China’s drastic reform

The Chinese government announced a blueprint to overhaul state-owned enterprises. Under the outline, it will gradually privatize state industries by 2020, merge or shut down ailing ones and bolster management sovereignty. The 120 companies currently under the auspices of the central government will be reduced to 40. President Xi Jinping finally acted out his promise to overhaul state entities two years after he stepped into office.

Reform has been the biggest challenge to the Chinese economy. Public enterprises total over 155,000 and generate an annual revenue of 47.1 trillion yuan ($7.36 trillion), taking up two-thirds of the Chinese economy and more than half of stock market capitalization. More than 80 percent of the revenue of the country’s top 500 companies goes to state-owned enterprises. They have gotten superrich under generous state patronage while also turning into epicenters of inefficiency and corruption. Debt-financed investment in heavy industries in the 2000s created overcapacity in shipbuilding, steel and petrochemicals, which is now slowing the world’s second-largest economy down. The overhaul is essential to the government’s shift away from the old manufacturing-based growth model towards the services sector and increasing domestic demand.

Success in the new reform drive remains uncertain. Deng Xiaoping in 1978 attempted the first reforms by separating ownership and management in state enterprises. Zhou Rongi, the prime minister under President Jiang Zemin, shut down thousands of nonperforming state enterprises. But corruption and bloated management in state industry continued. It is why many are skeptical about any major change in the Chinese state industry.

What matters to us are the repercussions. The proclamation on the reform drive again underscores Beijing’s will to push ahead with transition in the economic structure even if it means slower growth. Further slowdown in the Chinese economy is inevitable for some time. The Shanghai benchmark index fell more than 2 percent following the announcement. International raw material and stock prices will likely become more volatile due to China’s uncertainties.

The Korean government and companies must be extra vigilant, and those that compete directly with Chinese firms must be prepared to face leaner and stronger Chinese rivals. Korean companies must develop more export items that can appeal to Chinese consumers to benefit from Beijing’s policy to boost domestic demand.

Our agility to respond to the changes in China could shape the Korean economy’s future.