Reform in Deep Water Zone: How Could China Reform Its State- Dominated Sectors at Commanding Heights Yingqi Tan July 2020 M-RCBG Associate Working Paper Series | No. 153 The views expressed in the M-RCBG Associate Working Paper Series are those of the author(s) and do not necessarily reflect those of the Mossavar-Rahmani Center for Business & Government or of Harvard University. The papers in this series have not undergone formal review and approval; they are presented to elicit feedback and to encourage debate on important public policy challenges. Copyright belongs to the author(s). Papers may be downloaded for personal use only. Mossavar-Rahmani Center for Business & Government Weil Hall | Harvard Kennedy School | www.hks.harvard.edu/mrcbg 1 REFORM IN DEEP WATER ZONE: HOW COULD CHINA REFORM ITS STATE-DOMINATED SECTORS AT COMMANDING HEIGHTS MAY 2020 Yingqi Tan MPP Class of 2020 | Harvard Kennedy School MBA Class of 2020 | Harvard Business School J.D. Candidate Class of 2023 | Harvard Law School RERORM IN DEEP WATER ZONE: HOW COULD CHINA REFORM ITS STATE-DOMINATED SECTORS AT COMMANDING HEIGHTS 2 Contents Table of Contents Contents .................................................................................................. 2 Acknowledgements ................................................................................ 7 Abbreviations ......................................................................................... 8 Introduction .......................................................................................... 11 The State Sector and Socialism ............................................................. 24 Marxism and Socialism ................................................................................................ 25 The Commanding Heights ............................................................................................. 26 Phases of State Sector Development in Socialist Societies ............................................ 27 The Initial Construction Phase ........................................................................................................................ 27 The Growth Phase ........................................................................................................................................ 29 The Reform Phase ......................................................................................................................................... 32 The Privatization Phase ................................................................................................................................. 35 The Post-Socialism Phase ............................................................................................................................... 44 The State Sector in China ...................................................................... 46 The Historical Root ....................................................................................................... 46 Past SOE Reforms ......................................................................................................... 48 Contract Management Responsibility System .................................................................................................. 48 The Shareholding System and Modern Enterprise Institution ............................................................................ 51 Grasping the Large, Letting Go of the Small ................................................................................................... 52 Restructuring and Corporatization ................................................................................................................. 54 The Creation and Rise of SASAC ................................................................................................................... 57 A Snapshot of SOEs Now ............................................................................................. 59 Contribution to Economy ............................................................................................................................... 59 Contribution to Central Government Fiscal Revenue ........................................................................................ 59 Breakdown .................................................................................................................................................. 60 Financials of Central SASAC SOEs ................................................................................................................ 61 Reforms at the Commanding Heights ................................................... 74 Contents 3 1. Healthcare ......................................................................................................... 74 Current Challenges ....................................................................................................................................... 75 Past Reforms ................................................................................................................................................ 81 Constraints ................................................................................................................................................... 88 Potential Solutions ...................................................................................................................................... 102 2. Electricity Power .............................................................................................. 108 Current Situation ........................................................................................................................................ 111 Past Reforms .............................................................................................................................................. 120 Constraints ................................................................................................................................................. 127 Potential Solutions ...................................................................................................................................... 130 3. Railway Transportation ................................................................................... 144 Current Situation ........................................................................................................................................ 144 Past Reforms .............................................................................................................................................. 152 Constraints ................................................................................................................................................. 157 Potential Solutions ...................................................................................................................................... 167 4. Telecommunication .......................................................................................... 187 Current Situation ........................................................................................................................................ 188 Past Reforms .............................................................................................................................................. 195 Constraints ................................................................................................................................................. 205 Potential Solutions ...................................................................................................................................... 214 The Holy Grail of Reforms .................................................................. 219 Past Reforms .............................................................................................................................................. 220 Current Challenges and Constraints ............................................................................................................. 243 Potential Solutions ...................................................................................................................................... 249 Conclusion ........................................................................................... 256 Background and The Problem .................................................................................... 256 Findings ...................................................................................................................... 257 Recommendations ...................................................................................................... 259 Healthcare ................................................................................................................................................. 259 Electricity Power ......................................................................................................................................... 261 Railway Transportation ............................................................................................................................... 262 Telecommunications .................................................................................................................................... 264 Finance ...................................................................................................................................................... 265 Postlude .............................................................................................