China’s State Sector Needs to be Exposed to ‘Competitive Neutrality’

China’s economic policy makers should start treating the domestic state sector in accordance with the principle of ‘competitive neutrality’, in order to solve the structural problems in the country’s economy.

The concept of ‘competitive neutrality‘ was thrust into the discourse among Chinese economic policy makers last October, when it was mentioned by People’s Bank of China governor Yi Gang at a G-30 meeting. Specifically, Governor Yi stated that “to solve the structural problems in the Chinese economy we will consider treating state-owned enterprises (SOEs) with the principle of competitive neutrality.”

Governor Yi is certainly correct in highlighting that reform of China’s state-owned sector needs to be a key part of any forthcoming economic reform drive. Especially now, at this crucial time, when the country’s economic growth is slowing. Yet, up until last October, the phrase ‘competitive neutrality’ had  likely not entered the lexicon of many of the country’s economic policy makers.
The Organization for Economic Cooperation and Development (OECD) defines competitive neutrality as “a fundamental principle of competition law and policy that firms should compete on the merits and should not benefit from undue advantages due to their ownership or nationality”. Whereas the concept of ‘competitive neutrality’ was originally conceived of in Australia in the 1990s, the OECD only started using the term in 2011. The term has since become a trend word among chiefly Western economic policy makers.
Yet, ‘competitive neutrality’ is essentially just a new term for the age-old concept of ‘fairness’, and we should take the term to mean fair competition among all companies - whether they are state-owned, privately-owned or foreign-owned -  on a level playing field. This however is something that has not yet been fully realized in China in relation to the treatment of foreign and private Chinese enterprises vis-a-vis the country’s SOEs.
China’s SOEs still find themselves in a privileged position compared to these other types of companies, having access to a myriad of subsidies and playing on a pitch that is heavily tilted in their favour. Yet the nation’s SOEs are not the economic engine anymore that they once were and their often inefficient performance risks becoming a drag on the Chinese economy. Similarly, their monopolistic powers dampen market forces, thereby preventing more innovative players from rising up. Nowadays these players are chiefly found in China’s private sector.
Today China’s privately-owned enterprises (POEs) are both the chief drivers of innovation domestically and increasingly fierce - and highly competitive - players abroad. They have also become the best source of economic growth, jobs and tax revenue. Yet POEs too often lose out against their state-owned competitors. Especially the small and medium-sized ones - the innovative startups the country’s industrial upgrading rests on. Treating SOEs with the principle of competitive neutrality would thus likely be a boon to China’s innovation prowess. 
Moreover, adherence to the principle of competitive neutrality will be crucial to solving the deep-rooted structural problems in China’s economy. These problems are manifold and include over-capacities in various industries, a lot of corporate debt that is mispriced, and many other issues - all against the backdrop of slowing economic growth. Solving these problems will require resolve by the nation’s economic policy makers.
It so comes in handy that these policy makers are highly adept at solving problems and handling uncertainty. They also have a great set of blueprints to follow: the China 2030 report published by the Chinese State Council think tank and the World Bank, and the Decision of November 2013’s Third Plenum. Both of these documents included a large number of sound policy proposals that dovetail nicely with the OECD’s understanding of competitive neutrality.
Following these blueprints will enable China’s economic decision makers to implement policies that will greatly benefit the Chinese economy going forward. They could pursue OECD-style competitive neutrality and embark on true SOE reform. They could also implement holistic market access policies that tackle the myriad direct and indirect barriers to the world’s second-largest economy. They could likewise follow up on the oft-announced plans to finally embrace a true market economy. Ideally, China’s economic policy makers would do all these things.

The structural problems in the Chinese economy are deep-rooted and solving them will require some long-overdue reforms of the country’s state sector to actually happen. Part and parcel of this will be the arrival of a genuinely level playing field for all market players. It is increasingly clear at China’s current stage of economic development, that fair competition and economic growth are intertwined. Going forward, a strong level of economic growth will be contingent upon a fair treatment of all market players. In short, it will be contingent upon policy makers resolutely implementing competitive neutrality.
That said, the EU should not simply wait for China to make these changes, especially with many Chinese SOEs bringing their market distortions with them into our own markets. For that reason, the EU should deepen its engagement with China to see these reforms through. Important touch points are Comprehensive Agreement on Investment and multilateral cooperation initiatives to reduce industrial overcapacities to name but two.

Avv. Carlo Diego D'Andrea is National Vice-President of the European Union Chamber of Commerce in China (EUCCC), Chairman of the board the European Union Chamber of Commerce in China (EUCCC) Shanghai Chapter.

Article published in the Italian language by Milano Finanza on September 25th, 2019.