Under Secretary of State Robert Hormats summed up the U.S. Government position on SOEs as follows: “The issue the U.S. and other nations face is not whether SOEs are inherently good or bad, but whether governments give SOEs preferable finance or regulatory treatment, or provide them discriminatory access to government procurements or domestic markets at the expense of their competitors. This is our concern—and that of other nations as well.”
The U.S. Government is taking a number of steps to address the issue multilaterally, both at the OECD and in discussions on a potential Trans-Pacific Partnership. The effort in the OECD to develop a “Competitive Neutrality” framework is particularly important, building as it does on excellent work done by the OECD on SOE corporate governance guidelines.
The Chinese have been more interested observers than engaged participants in these multilateral efforts. But there is another avenue for progress—that is, leveraging the Chinese government priority directive for its SOEs to “go global.” The pressure today on Chinese SOEs to invest and operate successfully abroad is perhaps the greatest challenge they face and provides an opportunity to convince China that cooperating with multilateral SOE framework efforts serves its declared business self-interests.
The simple fact is that, the more open and level the sector from which SOEs emanate in China, the more opportunities they will have to make successful acquisitions abroad. And the more the SOEs play by the global set of rules to which they are now subject by nature of China’s WTO membership, the more likely they are to operate successfully abroad.
The Chinese SOEs that will succeed in “going global,” therefore, will be those that play by the global rules and become prime advocates for market access and liberalization in China itself. Yes, that means they will face more competition at home. But they will become more globally competitive abroad by facing that competition at home, where they will still enjoy significant “home court” advantages. And this liberalization of the Chinese market will benefit Chinese private companies as well as foreign counterparts.
Part of playing by the rules abroad will be to ensure that financing of deals follows good market practices rather than government support decisions. And commencing on a pathway to privatization will also help establish that an SOE is investing and operating for commercial not political purposes.
The wisdom of this approach was demonstrated by the most recent Strategic & Economic Dialogue (S&ED). Though the meeting in Beijing was overshadowed by the drama surrounding Chen Guangcheng, it produced significant results regarding SOEs. Specifically, China agreed (1) to provide non-discriminatory treatment in terms of credit, taxation, and regulation; (2) open new sectors for investment; and (3) take steps to join the WTO Government Procurement Agreement. These steps, if implemented, will move China and its SOEs in a significant and productive direction.
But recipient countries, too, have important responsibilities. They need to be as open and predictable as possible in their investment and operational regulatory reviews. SOEs, like SWFs before them, who invest and operate responsibly should be given fair and equitable treatment commensurate with that accorded to private companies. It was thus significant that the United States stated clearly at the recent S&ED that it “welcomes investment from all countries, including China, and including from State-owned enterprises.”
This mutuality of interests and responsibility should animate and benefit the debate on SOEs just as it did so successfully on Sovereign Wealth Funds four years ago. That is the challenge, but also the great opportunity, before us, as we all seek to operate effectively at that intersection where business, finance, and government meet.
Robert M. Kimmitt served as Deputy Secretary of the Treasury from 2005-2009 and had significant responsibility for the Department’s investment agenda, including a leading role on the Committee on Foreign Investment in the United States.
This article was originally published in the July/August edition of the Diplomatic Courier.