Monopoly of SOEs Dampens Innovation

The Fortune China website published a list of the top 500 Chinese enterprises on July 14， which comprises the 500 largest public companies in the country. Still topping the list are large state-owned enterprises （SOEs）， with Sinopec， PetroChina and China State Construction Engineering continuing to occupy the first three positions.

Inspiringly， a total of 36 rapidly growing companies like online retailer JD.com nudged into the list for the first time， mirroring a mushrooming Chinese economy. Aside from that， the list has reflected some potential systemic problems regarding Chinas economic growth.

The number of SOEs on the list has continuously increased during the past decade， accounting for two thirds of the 500 companies on this years list. Its good indeed to see that SOEs have become a dominant force in driving the countrys economic growth， but over-concentration of resources in their hands—especially in the hands of central SOEs—means that privately owned enterprises are left with less and less space to survive. Whats worrisome is that this phenomenon has lasted for many years， meaning that privately owned enterprises have long been struggling in an adverse environment. Despite the SOEs dominance on the top 500 list， they are still less efficient than privately owned companies and lack innovative capacity.

Meanwhile， on the Chinese top 500 list， 29 financial companies earned 1.27 trillion yuan （$205 billion）， accounting for more than half of the total profits earned by the 500 companies. At the same time， on a list of the 40 most profitable Chinese companies compiled by Fortune China， the big four state-owned commercial banks are frontrunners， with Industrial and Commercial Bank of China still ranking number one. Banking has become by far the most lucrative sector in China， which is also worrisome.

Most Chinese banks live on exploiting the margin of interest rates between loans and deposits and providing services such as wealth management to clients. In other words， the profit earned by banks comes primarily from enterprises， and banks performance is directly affected by the profitability of such enterprises.

Financial companies should serve the real economic entities. If financial companies exploit too much profit from the real economy， real enterprises will be financially squeezed， which will greatly frustrate their enthusiasm to manufacture products and in return affect the sustainability of financial companies profitability. This could eventually lead to a financial crisis.endprint

Therefore， measures should be taken to rebalance resource allocation between the real and the virtual economy， and between enterprises and banks. To allow the market to play a decisive role in resource allocation， priority should be given to reducing burdens for companies and governmental intervention in their affairs， to launching tax credits for small and micro-enterprises， to transferring more powers concerning administrative approvals to the market， and to eliminating barriers for entrepreneurs in starting-up businesses.

When such a mechanism is formed， the over-exuberance of the financial industry and the ensuing hollowing out of the real economy will be effectively reversed. Then， real enterprises， even small and microcompanies， will morph into our most profitable entities， and financial resources including bank loans will spontaneously flow to them.

At the same time， the expansion of monopolistic SOEs should be kept in check， and a focus should be placed on the promotion of mixed ownership in carrying forward SOE reform.

When an increasing number of real economic entities and innovative enterprises enter the Chinese top 500 list， and privately owned companies ascend to the top of the list， then we will know structural reform has finally been accomplished in China.endprint