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Reform of China’s Monopolized Industries: History, Experience, and Lessons
2019-12-16
By Shi Yaodong & Zhou Yi
Research Report Vol.21 No.6, 2019
Critical as they are to the national economy, monopolized infrastructure sectors and public utilities have witnessed extensive development and sweeping reform over the last 40 years, providing strong support for national economic and social development. In order to further deepen the reform of monopolized industries[]①, it is important to study its history and learn from its experience and lessons.
I. How and Why the Reform Started?
To fully understand the market-oriented reform of monopolized industries in China over the past 40 years, we had better start with the basic question, how and why the reform was initiated?
1. How the reform was initiated?
In the early days of reform and opening up,while the global wave of market-oriented reform was gaining momentum, China’s postal service, railway, civil aviation, power, petroleum, communications, and urban utilities sectors remained subject tovertical integration, administrative control, state-granted monopoly, and planned economy.
The petroleum industry provided a typical example of vertical integration. A few vertically integrated enterprises took charge of the whole process, from upstream exploration and extraction of oil and gas resources and import of crude oil, through midstream transporting by oil tankers and pipelines, to down stream refining, marketing, and export of petroleum products. Strong administrative control of monopolized sectors was shown in the multiple functions assumed by a single company, acting as both micro manufacturer and macro industrial regulator. In addition to production, policy formulation, industry monitoring, and management of state-owned assets, companies like this sometimes undertook other functions including the provision of public services such as education, medical care, and sanitation. Due to their unique position in the national economy, these sectors used to be dominated by state-owned capital, especially in the early days of reform and opening up, and private and foreign capital were strictly restricted. Moreover, the monopolized sectors had to follow closely state plans on production, use of capital, pricing, cost accounting, material allocation, and product distribution and all their operating profits had to be handed over to the state. These formed a sharp contrast with the global wave of market-oriented reform of monopolized industries in western countries. As represented by Thatcherism, reforms of railway, postal service, power, oil, gas, and urban utilities sectors were vigorously promoted in Britain, the European continent, and North America. Legislative measures were coupled with practical tools to loosen economic control, foster competitive markets, facilitate large-scale privatization, promote industrial restructuring, and establish regulatory agencies.
2. Why the reform was initiated?Shortage, inefficiency, and public demand
From a macro perspective, the long-term severe supply shortage under the tightened-up operating conditions of the national economy was the most fundamental initial cause of the first round of reform of monopolized industries in the mid-1980s. The shortage was most keenly felt in the railway, civil aviation, power, and communications sectors, which were subject to especially strict institutional constraints in terms of market access, investment and financing management, and price formation. Such a shortage became the biggest obstacle to sound national economic and social development. Statistics show that by 1986, China had faced an installed capacity gap of 14 million to 15 million kilowatts and a power generation gap of 60 billion to 70 billion kilowatt-hours. Nearly 35% of the country’s rural households did not have access to electricity and power rationing was a national norm.
From a micro perspective, industrial monopoly posed an insurmountable obstacle to the improvement of production and service efficiency. Under the planned economic system, companies that had long served as infrastructure builders and providers of public utility services were deprived of such basic rights as independent decision-making on investment, operation, and pricing, resulting in redundancy, inefficiency, and the lack of motivation and ability for improving production efficiency and service. On the other hand, the high wage level in these monopolizes sectors which far exceeded the country’s average, coupled with various hidden incomes and benefits,had make unfair income distribution a more prominent social issue.
In addition, rising fiscal pressure had also been an important factor that led to the reform of monopolies. Monopoly operation and supply shortage also created more opportunities for rent-seeking and power-for-money deals.These were all factors contributing to rising social expectation and demand for speeding up the reform of monopolized sectors.
II. A brief Review of the Reform
The history of market-oriented reform of power, telecommunications, oil and gas, railway, civil aviation, and other monopolized sectors during the past 40 years can be divided into three phases in terms of priorities and major tasks.
1. Phase I (from the early 1980s to the mid-to-late 1990s):exploration, decentralization,and separation of functions of administration and enterprises
Major tasks included: a) easing control over market access to address supply shortage; b) improving micro vitality through the separation of administrative and business functions and the establishment of an operational accountability system; and c) preliminary exploration of market-oriented reforms. In the power industry, the reform focused on the investment and financing system and the corporate operating mechanism to better address the contradiction between supply and demand. In the oil and gas industry, the reform focused on the management system of the energy industry to promote the separation of administrative and business functions and expand business autonomy. In the postal and telecommunications services industry, the reform stressed easing price controls and advancing investment in the telecommunications sector. In the civil aviation industry, the State Council replaced the Air Force to head the Civil Aviation Administration. In the railway industry, the Ministry of Railways, which was entrusted with both administrative and business functions, delegated certain planning, financial, and labor and capital distributing power and rights to its subsidiaries in order to give play to their initiative and creativity.
2. Phase II (from the end of the 1990s to the Third Plenary Session of the 18th Central Committee of the Communist Party of China): industrial restructuring, accession to the WTO, and formal commencement of market-oriented reforms
Major tasks included: a) promoting industrial restructuring; 2) addressing challenges accompanying China’s accession to the WTO; and c) substantially advancing market-oriented reforms. In the power industry, the power plants of China State Power Corporation (CSPC) were regrouped into five major electricity generation companies including China Huaneng Group, China Guodian Corporation, China Datang Corporation, China Huadian Corporation, and State Power Investment Corporation while the power grid owned by the CSPC were divided up between the State Grid Corporation and China Southern Power Grid Corporation.
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