Competitive neutrality a necessity for China’s economic future

Every year, the European Chamber produces the Position Paper; a comprehensive analysis of the current state of the main industries in China in which European business has a strong footprint.

Jörg Wuttke, President
European Union Chamber of Commerce in China

The report includes more than 800 recommendations for the Chinese Government. It also reflects on efforts to reform China into a competitive market economy. While China’s market continues to inch open to foreign investment and the business environment marginally improves year after year, these advances have not been enough to offset the resurgence of the state-owned economy and mitigate the subsequent effects, such as the drying up of private-sector financing and flagging national productivity. We therefore decided to focus the executive position paper of our report on SOE reform and the need for China to adopt ‘competitive neutrality’.

This concept, that companies should not be afforded undue advantages as a result of their ownership type, is especially relevant due to the immense and growing role of SOEs in the Chinese economy. In the European Chamber’s Business Confidence Survey 2019, 70 per cent of members reported that SOEs are present in their sector, and that doesn’t include the many industries where SOEs enjoy exclusive access or their market domination effectively blocks international companies from competing.

SOEs’ privileges in the Chinese economy are seen in their easy access to cheap credit and subsidies, ability to skirt regulations and their practice of applying extremely long payment periods to suppliers, effectively treating them as loan providers. As long as the monopolistic and favoured position of SOEs continues to come at the expense of sound market competition, China’s private sector will struggle to reach its full potential. 

Fortunately, these issues are clearly recognised by some of China’s leaders. Competitive neutrality has been raised multiple times by key figures throughout the last 12 months, and the growing negative effects of an SOE-dominated market are becoming clearer to policymakers. China has a strong track record of successfully navigating economic crises by leaning further into market liberalisation. We expect that the government will do so again, and see this next step as a critical one to completing China’s ongoing transition into a full market economy.

One of the greatest benefits of adopting competitive neutrality and developing strong institutions to provide recourse when enterprises encounter unequal treatment, would be the resulting surge of confidence in China’s market and the accompanying boost in investment. With our focus on competitive neutrality, here and in our recently launched Position Paper, we again call for increased competition on a level playing-field between different kinds of economic actors in order for the Chinese economy to be able to thrive in the long-run.