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Competitive Neutrality and SOEs Reform:

Recent Development and China’s Practice

Pin-guang Ying

Shanghai University of International Business and Economics (SUIBE)

Shanghai Center for Global Trade and Economic Governance (SC-GTEG)

Abstract: Competitive neutrality can be understood as a regulatory framework

within which public and private enterprises face the same set of rules and where no

contact with the State brings competitive advantage to any market participant. There

are basically three forms of promoting competitive neutrality: (a) through domestic

legislation; (b) through "Best Practices" or "Guidelines" by international organizations;

(c) by RTAs or FTAs. SOEs reform in China is consistent with the basic requirements

of competitive neutrality in the sense that it has always been focusing on the

capitalization and marketization of state assets, but it could not completely solve the

problem of state-owned system. Currently it is urgent to realize the classified

management of SOEs by dividing SOEs into competitive SOEs and non-competitive

SOEs, and implement different regulatory approaches on this basis. Also, it needs to

gradually establish a constitutional governance structure of state-owned assets. The

implementation of competitive neutrality will bring more opportunities than

challenges to China. China can explore competitive neutrality in domestic FTAs

through (a) classified management of SOEs, (b) ‘power list’ of SOEs reform, (c)

competition compliance and (d) industrial policies with the connotation of

competitive neutrality.

Key words：competitive neutrality; SOEs reform; TPP; TTIP; RCEP

Since the concept of competitive neutrality and its regulatory framework was

first proposed and implemented in Australia in the 1990s, competitive neutrality has

become a widespread phrase in today’s world. To put it simply, the so-called

"competitive neutrality" means that the State should treat state-owned enterprises

(SOEs) and private enterprises alike in terms of market competition. Competitive

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neutrality is to solve unfair competitive advantages enjoyed by SOEs because of state

ownership or the State’s special treatment in aspects such as taxation, financing and

regulation.

Ⅰ Different Forms and Positions of Competitive Neutrality

Although there are divergence between countries on the basic connotation of

competitive neutrality, the forms to realize it are varied. From a global perspective,

efforts to promote competitive neutrality basically can be summarized as three forms:

(1) achieve competitive neutrality through domestic legislation; (2) promote

competitive neutrality through "Best Practices" or "Guidelines" by international

organizations (mainly OECD/UNCTAD/ICN, etc.) at the international level; (3) form

binding competitive neutrality terms by regional trade agreements (RTAs) or free

trade agreements (FTAs) (hereinafter commonly referred to as “FTAs”).

1. Achieve competitive neutrality through domestic legislation

Australia was the first country in the world put forward the concept of

competitive neutrality and put it into practice. In April 1995, the Australian

governments, including the Australian Federal Government, six states and two

territories, reached agreement on a National Competition Policy (NCP) for Australia,

and competitive neutrality policy is a part of NCP. 1 Three inter-governmental

agreements underpin the NCP: the Competition Principles Agreement (CPA), the

Conduct Code Agreement and the Agreement to Implement the National Competition

Policy and Related Reforms (Implementation Agreement). All signatories of these

agreements shall implement competitive neutrality policy, mainly including:

· Corporatisation of SOEs, which makes the operation and management of

SOEs consistent with that of private enterprises.

· Taxation neutrality, which tends to cancel as much as possible tax exemptions

or preferences enjoyed by SOEs.

· Debt neutrality, which seeks to adjust the debit and credit costs of SOEs to the

extent as of private enterprises bear.

· Rate of return requirement, which requires the rate of return2 of SOEs must

not be lower than the interest rates of long-term (typically ten years) government

1 See The Council of Australian Governments, Competition Principles Agreement, available at : http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0015/11472/Application_of_National_Competition_Policy_to_Local_Government_Appendix.pdf. 2 Rate of return is the ratio of profits divided by investment costs.

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bonds , and be fairly equivalent with that of other competitors.

In order to ensure competitive neutrality be achieved, Australia has also designed

some monitoring mechanisms.

(1) self-monitoring

SOEs should take the initiative to notify the Ministry of Finance to indicate

whether they are covered by the scope of competitive neutrality policy. If SOEs enjoy

competitive advantages and result in unfair competition in the market, they shall pay

to specific institutions competitive neutrality adjustment fees on their own initiative,

and report annually the payment situations.

(2) Competitors monitoring

If competitors believe that SOEs enjoy government privileges and cause unfair

competition, or do not pay competitive neutrality adjustment fees as required, they

can trigger "complaints mechanism" to complain the violence of competitive

neutrality policy. Australia has set up the Competitive Neutrality Complaints Office

(CNCO) at the federal level to receive related complaints. Various states and

territories have also established competitive neutrality complaints bodies independent

from government departments, or directly handled by the finance department.

In addition, according to the NCP, all levels of governments should disclose their

own competitive neutrality policies in terms of specific framework, the

implementation schedule and the institutional arrangements, and publish annual

reports on the implementation of competitive neutrality policy. In the absence of

effective monitoring mechanisms, new SOEs shall not be set up.

2. Promote competitive neutrality through "Best Practices" or "Guidelines"

by international organizations

As early as the 1970s, the international community has began to focus on the

impact of anti-competitive practices on international trade and investment. In the

following 20 years, the international community has never stopped efforts to bring

competition rules into multilateral trade negotiations and to establish international

competition rules. In the 1996 WTO Ministerial Conference held in Singapore,

Members agreed to work on competition issues and established the WTO Working

Group on Trade and Competition Policy. However, since the majority of developing

members taking into account their own economic development, and huge

disagreement among developed members in understanding and implementing

competition policies, eventually it encountered failure in incorporating competition

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policy issues within the multilateral trade framework.

Currently, international organizations primarily promote exchanges and

convergence of global competition policy through the issuance of research reports,

"Guidelines" or "Best Practices". In terms of competitive neutrality, the Organization

for Economic Cooperation and Development (OECD) and the United Nations

Conference (UNCTAD) have obtained the most prominent achievements.

OECD has launched competitive neutrality research since 2009 and progressed

rapidly. Until now, OECD has issued quite a lot reports concerning competitive

neutrality, including: State-Owned Enterprises and the Principle of Competitive

Neutrality (2009), Competitive Neutrality and State-Owned Enterprises—Challenges

and Policy Options (2011), Competitive Neutrality and State-Owned Enterprises,

Corporate Governance Working Papers, No. 1 (2011), Towards a Best Practice Report

on Competitive Neutrality (2011), Competitive Neutrality: Maintaining a level

playing field between public and private business(2012), Competitive Neutrality: A

Compendium of OECD Recommendations, Guidelines and Best Practices (2012),

Competitive Neutrality: National Practices in Partner and Accession Countries (2013).

These reports summarized competitive advantages of SOEs in different jurisdictions

and varied attitudes and practices on competitive neutrality. They also put forward

"best practices" of competitive neutrality and from which different jurisdictions could

learn and make a choice according to their own situations.

However, most recommendations provided by OECD were modified by

Australian version in order for internationalization. For instance, it cites separating

commercial and non-commercial activities to the extent that benefits outweigh costs,

again providing a ready excuse not to act. There are many examples of OECD

prescriptions being far too vague or simply inapplicable. Country variations mean

internationalization is a challenge even when all countries do have the desire and the

capacity to act, as in the OECD. For countries with extensive state sectors, such as

Malaysia, Vietnam, China and undoubtedly others, OECD neutrality guidelines are

utterly inadequate.3

In addition to the OECD, UNCTAD also initiated some research projects on

competitive neutrality since 2011. In the “UNCTAD Competitive Neutrality Project”

3 Derek Scissors, Why the Trans-Pacific Partnership Must Enhance Competitive Neutrality, http://www.heritage.org/research/reports/2013/06/why-the-trans-pacific-partnership-must-enhance-competitive-neutrality.

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launched in 2011, experts and scholars from China, Australia, India, Malaysia and

Paraguay submitted several reports concerning the situations of competitive neutrality

in their own countries. Compared to the OECD, UNCTAD's focus lies more in

developing countries and transition economies. For example, in 2012, in order to

explore competition issues related to India's SOEs, the Competition Commission of

India and UNCTAD set up a working group in New Delhi to promote a research

project called "competitive neutrality in India" .

3. Competitive neutrality in FTAs

(1) State Aid Control Rules in EU Treaty (Treaty on the Functioning of the

European Union)

There is no clear competitive neutrality policy in EU, but state aid control

provisions in the Treaty on the Functioning of the European Union (TFEU) have the

effects of enforcing competitive neutrality policy.

First, according to Article 106 of TFEU, in the case of public undertakings and

undertakings to which Member States grant special or exclusive rights, Member

States shall neither enact nor maintain in force any measure contrary to the rules

contained in TFEU, especially competition rules. In other words, all enterprises

(whether state-owned or private) shall comply with the competition rules at the EU

level. Where necessary, the European Commission (EC) may issue directives or

decisions to Member States to ensure the implementation of this article.

Second, the EC has the right under TFEU to directly deal with competition issues

involving SOEs of Member States. If SOEs of Member States were in violation of EU

competition law, the EC can make a decision to require SOEs to cease related

measures, and can fine them accordingly. If SOEs of Member States were in breach of

competition law under the influence of government, the EC can issue a compulsory

decision to the government of member states to stop such measures.

Third, Article 107 of TFEU divides state aid into three categories: (1) aid

incompatible with the internal market; (2) aid maybe compatible with the internal

market; (3) aid shall be compatible with the internal market. The first category is

absolutely prohibited. For the second one, it is decided by the European Council or

the EC whether an approval is granted. For the third one, it is valid originally. Under

the EU state aid control system, if any member state want to provide aid to enterprises

or to modify existing aid measures, it shall notify to the EC for permission in advance.

Before the EC makes a final decision, member states shall not implement state aid,

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otherwise it will be identified as illegal. The EC can also carry out investigative

measures on existing state aids, . If the EC believes that certain state aid is

incompatible with the internal market, it can recommend Member States to take

necessary remedial measures. If Member States do not adopt its recommendations, the

EC may also commence a formal investigation and order Member States to take

measures to restore the status quo based on the results of the investigation.

Fourth, the EC has another measure to ensure competitive neutrality -

"Transparency Review". This measure requires SOEs take independent responsibility

for its public programs and commercial practices. For those who bear some of

non-commercial activities, the measure calls for the establishment of different

accounts to illustrate how their budgets are separate in commercial and

non-commercial activities. This measure has been widely applied to various areas in

the EU, such as energy, transport, postal services and so on. 4

(2) Competitive neutrality in Trans -Pacific Partnership Agreement (TPP)

According to a report released by CUTS,5 the November 2011 framework

indicates that the TPP partners are discussing language for a chapter on competition

policy to “promote a competitive business environment, protect consumers, and

ensure a level playing field for TPP companies. Negotiators have made significant

progress on the text, which includes commitments on the establishment and

maintenance of competition laws and authorities, procedural fairness in competition

law enforcement, transparency, consumer protection, private rights of action and

technical cooperation.” And the following contents would constitute parts of the text:

·Members to maintain & adopt competition laws that proscribe anticompetitive

practices;

·Members to maintain authorities responsible for the enforcement of its national

competition laws (‘competition authorities’);

·Members to ensure procedural due process in the enforcement of their

competition laws;

·Members to adhere to the principle of competitive neutrality in the treatment of

their state-owned enterprises, government enterprises and designated monopolies;

4 Commission Directive 80 /723 / EEC of 25 June 1980 on the transparency of financial relations between Member States and public undertakings ( OJ L 195,29.7. 1980,p.35). 5 Alice Pham, The TPP Agreement: Chapter on Competition Policy, CUTS Hanoi,May, 2013, http://a2knetwork.org/sites/default/files/tpp_competition_chapter.pdf.

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·Members to recognize the value of transparency in relations to their

competition law enforcement activities, and to make available to the public

information such as exceptions and immunities to their respective competition laws;

and information about state enterprises and designated monopolies; etc

·Member to cooperate in the enforcement of their consumer protection laws;

·Member to provide for private right of action in the enforcement of their

competition laws; and

·Technical cooperation between TPP Members.6

Most of above contents were covered in the KORUS (the Korea-US FTA) and/or

the Singapore-US FTA.

In fact, in light of these concerns about fair competition, SOEs are addressed,

though not extensively, in several existing U.S. FTAs. NAFTA and subsequent U.S.

FTAs with Australia, Chile, Colombia, Peru, and South Korea have similar language

on SOEs. Though the specific details vary among these agreements, most contain

national treatment, non-discrimination, and transparency provisions, while upholding

the prerogative of countries to establish and maintain SOEs. The U.S.-Singapore FTA

includes somewhat more extensive provisions on SOEs, but they largely apply only to

Singapore and not the United States.7

(3) Competitive neutrality in Transatlantic Trade and Investment Partnership

(TTIP)

In competition policy issues (including competitive neutrality), as reflected from

the statements and related comments of both sides, US and EU are basically the same.

Both sides have developed competition law, and follow the same concept of the market

economy. Based on a shared belief in the need for open, fair and competitive

international market, both efforts to promote the TTIP competition provisions serve as

a global benchmark for third countries to follow. Both the EU and US focus on antitrust

and merger issues, particularly transparency and the use of international best practices,

6 Outlines of the Trans-Pacific Partnership Agreement : <http://www.ustr.gov/about-us/press-office/factsheets/ 2011/november/outlines-trans-pacific-partnership-agreement >. 7 For instance, the agreement states that Singapore’s government must ensure that any government enterprise “acts solely in accordance with commercial considerations in its purchase or sale of goods or services” and that Singapore must make public a listing of organizations that satisfy the agreement’s definition of a “covered entity,” essentially any company organized in Singapore above a certain size and with a sufficient level of government influence. This list is also to include the ownership structure of the organization, members of government that serve on the board of directors, and total revenue or assets; USTR, United States-Singapore Free Trade Agreement, May 2003, pp. 133-140, http://www.ustr.gov/sites/default/files/uploads/agreements/fta/singapore/asset_upload_file708_4036.pdf.

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and the targeting of global market distortion stemming from, inter alia, stateowned,

-controlled or -influenced companies.8

In July of 2013, the Institute for Agriculture and Trade Policy, located in

Washington D.C. and Minneapolis, Minnesota, posted on their website

(http://www.iatp.org/documents/european-commissions-initial-position-papers-on-ttip)

a series of leaked position papers on the TTIP from the European Union.9 It indicated

that TTIP should include provisions with anti-trust and merger disciplines:

· Recognition of benefits of free and unfettered trade and investment relations;

· Consideration and use of generally accepted best practices;

· Commitment to active enforcement of antitrust and merger laws;

· Commitment to implementation of transparent and nondiscriminatory

competition policy;

· Clearly stated provisions dealing with the application of antitrust laws to SOEs

and enterprises that are granted exclusive rights or privileges (SERs).

It is also suggested a need for a level playing field with respect to SOEs/SERs and

the private sector. TTIP should reflect a distinction between entities that have been

granted SERs and those entities controlled by the government but fairly compete with

the private sector, and the use of subsidies should be addressed by the TTIP by the

following provisions:

· Mechanisms to improve transparency;

· Consultation mechanisms that provide for the mutual exchange of information

about the threat that one nation’s use of subsidies might pose to another nation; and

· A recognition of the most abusive and damaging forms of subsidies.

On competition policy issues, TPP's proposal is likely to become the basis for

TTIP discussion. In the context of TTIP, the fair competition of SOEs is not

significant concern for both US or EU. In fact, the EU's state aid rules in large part

ensure that the market participants (including SOEs) are not subject to government

preferences. Obviously, TTIP provides an excellent opportunity to leaders on both

sides of the Atlantic to be able to send a signal to other countries that EU and US will

not sit back and look unconcerned on unfair competition of SOEs.

8 WHITE&CASE, EU outlines preliminary goals in connection to first TTIP round, 17 July 2013,http://www.lexology.com/library/detail.aspx?g=105edc5d-d900-40ee-8a7f-67c44a93f516. 9 Citizen Trade Policy Commission , Summary of EU TTIP position papers, September 19, 2013, http://www.maine.gov/legis/opla/CTPCEUTTIPpositionpaperssum.pdf.

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(3) Competitive neutrality in Regional Comprehensive Economic Partnership

(RCEP)

Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade

agreement (FTA) between the ten member states of the Association of Southeast

Asian Nations (ASEAN) (Brunei, Burma (Myanmar), Cambodia, Indonesia,Laos,

Malaysia, the Philippines, Singapore, Thailand, Vietnam) and the six states with

which ASEAN has existing FTAs (Australia, China, India, Japan, Korea and New

Zealand). RCEP negotiations were formally launched in November 2012 at the

ASEAN Summit in Cambodia.

Because members of the RCEP are mainly developing members, it may much

more realistic to put trade barriers ahead of competition provisions. Obviously, RCEP

members understand a push for more substantive competition provisions has the

potential to slow negotiations and detract from the more important and fundamental

issue of lowering direct barriers to trade. Therefore, a useful reference for RCEP

would be the competition provisions in the existing FTAs, such as the

ASEAN-Australia-New Zealand FTA (AANZFTA).The chapter on competition in the

AANZFTA is expressly excluded from the agreement’s consultation and dispute

resolution provisions, with the result that any disputes arising in connection with

competition matters must be addressed through diplomatic negotiation. This reflects a

concern that while signatories may agree that competition law and policy is important

economically, and that co-operation on competition issues is to be encouraged, each

should retain its sovereign right to “develop, set, administer and enforce its own

competition laws and policies”.10

China’s attitude is crucial in the formulation of competition rule in RCEP. The

Chinese Government deems Free Trade Agreements (FTAs) as a new platform to

further opening up to the outside and speeding up domestic reforms, an effective

approach to integrate into global economy and strengthen economic cooperation with

other economies, as well as particularly an important supplement to the multilateral

trading system. Currently, China has 18 FTA partners comprising of 31 economies,

among which 12 Agreements have been signed already.

10 John W. H. Denton (Partner), Mark McCowan (Partner), Andrew Percival (Special Counsel) & Alistair Newton (Senior Associate), COMPETITION PROVISIONS IN INTERNATIONAL TRADE AGREEMENTS - THE CART BEFORE THE HORSE?, 8 November 2013, http://www.corrs.com.au/thinking/insights/competition-provisions-in-international-trade-agreements-the-cart-before-the-horse/.

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China currently only has added competition chapter to two FTAs already signed,

namely China-Iceland Free Trade Agreement (Sino-Iceland FTA) and

China-Switzerland Free Trade Agreement (Sino-Swiss FTA). These two agreements

have the following characteristics:

· Use principled expression for the regulation of anti-competitive practices

(copy the description of the Anti-monopoly Law);

· Have no relevant contents on due process (typically including

non-discrimination, the right of defense, judicial review, transparency, etc.) ;

· Quote the importance of cooperation, but only in a principled dimension, not

providing the concrete cooperation form in terms of information exchange,

notification, consultation, capacity building etc. It is noteworthy that Sino-Swiss FTA

provides that If a Party considers that a given practice continues to affect trade in the

sense of anticompetitive practices, it may request consultations in the Joint Committee

with a view to facilitating a resolution of the matter.

·In terms of competitive neutrality, both FTAs also give principal provisions

which emphasize that competition chapter applies to all undertakings of the Parties,

but such application shall not hinder undertakings with special and exclusive rights

authorised by laws and regulations from exercising those rights.

·Both FTAs make clear-cut provisions that Nothing in competition chapter

creates any legally binding obligations for the undertakings or intervenes with the

independence of the competition authorities in enforcing their respective competition

laws.

China has been more inclined to resolve competition issues through bilateral

framework of cooperation between the competition authorities, rather than be

included within the framework of bilateral trade agreements, because the former is

voluntary cooperation, while the latter has binding force. Once resorting competition

issues into bilateral coordination mechanism, it is possible to trigger a chain reaction

in which the other party may use the terms of competition interfere in China's

independent anti-monopoly enforcement, and even politicize the issue of competition,

thereby affecting some basic Chinese economic policies and systems.

Therefore, at present, both Sino-Iceland FTA and Sino-Swiss FTA only provide

basic principle terms on competition. However, in the negotiation process, foreign

Parties has presented some sensitive offers such as international comity and dispute

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settlement. As China participating in more and more FTA negotiations, it is inevitable

to face the challenge of negotiating a variety of sensitive and complex rules. Whether

to promote negotiations of RCEP and China-Japan-South Korea FTA or upgrade the

existing China-ASEAN FTA, competition policy will definitely be an important topic

China is bound to face.

It is foreseeable that more refined competition terms would show in future FTAs

involving China. But in the short term, it is not yet possible to appear competitive

neutrality provisions related to complaint mechanisms or dispute settlement

mechanisms.

4. Conclusions

By comparing the different forms and positions of competitive neutrality, it can

be found that different countries have different demands at different stages of

development. Although the concept of competitive neutrality is in common, the

policies and their implementation are varied. It is a prerequisite for China to further

build its competitive neutrality policy in line with its own characteristics by realizing

and summarizing China's experience in SOEs reform. For many developing countries,

studying competitive neutrality policy is a demand to integrate into the globalization

and to participate in international competition, and promote domestic reforms.

Ⅱ China’s History of SOEs Reform and Exploration of

Competitive Neutrality It is necessary to sort out China's SOEs reform process before discussing China's

competitive neutrality.11 This is because China's SOEs reform was undertaken in the

process of transforming China's economic system from a planned economy to a

market economy by turning direct government control to a market based management

of SOEs. This constant "marketization" process of SOEs reform, although not finished

yet, laid the foundation for building competitive neutrality policy. If there were no

SOEs reform, it is impossible to require SOEs to operate in consistent with market

rules and achieve fair competition. In this sense, the SOEs reform is a prerequisite for

competitive neutrality. Meanwhile, some of the experiences and lessons drawn form

the SOEs reform process provided valuable nutrition for designing competitive

11 It is more accurate to say China's SOEs reform as "reform of SOEs management system", since it was basically not the reform of SOEs themselves.

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neutrality regime in China.

1. History and experience of SOEs reform

(1) Phase 1: grant power to SOEs and allow keeping a bigger share of profits

(1978-1986)

Without breaking the original planned-economy institutional framework, China

started the first attempt of SOEs reform through the "devolution of power" (grant part

of the management rights to SOEs and allow keeping a bigger share of profits). This

reform tended to improve production and enhance revenue growth by arousing the

enthusiasm of managers and employees for work. However, because the production

targets of present year were planned based on the completion situation of the previous

year, it left a bargaining space between SOEs and government and inevitably form an

abnormal "whipping the fast cow" phenomenon. Government can decide to continue

grant or withdraw decentralized rights according to economic situations or political

needs. This reform did not really decentralize operation rights to SOEs, but only

provide limited space for distribution of benefits.

(2) Phase 2: separation of ownership and management (1986-1992) The typical way of "separation of ownership and management" is contracting,

which separated the state ownership and enterprise management. Under normal

conditions, SOEs could manage enterprises automatically provided that they could

turn over profits to the government as planned. However, contracting system itself did

not change the traditional administrative dependent enterprise system. Government

intervention in the business was still prevalent. Especially in case of poor business

performance, the government tended to withdraw the right to operate the enterprise.

Or when the external economic and policy environment deteriorated, to giving up the

management rights and returning to the old system also became the first choice of

enterprises. Therefore, in this reform process, it is very common phenomenon that

“profits in hort-term but losses in long-term”. Soft budget constraint problem was

serious. However, the most important human capital in business organization -

entrepreneurial talent, got some development in this phase of reform.

(3) Phase 3: establishment of modern enterprise system (1993 - 2012)

In this phase, the SOEs reform entered into core areas - property rights reform,

which implied that SOEs reform began to shift from passive reform to active reform.

Typical initiatives include:

1) Shareholding reforms

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Based on the establishment of Shanghai and Shenzhen Stock Exchanges, and the

enforcement of the 1993 Company Law, in 1994, the State Council selected 100 large

and medium SOEs to pilot the establishment of modern enterprise system, and various

localities and departments also chose more than 2,000 enterprises as pilots. Although

the shareholding system reform made a major step forward in the form of a modern

enterprise system, it did not establish effective corporate governance structure since

some essential problems such as the functions of the government and enterprises

mixed up remained unresolved.

2) Strategic restructuring of SOEs

Since 1995, SOEs reform turned from individual pilot reform to an entire reform

of state-owned economy. In 1997, the central government required that in about three

years the problem that comprehensive SOEs running under the deficit should be

resolved. The principle of "managing successfully large enterprises while invigorating

small ones" was adopted. The government gradually shrink the range of SOEs to

some major fields: industries related to national security, natural monopolies, public

goods and services, and backbone enterprises in pillar industries and high-tech

industries. After the establishment of the State-owned Assets Supervision and

Administration Commission (SASAC) in 2003, the SOEs were mainly laid out in the

petroleum & petrochemical, electricity, national defense, communications,

transportation, mining, metallurgy, machinery and other fields.

3) Establishment of State-owned Assets Supervision and Administration

Commission (SASAC)

The State-owned Assets Supervision and Administration Commission (SASAC)

was established in March, 2003, performing the duties and responsibilities of the

capital contributor on behalf of the State. In June 2004, state-owned assets supervision

and administration agencies were established by local governments nationwide. Up to

2007, the establishments of state-owned assets supervision and administration

agencies at the level of a prefecture or city and the organization of this system have

been fundamentally accomplished.

(4) Phase 4: development of a mixed ownership economy (since 2013) The Report to the Eighteenth National Congress of the Communist Party of

China on Nov 8, 2012 pointed out that, on the one hand, “we should unwaveringly

consolidate and develop the public sector of the economy; allow public ownership to

take diverse forms; deepen reform of state-owned enterprises; improve the

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mechanisms for managing all types of state assets; and invest more of state capital in

major industries and key fields that comprise the lifeline of the economy and are vital

to national security. We should thus steadily enhance the vitality of the state-owned

sector of the economy and its capacity to leverage and influence the economy”, on the

other hand, “we must unswervingly encourage, support and guide the development of

the non-public sector, and ensure that economic entities under all forms of ownership

have equal access to factors of production in accordance with the law, compete on a

level playing field and are protected by the law as equals”. Since 2013, a series of

reform measures to "develop a mixed ownership economy" were introduced.

On July 15, 2014, the SASAC announced four reform measures involving the

restructuring of state-owned capital investment company, mixed ownership, the Board

powers and the accreditation of the Discipline Inspection Groups in SOEs. These four

reforms released some signals: first, whether the restructuring of state-owned capital

investment company will gradually withdraw the state capital from the competitive

field and investment mainly in the field of public service? Second, how much

breakthrough the mixed ownership reform can achieve? In particular, what can the

government provide to mix? What percentage the private capital can account for? And

whether the mixed enterprises would suffered administrative intervention? Third, to

what extent the Board reform of SOEs can optimize corporate governance? Fourth,

whether the accreditation of the Discipline Inspection Group mean that SOEs reform

and anti-corruption efforts dovetail?

According to some reports, after the Third Plenary Session of the 18th Central

Committee of the Chinese Communist Party, the SASAC has organized a study to

modify and further deepen the reform of SOEs, and made clear the overall direction

of the reform of state-owned assets: first, to expand market access, develop

mixed-ownership economy, promote restructuring and listing of enterprises, and

actively introduce private capital and strategic investors; second, to realize classified

regulation of SOEs by clarifying policy business and competitive business of SOEs.12

However, the general plan on the SOEs reform has not finalized yet. In contrast, the

various local governments already have come up with some unique solutions in terms

of mixed ownership reform.

Take Shanghai for example, on December 17, 2013, the Opinions on Further

12 耿雁冰：《重提混合所有制：国企改革再出发》，http://jingji.21cbh.com/2013/11-14/3ONjUxXzkyODY3OA.html.

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Deepening the Shanghai State-owned Assets to promote the development of SOEs

(hereinafter referred to as "Shanghai Opinions 1"); on July 7, 2014, Shanghai again

introduced the Several Opinions on Promoting Shanghai’s State-owned Enterprises to

Actively Develop the Mixed Ownership Economy" (hereinafter referred to as

"Shanghai Opinions 2"). These two comments pointed out the basic objectives and

directions of the reform of state-owned assets in Shanghai, and there are four main

highlights:

·Classified supervising of SOEs. For instance, Shanghai Opinions 1 provides

that Shanghai SOEs will be divided into three categories: competitive enterprises,

functional enterprises and public service enterprises ,and the classification could be

adjusted dynamically.

· Private capital can have controlling power. For example, Shanghai Opinions 2

encourages non-public enterprises to participate in the SOEs reform and develop

mixed ownership enterprises controlled by non-public owners. Shanghai made it clear

that SOEs in the general competitive fields can retreat from the market in accordance

with market rules.

·Establish open and transparent state-owned assets trade platforms, so that part

of market-oriented and highly competitive SOEs can exit market in a open and

orderly way.

·Gradually increase the proportion of state-owned capital gains paid. For

example, Shanghai Opinions 1 points out that Shanghai state-owned total assets

exceed 10 trillion yuan, contributing to over 20% of Shanghai’s GDP. However, a

considerable number of SOEs occupy a lot of resources but economically inefficient.

It is required that by 2020 the proportion of state-owned capital gains paid will be not

less than 30%, and an evaluation system aims for the evaluation of performance of

state-owned assets income will be established.

In addition, Shandong, Hunan, Jiangsu, Tianjin and other local governments have

also introduced some opinions on SOEs reform. However, most of these opinions

only sketched the "road map" and "timetable", but with little innovation and

breakthrough on the "scale" of reform and without concrete operational measures.

2. Evaluation and outlook on SOEs reform process

(1) Evaluation on SOEs reform process

First, the government financial difficulties is the main factor triggered the early

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SOEs reform. The SOEs reform in late 1970s started in a period with financial

deficit in successive years. The shareholding reform also aimed at collecting money

for survival of SOEs. And the strategic reorganization of SOEs was because the

central government can not continue to bear the loss of SOEs.

Second, by far the most successful reform is perhaps the strategic restructuring

of SOEs. By "invigorating large enterprises while relaxing control over small ones",

the reform shrank the areas of SOEs to monopoly industries and industries with

strategic importance, and in reality imposed privatization to small and medium SOEs

to reduce the financial pressure of the government. This reform is actually a form of

Pareto improvement, that the competent authorities get rid of the burden while the

managers and workers of the enterprises benefited from the enhanced efficiency after

privatization. If this kind of reform continued, the scale of private economy will

become increasingly large, and the SOEs left will pull back to public economic

sphere.

Third, the establishment of state-owned assets management system is one of the

"most active" reforms, but the results may deviate from the basic direction of the

strategic restructuring of SOEs had established. After the establishment of

state-owned assets management system, the SASAC and other local state-owned

assets supervision and administration agencies became the ultimate agents and the "de

facto" owner of SOEs. This excludes, to some extent, the possibility that other

government departments intervene in SOEs, so that the actual ownership of SOEs has

been strengthened. When the interests of the authorities and SOEs gradually reached

an agreement, in the absence of requirements to turn over profits to the government,

the problems of SOEs seem to have been resolved. In fact, the "conspiracy" between

the state-owned assets supervision and administration agencies and SOEs not only can

not solve the problems fundamentally, but also may be detriment to fair competition

of the market economy.

Fourth, the mixed ownership reform is also a proactive reform, but if the

top-level design is unknown, it may once again become a nominal show. The prospect

of mixed ownership reform is still worrying if the mixed ownership reform can not

start from the reform of parent company, do not make sure that the private capital can

have controlling interests,not strictly follow the rules of corporate governance and

guarantee that the government will not intervene mixed ownership companies other

than the exercise of shareholder’s rights. Classified supervising of SOEs can be a

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good start, but the top-level design of this kind of reform has not come on, which

greatly affected the SOEs to exit the competitive field.

(2) Outlook on SOEs reform process

Although China's SOEs reform has made remarkable achievements, the reform is

far from finished. With the deepening of reform, the capitalization of state-owned

assets will come to an end. The reason is that SOEs not only have relative inefficiency,

and more crucially, the state capital continues to exist in the competitive area is bound

to have serious threat to China's economic development and social justice.

The current reform may in wrong directions that always emphasizes

market-oriented reform of SOEs, while ignoring the SOEs should assume

responsibility for public welfare. A basic idea of the current mixed ownership reform

is to make large SOEs listed as a whole. The shortcomings of this idea is that: first,

the mixed ownership is only suitable for competitive SOEs, since non-competitive

SOEs are supposed to bear public service functions and should not have a profit target.

Second, merely mixed ownership may lead SOEs to be profit-worship and unfairly

compete with private enterprises. Therefore, the most critical is not to launch

mixed-ownership reform all around the country, but first to achieve classified

management of SOEs, that is to say, to divide SOEs into competitive SOEs and

noncompetitive SOEs (including public welfare SOEs and monopolistic SOEs). On

this basis, competitive SOEs can take mixed ownership reforms while

non-competitive SOEs can not establish "modern enterprise system" and "modern

property rights system", but should take rigid state-owned form and managed as

public institutions.

At the same time, it needs to gradually establish constitutional governance

structure of state-owned assets. All state-owned assets are owned by the public, so

theNational People's Congress (NPC), rather than the executive branch, should

enjoy the public ownership of state-owned assets on behalf of the public. By then, the

governance of state-owned assets would be within the scope of public governance.

Currently, the SASAC assumes both the functions as the an investor and a regulator.

In the future, the SASAC shall only act as a regulator under the supervision of the

NPC. If a SOE wants to enter a for-profit field, it must be approved by the NPC.

3. The Establishment of competitive neutrality regime depends on further

SOEs reform

China has not formally proposed institutional framework for competitive

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neutrality, but a range of SOEs reform measures can be seen as part of the competitive

neutrality policy. The history of China's economic reform is also the implementation

process of China's competitive neutrality policy. However, the formal establishment

of competitive neutrality regime still needs to base on further reform of SOEs.

The core of competitive neutrality is to the greatest extent to ensure fair

competition among market players. Seen from the Australian experience, the primary

content of competitive neutrality policy is corporatisation of SOEs. The 30-years

history of China’s SOEs reform were processed in the same direction, and this in in

line with the requirements of competitive neutrality. In this sense, China has taken

some substantive reform measures that were like competitive neutrality.

Abovementioned reform course fully shows that competitive neutrality is synergistic

with Chinese target of SOEs reform. However, to achieve competitive neutrality in

China, it still needs to rely on further SOEs reform, especially reforms based on

classified management. Otherwise, even the so-called competitive neutrality regime

has been established, it is impossible to prevent unfair competition between

state-owned and private companies .

Ⅲ China's Basic Position on Competitive Neutrality and

Counter Measures 1. China's basic position on competitive neutrality

(1) Determine China's basic position on competitive neutrality

So far, China has no formal official document on competitive neutrality. Although

China’s many legislative and policy documents in support of "fair competition", this

does not directly linked to SOEs. Whether China has be ready to accept this concept?

From the current point of view, it seems not yet. Or more accurately, it was accepted

only in individual industries or in some limited areas. The vast majority of people still

do not have the sense to regulate SOEs relying on competitive neutrality. In majority’s

opinion, the SOEs are still the basis for China's economy, and also an important

means for China to participate in international competition.

In general, the opportunities to adopt competitive neutrality is bigger than

challenges. Competitive neutrality dose not reject SOEs, but only require fair

competition. It is also the direction of China's SOEs reform to prevent monopolies

and excessive occupation of social resources by SOEs. On July 8, 2014, China issued

the Several Opinions of the State Council on the Promotion of Fair Market

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Competition and Maintenance of Normal Market Order, which is the first complete

top-level design put forward by the State Council on improving market supervision

system, providing a pre-2020 action guide on reforming market supervision system.

These opinions present many requirements in reforming market access system (in

particular the development of market access negative list), breaking regional and

sectoral monopolies, punishing severely of monopolistic or unfair competition

behaviors as well as releasing law enforcement information. All these requirements

are consistent with competitive neutrality.

China should build competitive neutrality regime with Chinese characteristics

based on public interest and guided by "fair competition" by absorbing experience in

economic reform (especially SOEs reform). Maybe eventually this regime is

incorporated into SOEs reform and not called "competitive neutrality", but it should

reflect the basic requirements of competitive neutrality.

(2)Competitive neutrality regime should be to consistent with a country's stage of

development

Competitive neutrality is a policy tool, thus its rules and procedures must comply

with a country's public interests and social welfare. For developing countries, it is

hard to achieve a real sense of fair competition with the developed countries in a

differentiated global value chains. Thus, in order to share the benefits of globalization,

it should increase the competitiveness of domestic industries to better integrate into

the global value chains. To improve the disadvantageous position of developing

countries in international trade and investment, they should have the rights to protect

domestic industries and improve their competitiveness, including the ability to

develop and apply flexible competitive neutrality policy.

In order to realize substantive fairness and protect the public interest, developing

countries shall have the rights to determine some "exemptions" for enforcement of

competitive neutrality. These exemptions may include, but are not limited to: (a)

SOEs that has a special obligation to maintain public service; (2) SOEs as a tool of

industrial policy or development policy; (3) SOEs that ensure revenue. However,

above exemptions should not have a serious impact on competition in the market.

(3)The implementation of competitive neutrality shall be adapted to the legal

background of a country

Here are several special factors that should be considered as background:

First, the special provisions provided in the Constitution of the People’s Republic

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of China in relation to socialist public ownership13 and State-owned economy14 are

important factors in considering the status of competitive neutrality policy in China. It

has become a double dilemma for China’s Anti-monopoly Law (hereinafter referred to

as AML) to deal with the relationship between state-owned enterprises (hereinafter

referred to as SOEs) and the law itself. On one hand, AML cannot conflict with

Constitution which protects completely the SOEs as the leading force of the national

economy. On the other hand, the AML is applicable to all monopolistic conduct

including that such conduct engaged in by SOEs.

Second, China is in the transition process towards the goal of establishing a

market economic system. There still exists a lot of structural problems and obstacles

which impact on the sustainable development of economy. The reforms in relation to

SOEs, natural monopoly industries and government regulation system are still in the

process of exploration and development. In this case, it is necessary to regard a range

of Chinese SOEs reform as part of the competitive neutrality policy, and promote the

establishment of competitive neutrality regime in stages and step by step.

Third, there exists no complaint and supervision system directly related to

competition neutrality in China so far. However, there exist some channels for

complaint through proposing bills regarding SOEs by deputies to NPC, political

advisors to People's Political Consultative Congress and members of some democratic

parties to promote relevant legislation.

In addition, according to Article 9 of AML, the Anti-monopoly Commission was

established under the State Council with main responsibility of “studying and drafting

related competition policies”. It is the first time for China to raise the notion of

studying and drafting related competition policies in the form of legislation.

Competition policy includes the content of competition neutrality in itself. Provided

that the Anti-monopoly Commission is empowered to establish and enforce complaint

and supervision system of competition neutrality framework, it will facilitate the

coordination of the relationship between competition enforcement authorities and

government regulation authorities and promote fair competition between SOEs and

private enterprises so that the unfair advantages of SOEs in competition will be

13 Article 6 of the Constitution provides that the basis of the socialist economic system of the People’s Republic of China is socialist public ownership. In the primary stage of socialism, the State upholds the basic economic system in which the public ownership is dominant and diverse forms of ownership develop side by side. 14 Article 7 of the Constitution provides that the State-owned economy, namely, the socialist economy under ownership by the whole people, is the leading force in the national economy. The State ensures the consolidation and growth of the State-owned economy.

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minimized.

Despite that the current legal and institutional framework may hinder the

development of competitive neutrality, but through proper legal interpretation and

institution re-construction, there is still space to develop competitive neutrality regime

in line with China's national condition.

2. China's counter measures on competitive neutrality

(1) Explorations in China (Shanghai) Pilot Free Trade Zone

Since the China (Shanghai) Pilot Free Trade Zone (hereinafter referred to as

"Shanghai FTA") was established, antimonopoly is one of important elements. The

Notice of the State Council on Issuing the Framework Plan for China (Shanghai)

Pilot Free Trade Zone states that the Shanghai FTA "collaborates with relevant

departments of the State Council strictly enforce antimonopoly review of business

concentration”. On September 29, 2013, the Shanghai Municipal Government issued

the Measures for the Administration of China (Shanghai) Pilot Free Trade Zone,

which provides that the Shanghai Municipal Government set up the Shanghai FTA

Management Committee, and one of its responsibilities is to undertake related work

concerning national security review and antimonopoly review. The Article 30 also

states that the Shanghai FTA establishes relevant working mechanisms related to

national securities review and antitrust review, and the Shanghai FTA Management

Committee shall promptly apply for national security review or antimonopoly review

once find that investment projects or companies belonging to the scope of national

security review or antimonopoly review. The Regulations of China (Shanghai) Pilot

Free Trade Zone, took effective on August 1, 2014, also makes similar provisions,

requiring that the Shanghai FTA Management Committee "carries out relevant duties

of national security review and antimonopoly review", and the Shanghai FTA

“establishes antimonopoly work mechanisms”. It is worth noting that Article 35 of the

regulations stipulate that the tax departments in the FTA should “create a tax

environment beneficial to business development and fair competition”. This reflects

potential possibility of "tax neutrality", but because it is a non-operational clause, it

would not have a material effect.

Overall, these provisions merely state that anti-competitive practices should be

regulated in the Shanghai FTA, with no breakthrough on competitive neutrality issues.

In fact, as one of the measures to respond to large-scale regional trade agreements led

by the US and EU, Shanghai FTA could have some explorations on competitive

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neutrality. For example:

·Explore classified management of SOEs in Shanghai FTA by making a clear

distinction between competitive SOEs and non-competitive SOEs, and make it public

to society.

·Develop "power list" of SOEs comparing with the "negative list" used in

investment area, and make it clear the scope SOEs could enter on the basis of

classified management. SOEs should not enter areas beyond the scope the power list

has enumerated .

·Enhance the transparency of SOEs. The government can require SOEs in

Shanghai FTA disclose their operational costs, including the costs of business

operations and that of providing public services in a bid to prevent SOEs take

advantage of government subsidies for public services to compete unfairly with

private enterprises. Meanwhile, SOEs shall publish independent annual audit report

which strictly follows the auditing standards applied to other non-state-owned

enterprises.

·Explore competition compliance (particularly government compliance). The

so-called competition compliance here refers to not only competition advocacy

aiming at SOEs, but also involvement of competition authorities in the process of

rule-making by other government departments (in particular regulatory authorities). In

practice, since the Shanghai FTA Management Committee has been given the duty to

assist the implementation of competition law, it should be further given the power to

comment on proposed regulations and policies, including the power to assess the

effect such regulations and policies may have on fair competition.

·Incorporate the concept of competitive neutrality into industrial policies

implemented in Shanghai FTA. For example, it is possible to gradually reduce

advantages granted to SOEs by industrial policies in terms of financing, credit or

regulation. (2) Explore domestic competitive neutrality policy 1) Determine the applied scope of competitive neutrality

Competitive neutrality does not mean that all SOEs should be involved in the

competition. In fact, some public services may be more beneficial to the public with

exclusive or monopolistic supply. This relates to the applied scope of competitive

neutrality. Competitive neutrality applies only to SOEs engaging in commercial

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activities, but not SOEs performing public functions or engaging in public welfare

activities. If a SOE engage in both non-profit and for-profit activities, the former does

not apply, but the latter is applicable.

There are basically three points of view on the application of competitive

neutrality on SOEs: (a) apply only to SOEs the government has controlling ownership;

(b) apply to any SOEs and private enterprises supported by the governments; (c)

apply to all business activities linked with the governments. For example, the KORUS

not only regulates SOEs, but also regulates the "designated monopoly". The

designated monopoly here includes both the designated government monopolies and

private monopolies. Meanwhile, some organizations in the US are trying to subject

state privileged enterprises to the application of competitive neutrality in proposed

competition chapter.

China can make sure that competitive neutrality merely apply to SOEs the

government has controlling ownership. In addition, a much more clear-cut method is

to enact a list of SOEs which are subject to competitive neutrality policy.

2) Establish complaints mechanism of competitive neutrality

Complaints mechanism is key to ensuring the effective implementation of

competitive neutrality policy. Complaints should bear the burden of proof to prove

that their rivals in violation of competitive neutrality policy. A specialized agency

shall be responsible for analyzing whether SOEs challenged have unfair competitive

advantages, and taking certain corrective measures against SOEs in violation of

competitive neutrality. It is worth noting that the implementation of competitive

neutrality policy is not to combat enterprises with high efficiency, but to eliminate

unfair competitive advantages arising from the ownership. If the competitive

advantages are generated by improving the operational efficiency of SOEs, this does

not belong to the applied scope of competitive neutrality .

3) Set implementation authority of competitive neutrality

According to Article 9 of AML, the Anti-monopoly Commission was established

under the State Council with main responsibility of “studying and drafting related

competition policies”. If the Anti-monopoly Commission could take the responsibility

of implementing competitive neutrality, it can not only play its roles in coordinating

competition authorities and various government regulatory agencies, but also push a

level playing field for SOEs and private enterprises.

4) Build supplementary mechanisms to competitive neutrality

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The effective implementation of competitive neutrality needs related

supplementary mechanisms, including: (a) mechanisms directly related to the

implementation of competitive neutrality policy, such as the transparency of

competition policy, competitive review of sectoral regulations and industrial policies,

and the application of competition law to SOEs; (b) mechanisms promoting or

influencing the formulation and implementation of competitive neutrality policy, such

as supervision of state-owned assets and SOEs, as well as competitive neutrality

related tax policy, government subsidies policy, environmental policy, financing

policies and land policies; (c) link the implementation of competitive neutrality with

anti-corruption.

(3) Develop evaluation tools of competitive neutrality suitable for developing

countries Whether a policy is good or bad depends largely on its effectiveness, thus it is

necessary to assess the implementation effect of competitive neutrality policy.

However, countries at different stages of development definitely face different policy

issues, and obviously should not apply the same assessment tools or indicators.

Therefore, China should design its evaluation tools of competitive neutrality based on

"problems" China faces.

.