BREAKING SOE MONOPOLIES: The power industry is a focus for the reform of monopolized industries. A worker checks power lines in Chuzhou, Anhui Province  (WANG JIAGUO)

At a national conference on economic reform held in Wuhan, Hubei Province, on May 6, six priority areas were stressed for economic reform, namely, state-owned enterprises, essential production factors, rural areas, society, foreign-related sectors and the modern market. "All of the priorities are directly aimed at the core of economic reform," said Yuan Xucheng, Deputy Secretary-General of the China Society of Economic Reform.

This year marks the 30th anniversary of China's economic reform, which is now in the stage of perfecting the market system. Gauging the six priorities of this year's economic reform, the government is showing its intent to reform the monopolized industries.

Three targets

At this conference, officials from the National Development and Reform Commission stressed that prior reforms would be implemented in three monopolized sectors: the railway, power and salt industries.

For administrative reasons, some industries were monopolized during the process of China's economic reform, such as those involved in petroleum, railways, tobacco, power and salt. Reform is to be carried out first in railway, salt and power sectors in compliance with the general arrangement of China's present economic reform, said Yuan.

According to Yuan, China's economic reform has progressed step by step. From 1978 to 1992, China carried out reforms to establish a socialist market economy, with the goal initially accomplished between 1992 and 2003. With the socialist market economy being perfected currently, China's economic reform is at a crucial stage.

In China's economic development, however, the state-owned economy still occupies the leading position. In particular, state-owned enterprises (SOEs) monopolize many industries. To further perfect the market economy, monopolies must be broken.

But breaking up monopolies is a gradual process. Small-scale reforms were once carried out in the railway and power sectors, and those reforms have yet to stop. So it's rational to give priority to reforming these two sectors. The government has clearly resolved to completely break down the monopolies in the two industries.

This is the first time the salt industry has been the target of reform. At present, the salt industry is operated under a government license. According to Yuan, salt, especially common salt, is crucial to the daily lives of the 1.3 billion people. How to operate the industry and how to reform it are quite important, since it affects people's daily lives.

Zhou Minliang, a researcher at the Institute of Industrial Economics of the Chinese Academy of Social Sciences, contends that the core of the reform lies in the rational allocation of social wealth. The strong appeal of people to reform the monopolized industries is not because these industries create lower economic gains than other industries, or that people are naturally opposed to monopolies, but because the monopolized industries have created much more wealth for themselves than other sectors due to the benefits provided for them in resources. Such benefits have greatly influenced people's attitude toward monopolies. Therefore, it is in compliance with the will of the people to reform the monopolized industries, and the railway, salt and power industries are the three drawing the most ire of the people, he said.

Zhou also said that the three industries are faced with the problem of having a mixture of government administration and enterprise management, especially the railway sector. It may be a prime issue for the reform to solve this problem.

Too much of a good thing?

"There are many critics of monopolized industries, and reform must be carried out," said Chen Yizhou, Vice President of sohu.com and an MBA graduate of Stanford University. "But since the monopolized industries are closely related to economic development and people's livelihood, the reforms shouldn't be over market-oriented." Chen holds the opinion that the monopolized industries should remain partly state-owned.

According to Chen, the over market-oriented tendency of the reform of China's public utility industries has been a warning of what could happen. On December 12, 2002, the then Ministry of Construction decided to accelerate the marketization of urban utility industries. Since then, overseas and private capital have entered into funding the operation of urban utilities. Many SOEs in the water, gas and public transport sectors were marketized, and this tendency is still ongoing. "Marketization" does alleviate the disadvantages of monopolies in many urban utility enterprises and improve their vigor and competitiveness. However, there is an extreme tendency to become too heavily influenced by the market-large holdings of state-owned assets are converted to private capital and some SOEs become totally private. Many companies have chased economic benefits solely and abandoned the nature of public service.

"The tendency of over-marketization not only means a loss of state capital, but also weakened government supervision," said Chen.

According to Chen, reforming monopolized industries also has to take public welfare into account. "I think the focus of the reform of monopolized industries should be on the equitable allocation of public resources, the introduction of competition mechanisms to break the monopolies, the establishment of more standard corporate governance structures, and more effectively providing public products and services-not just simply selling state-owned assets," Chen continued.

In Chen's opinion, the government's stripping the "clothes of administrative protection" from monopoly enterprises is not meant to leave public welfare uncovered. In fact, if state assets in the monopolized industries are excessively privatized, the government cannot supervise their services any more and the service function that had been weak will soon collapse. Companies involved in such industries will turn to interest groups completely serving their own benefits, leading to more serious problems in public welfare.

According to Chen, it is the general trend to separate the functions of monopoly enterprises from those of the government and realize the market-oriented supply of resource-based services. However, because of the actual conditions and characteristics of the monopolized industries, the reform is fated not to be excessively market-oriented, he said.

Six Priorities of Economic Reform in 2008

-- Advancing the reform of SOEs and the development of non-public economies. Led by the State-Owned Assets Supervision and Administration Commission, the Ministry of Industry and Information Technology and the Ministry of Finance, the reform will speed up the restructuring of central enterprises, establish and improve structural optimization and strategic adjustment mechanisms of state capital, and promote the flow of state capital to major industries, key areas and basic public service sectors closely related to state security and the national economy.

As for the reform of SOEs, the focus will be on advancing the reform of monopolized industries. Three industries are involved: researching and formulating reform proposals for the railway industry; researching and tabling reform proposals for the salt industry; advancing and carrying out reform of power grid companies; and improving regional power market construction and organizing experiments for power mechanism reform.

-- Speeding up the transformation of government functions, deepening the reform of planning, fiscal, taxation and investment mechanisms and improving the macro-control mechanism.

As for the financial reform, the country will advance shareholding the reform of Agricultural Bank of China and the reform of the China Development Bank, and formulate reform proposals for the Export-Import Bank of China and the Agricultural Development Bank of China.

-- Speeding up social reform. The country will research the establishment of a regulating mechanism covering monopoly profits; improve the mechanism of a special oil gain levy; launching at the proper time guiding opinions on furthering the reform of income distribution; and reforming the payroll management of SOEs and strengthening supervision over payroll of monopoly companies.

-- Advancing construction of the modern market system and deepening the reform of resource prices.

-- Deepening reform in rural areas and establishing a long-acting mechanism that promotes agricultural development with industrial development and advances rural development with urban development.

-- Speeding up foreign-related economic reform and improving an open economic mechanism that is balanced, mutually beneficial, safe and effective.