Three Questions With: Andrew Batson

Andrew Batson HeadshotWith state-owned enterprise (SOE) reform at the center of Xi Jinping’s reform agenda, China is now taking unprecedented steps to address its economic pillars. Andrew Batson, who previously wrote a Paulson Policy Memorandum detailing how China might get its SOEs back on track, tells us now why China’s economic future is at stake.

1-balloonIs China doing enough to make SOEs more competitive?

They are at least doing more than they have been. For the past decade, the government’s position was that state firms were doing a great job, and that critics failed to recognize real improvements. Now there is more acceptance of what I think are undeniable facts: that the competitiveness of SOEs has greatly deteriorated, and that their management needs to be overhauled. That’s an important shift, but the changes are still mostly in the planning stages. Nineteen of China’s provinces have published SOE reform plans, and a handful of Beijing-run firms are doing some experiments. But we still haven’t seen a lot of substantive changes at the company level.

2-balloonWhere do you see the greatest opposition to change?

I’m most optimistic about change at the state firms that are controlled by city and provincial governments. Local governments tend to be more pragmatic and less ideological, and they also don’t have the financial resources to endlessly subsidize money-losing firms. Change is much more difficult at the big firms that are controlled by the central government. They tend to be in industries that are more politically sensitive, and the firms themselves have more political sway. But since half of all SOE assets are at the local level, a reform process that mostly covered local SOEs would still have substantial economic impact.

3-balloonWhat if Beijing doesn’t succeed with these reforms? What’s at stake?

A lot is at stake—in my view nothing less than China’s ability to maintain rapid income growth. Most economists agree there has been a real deterioration in China’s productivity growth since 2008. A lot of this is cyclical. But some of it is due to the decline in productivity at state firms. If China wants fast economic growth that is not so dependent on credit, it needs better productivity growth. One very obvious way to do that is to improve productivity at state firms, or to transfer state assets to private hands where they will be better managed.

Andrew Batson is director of China research at GaveKal Dragonomics, an independent economic and financial research firm. He has lived and worked in China since 1998. Before joining GaveKal in 2011, he covered the Chinese economy for The Wall Street Journal.