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The Sunday Paper – What Causes the Partial Reforms Equilibrium of Mega-SOEs in China? – A Nash Bargaining Approach

The math in this paper will be beyond most mortals; but the conclusion is straightforward if depressing. The authors, Huangnan Shen Jim from the School of Oriental and African Studies in London et al, wanted to re-visit the old chestnut of why China’s SOEs remain so powerful and so un-reformed.

They believe the answer lies in how these entities are controlled. They look outside the companies through to the political controllers and conclude there’s a cahoots of company management and their handlers. The handlers want to see high tax revenues for other pet-projects and believe big payrolls are a net benefit to society. The company managements have learned the road to promotion and higher compensation is in delivering on these objectives.

After a policy a few years ago of rolling up the small and totally hopeless SOEs what remain are a muscular, profitable and well connected bunch. A ‘partial reform equilibrium’ is therefore where we find ourselves today; which suits handlers and managers alike.

The authors conclude the present situation is likely to persist. Investors who’ve been tempted into some of these groups in the past in the hope of reform should take especial note.

You can read the paper in full via this link What Causes the Partial Reforms Equilibrium?

Happy Sunday

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