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By Root 404 0

State monopoly has persisted along side high growth, stifled competition, and undermined efficiency. But this outcome becomes more understandable if we make the connection between rent protection and regime survival. There are several compelling reasons for maintaining the telecom service sector as a state monopoly. First, like the grain procurement system, the telecom service sector has the characteristics of a prized commanding height that a developmental autocracy cannot afford to cede. It is in a vital industry (information) that directly affects the regime’s capacity of social control. This strategic importance makes it more difficult to open the telecom sector for competition because opponents of reform can easily justify their opposition on grounds of national and regime security. Second, the telecom sector is itself a huge patronage machine and a source of rent generation because it employs a large number of employees, invests massive capital, and collects monopoly rents. Direct control of this sector provides the regime the ability to reward and keep its supporters (the low returns of China’s telecom SOEs should be an indication that their monopoly rents may have been dissipated among the insiders). Of course, the introduction of new state-affiliated competitors may temporarily upset the balance, as the case of China Unicom illustrates, principally because it threatens the bureaucratic clout and rents of the existing monopoly (MPT’s China Telecom) . The ostensible “corporatization” of the state-owned telecom assets and the transition from a monopoly (a single SOE) to a duopoly (two SOEs) have not altered the nature of the state monopoly. Entrenched interests have succeeded in protecting their rents.

One intriguing question emerges from this examination of the telecom sector. Why has the Chinese government locked out domestic private competition from the sector and even prevented domestic portfolio investment in its telecom SOEs (none are listed on the domestic stock markets), but allowed minority foreign ownership in these firms, both through overseas stock market listings and potential post-WTO direct investment? Several explanations are likely. Minority foreign ownership does not threaten the regime politically even though it may force some changes in corporate governance on the margins. Instead, such ownership can actually add a gloss to these state-owned assets. As a result of overseas listings, the monopoly value of the state’s telecom assets is instantly reflected in the share prices of the state-owned telecom firms listed in Hong Kong and New York. Perversely, this explicit link between capital market valuation and state monopoly becomes another obstacle to reform. Under the pretense of protecting the state’s investments, the government can justify its monopoly because stock markets value monopolies. Indeed, since the listing of Chinese telecom firms overseas, MII and China Telecom have tried on at least two occasions to use their power to boost the stock prices of listed telecom firms.48

The Banking Sector

Of China’s major economic sectors, the banking system is arguably the least reformed and most troubled. In this sector, as in other sectors critical to the CCP’s ability to retain rents, gradualist reforms have not only failed to reduce inefficiency and promote competition, but also contributed to the build-up of a massive amount of nonperforming loans (NPLs) that has become the most serious threat to the sustainability of China’s economic growth in the twenty-first century.49 In many ways, the lack of progress with regard to financial reform in China is an anomaly. On the one hand, the country has achieved unprecedented financial deepening—a measure of progress in financial liberalization—during the reform era. The key indicator of financial deepening, the ratio of financial assets to GDP, rose from 0.94 in 1978 to 2.78 in 1998—a level higher than that reached in the early 1990s by the most developed financial markets, such as the United States, Germany, and the United Kingdom. The level of China