The 2011 data in the chart below brings out the imperative for Xi Jinping to move forward with another round of privatization. Despite the development of so many successful, large scale private enterprises over the last 15 years, the state still dominates many sectors.

Easier sectors to move forward with privatization are likely those industrial sectors with many state-owned participants. These already have some characteristics of markets, especially intense competition as growth slows, but they lack other market disciplines in the allocation and cost of capital, and in the ability to pull all available levers to improve efficiency or to innovate. For CEOs, it is rather like trying to compete with one hand tied behind their back in a market almost designed to create structural overcapacity.

Many of these enterprises need at a minimum to close, some need to consolidate. Lots need to improve their environmental performance. Lots need to improve their capital efficiency, their labor efficiency and their energy efficiency. While it will be good if these are all addressed, it will be painful and likely lead to a lot fewer jobs in these industries. It will be very helpful for government leaders if it is not they who are seen to be making this happen, at least not directly.

Even with privatization, it is unlikely the CEO’s hands will be fully untied. Freedom to acquire and consolidate, freedom to reduce jobs, freedom to change suppliers may well still implicitly be constrained, even if the IPO document says nothing to that effect. But without doubt, given the quality of some of the CEOs, truly successful winners will emerge. The sooner they are allowed to get started the better.

privatization