An employee counts steel bars at a plant in Changzhi, Shanxi Province, January 2008.

The Costs of Reform

China Shakes Up Its State-Owned Enterprises

In 2015, Chinese factories produced more than 800 million metric tons of steel—nearly eight times as much as the United States produced in the same year and more than the entire world produced in 1995. By all accounts, that figure reflects an overcapacity problem: China's big steel firms are increasingly turning to foreign markets to absorb their excess output, but because of lower prices and reduced domestic demand, they are still struggling to make money, losing nearly $10 billion in 2015.

It's not just China's steel sector that suffers from an overcapacity problem. The country is pumping out too much of other industrial products, too, including coal, aluminum, and copper wire.

To its credit, the Chinese government has recognized the need to make cuts to the country's industrial sector. In January, Beijing pledged to trim steel production by between 100 million and 150 million metric tons per year, and in February, it announced plans to cut around 500,000 jobs from the sector. Cuts to production and employment levels in the coal industry will be even steeper.

Beijing's main tool for reducing excess industrial capacity is the reform of China's giant state-owned enterprises (SOEs), something it has been trying to do since the late 1970s. In the 1980s, Beijing sought to make individual state-owned factories responsible for their financial performance by, for example, moving their accounts out of the state budget and onto separate income statements. In the 1990s, Chinese officials attempted to turn legacy communist production units into modern corporations. And in the first decade of this century, Beijing consolidated its oversight of SOEs by creating so-called state asset management committees, with the State-owned Assets Supervision and Administration Commission at the top of the pyramid.

A miner smokes near a coal mine operated by the Longmay Group in Heilongjiang Province, China, October 2015. The Chinese government has recognized the need to make cuts to the country's industrial sector.

A miner smokes near a coal mine operated by the Longmay Group in Heilongjiang Province, China, October 2015.

Throughout the course of these reforms, the Chinese state, and the Communist Party in particular, has kept a firm grip on the top management of SOEs. The government uses SOEs to support official policy, big losses, such control has been less rewarding. In the past, Beijing has sought to address this problem by privatizing or shuttering smaller SOEs and maintaining control over the country's larger, more profitable ones—a practice that the government of Chinese President Jiang Zemin introduced in the 1990s under the slogan of "grasping the large and letting go of the small."

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