Twofish's Blog

October 4, 2006

Martin Wolf and China’s piggybank

Filed under: china, economics, finance, Uncategorized — twofish @ 5:55 pm

I agree with Martin Wolf that one thing that should be done is that now the state-owned enterprises are profitable, that the Chinese state should use some of these profits.  There is no shortage of things that the Chinese state can usefully spend these profits on, including boosting education, health spending, environmental cleanup, funding old age pensions etc. etc.  There is also a multiplier effect in that once the government spends money on healthcare and education, this reduces the need for households to save and this releases more capital into the economy.

The problem is that having SOE’s issue dividends needs to be done carefully and according to some policy.  The classic problem with SOE’s is that the state takes out too much money in order to pay for government spending of questionable usefulness.  This makes it difficult for SOE’s to invest in capital improvements or pay its own workers decent wages, and this makes the SOE more inefficient which causes a downward spiral.  Also what is the point of making a profit, if the state just comes and takes it away, and what happens when the economy changes and the SOE isn’t making a profit?

It’s for these reasons that the PRC established very early on the principle that the government would only take money from the SOE’s in the form of taxes and only provide money to the SOE’s in the form of loans.  This policy has outlived its usefulness, but we have to think very carefully about what the new policy should be.

Personally, my feeling is that diversifying the ownership of SOE’s would help a lot.  If you have an SOE whose shareholders consist of twenty different owners with a mix of both public and private owners, you are likely to make better decisions about dividend distribution than if you have one big owner.

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