Does Russia’s 1990s privatization hold any lessons for China?

China looks to divest a major stake in many of its state-run companies.

China looks to divest a major stake in many of its state-run companies.

State-sector reform is crucial for the long-term prospects of the Chinese economy, but it remains unclear how Russia's experience in dealing with the state sector could be of any use to Beijing.

At a recent press conference, the Chairman of China’s State-owned Assets Administration and Supervision Commission (SASAC), Xiao Yaqing mentioned Russia’s experience in reforming its state sector with unusual appraisal. 

Xiao refrained from criticizing Russia’s economic reforms in the late 80s and early 90s, which included vast privatization of the state owned enterprises (SOEs), despite the fact that even in Russia it is widely acknowledged that the privatization was conducted with haste and has led to serious long-term consequences.

Although Xiao didn’t say anything specific about applying Russia’s privatization experience to China's, his statement provoked some interest in the media.

China's state burden

China’s state sector has generated lively discussions in academic circles because it embodies the country's most serious economic problems: its heavy debt burden, its ineffectiveness and a lowering of returns on investment.

The transformation of SOEs is part of an ambitious economic reform plan proposed by China's new leadership in 2013. Despite all of the problems plaguing its public sector, Beijing has called for stronger support for state companies, which play a “leading role” in the economy.

This approach towards the transformation of SOEs has caused a visible rift between China's two top leaders: Xi Jinping and Li Keqiang. After three years in office, Premier Li has tried to oppose Xi’s desire to preserve the state’s dominant role in key economic assets. Li emphasizes the potential for free-market forces in reforming the “zombie” SOEs.

Unequal weight

The SASAC as a major shareholder of state property enables the government to retain control over at least 102 of the largest SOEs in the country.

The list of SASAC-administrated companies includes two leading Fortune Global 500 companies: State Grid (number 2 in total revenues, with $329.6 billion during the last fiscal year) and CNPC (number 3 in total revenues, with $299.2 billion during the fiscal year).

Overall, there are about 100 Chinese companies in the Fortune Global 500 list, most of which are controlled by the state via the SASAC.

By contrast, only 5 Russian companies made it to the Fortune list last year.

The target of Russian reform

The economies of present-day China and Russia differ markedly from those that existed in the 1990s. The 1990s Russian reformers aimed to transition from a socialist economic model towards a free market one.

On the other hand, China already has somewhat of a free-market economic system. Its private sector generates up to 60 percent of its GDP and accounts for 90 percent of the country’s exports.

“The Chinese economy is not a planned system anymore,” Alexander Gabuev, head of the Carnegie Moscow Center's 'Russia in the Asia-Pacific Region' program, told RBTH. “The original aim of privatization in Russia in the 90s was to create a proprietary class, which already exists in China. So when it comes to an effective privatization scheme, there is nothing for China to learn from the Russian experience. China functions in a completely different economic reality.”

Reform a la Russe?

Gabuev also mentioned the famous case of Zhou Yongkang, a former Politburo Standing Committee member who was indicted for corruption during the first years of Xi Jinping’s leadership. “Zhou Yongkang’s case echoes the illegal practices of Russian privatization in the 90s, when state assets were sold for a low price to dummy corporations,” he said.

Zhou also used to be the powerful kingpin of China’s state energy sector, with his allies owning over $14 billion worth of assets in China and overseas. After 2 years of investigation, Zhou was sentenced to life in prison for corruption and was deprived of all of his former privileges.

Zhou’s case bears an uncanny resemblance to the infamous loans-for-shares auctions in Russia in the mid-1990s. During these auctions, state property was sold at an undervalued price, and competition between the various bidders was practically non-existent.

Zhou Yongkang, painted portrait./Source: Flickr/thierry ehrmannZhou Yongkang, painted portrait./Source: Flickr/thierry ehrmann

“Russia’s privatization experience is exactly how China should not operate,” Gabuev added.

It seems that China’s bureaucrats already know how to carry out “Russian-style” privatization schemes. However, with Xi Jinping’s current high-profile anti-corruption campaign going on, China could learn a lesson from Russia’s experience and do the exact opposite of its northern counterpart in dealing with state-sector reforms 

Keeping Russia’s experience in mind the least Beijing could do is to implement a gradual SOE privatization policy and bring about clear-cut regulation.  

All in all, there is no ideal recipe for the privatization of state-owned businesses and it is not quite clear as to how Beijing is planning to deal with it. For now, it is visible that a vigorous debate on this topic is going on in China and we could expect some answers during the 19th Party Congress next fall.  

Vita Spivak is Coordinator of the ‘Russia in Asia-Pacific Region’ program at the Carnegie Moscow Center. Views expressed are personal. 

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