China leapfrogs the West with funding the Welfare State

In Club News by Stephen Perry

In the story below from the Financial Times the Chinese reveal the funding model experiment for the Chinese Welfare State, first given to the 48 Group 18 years ago. That shows how long term Chinese thinking is.

The story below shows how the Chinese are overcoming the greatest weakness of the Western Welfare State – that all the costs are a burden to the taxpayer. There is no basis for creating income to the Welfare State in the West. The costs are paid out of current income – tax – and the future known costs are not budgeted for, or provided for. This creates problems when nations experience negative financial crises and are short of funds.

The Chinese had identified this problem over 20 years ago as they started preparing for a Welfare State due to start around 2010. In their working through the issue they identified that if State Owned enterprises could be profitable then putting the shares in the hands of the Welfare Funds created four significant advantages.

Firstly, the dividends would cover the costs, and define the scale of expenditures that could be afforded.

Secondly, the funding through shares meant the expense was not a cost to the taxpayer.

Thirdly, the future costs could be considered managed as long as the companies were generally profitable.

Lastly and fourthly, it meant that the key companies could be owned and controlled through organisations under the direction of the Party and could be a means to ensure the overall direction of the economy and other policy measures, such as disaster relief donations.

In the story below a significant individual, trained in contemporary regulation – the former Securities Regulator – is given the position of Governor of Shandong Province to implement the first provincial roll out. I would guess we can expect him to get this started and then enjoy an extended role in Central Government helping to link the Welfare state and the SOE’s.

We can forecast that this will be rolled out across the nation in due course and is an early example of socialism with Chinese characteristics.

So much of what is coming through now are the foundations of 2049, which Deng designated an early form of Socialism. Many will find this all examples of prudent capitalism, caring for the people.

China tests new model for SOE reform

Gabriel Wildau in Shanghai

A major Chinese province has transferred equity stakes in three state-owned enterprises to its social security fund in a move seen as a model for nationwide reform of China’s inefficient state sector.
Shandong transferred 30 per cent stakes in Shandong Energy Group, Shandong Airport Ltd and Shandong Salt worth a combined Rmb3.3bn ($532m) to the social security fund. The provincial government has said it eventually plans similar stake transfers for all 471 of the companies it controls.

The architect of the plan, Guo Shuqing, served as head of China’s securities regulator before taking over as governor of Shandong province, China’s second largest by population, in 2013. Mr Guo, a former chairman of China Construction Bank, is considered a leading candidate to succeed Zhou Xiaochuan as China’s central bank governor.

Mr Guo has long advocated transferring stakes in state groups away from the State-owned Assets Supervision and Administration Commission (Sasac), which has been criticised for interfering in SOE management in order to advance political and policy goals.

The equity transfers will help shore up social security funds, which are facing huge future shortfalls because of China’s ageing population.

At the same time, analysts say equity transfers can help raise efficiency in the state sector, where companies’ returns on assets trail far behind their privately owned counterparts. Social security funds, which focus narrowly on maximising financial returns, are considered more likely to prioritise efficiency over political correctness.

“The social security fund will influence these enterprises’ governance structure and operations. It’s still a state shareholder but they have their own interests and their own voting rights to advance those interests,” said Ju Jinwen, a researcher focused on state-owned enterprise reform at the Institute of Economics at the Chinese Academy of Social Sciences, a think-tank that advises the government.

“Shandong will be used as a pilot. If it is successful, we could see the same thing around the country.”

Top Communist party leaders originally proposed injecting state-owned assets into social security funds in 2004 but the transfers announced by Shandong late on Monday mark the first implementation. Analysts say Sasac has resisted relinquishing its authority over SOEs.

A landmark economic reform blueprint that China’s top leaders endorsed in November 2013 pledged to raise efficiency at state groups while maintaining their role as the backbone of the economy. Local media has said an elite policy making body created to implement the blueprint will release a detailed plan for SOE reform later in the year.

Analysts expect that incremental reforms aimed at improving corporate governance will comprise the bulk of the plan. Stock market listings and minority stake sales will also play a role but full-scale privatisation is likely to be used sparingly.