Achieving Competitive Neutrality in China

The concept of competitive neutrality was first advanced in Australia more than 20 years ago, and the Organization for Economic Cooperation and Development (OECD) began studying and promoting this concept almost a decade ago. Essentially, competitive neutrality means that any action taken by a government should have a similar effect on both private and state enterprises. One OECD study of the concept is summarized under the following points:

• State-owned enterprises (SOEs) providing public services should be given fair and transparent compensation, and commercial operations of SOEs should be separated from their responsibilities for public services.
• State and private firms should enjoy equal tax, supervision, and government procurement treatment.
• The state should not provide implicit or explicit guarantees of SOE borrowing. Exemption from debt repayment is equivalent to a subsidy.
• The state as a shareholder in an SOE should require the same rate of return as it would get on a commercial investment. Injecting state capital into SOEs while not demanding a commercial rate of return is a form of subsidy.

Chinese policy has long emphasized that the state should protect the ownership rights and legal interests of all enterprises, regardless of their ownership status, allowing them equal use of factors of production and to openly and fairly participate in a competitive market. But Chinese practice has fallen short of these ideals. This paper explores some of these shortfalls and suggests policies that would form an essential part of any serious effort to implement competitive neutrality in China.