Nobel laureate Oliver Hart talks on China's SOE reform
By Zhang Yanfei |
China Watch |
Updated: 2018-05-21 10:55
Economists and entrepreneurs at home and abroad exchanged thoughts on the reform of SOEs in China at the 4th Great Minds China Forum co-hosted by the National Economic Foundation and National Academy of Development and Strategy, Renmin University of China, on May 12.
Nobel laureate Oliver Hart shared his thoughts on incomplete contracts and control with Chinese economists and entrepreneurs in his keynote speech.
Hart, who is the Andrew E. Furer professor of economics at Harvard University, won received the 2016 Nobel Prize in economics together with Bengt R. Holmstrom.
In his speech, he said the long-term contracts written by companies are inevitably incomplete, while the residual control right goes with asset ownership. This explains the advantage of independence and the root of many entrepreneurial behaviors.
Hart further pointed out the importance of the concept of residual control rights in corporate finance, and said the theory of incomplete contracts help us understand the relationship between startup entrepreneurs and venture capitalists.
The British-born American professor said he believes a debt contract is a simple way to make the control state contingent. With a debt contract, the control rights remain flexible between entrepreneurs and venture capitalists.
For companies that have a social purpose, they can adopt dual class shares rather than a one share-one vote system that prioritizes monetary returns. Companies like Alibaba, Google and Facebook have a superior class of votes held by insiders.
Speaking after Hart, Chen Qingtai, former Party secretary of the State Council's Development Research Center, focused on SOE reform and introduced possible reform plans.
He said the reform SOE calls attention to three aspects: The first is the shift from managing enterprises to managing capital; the second is to allocate State-owned capital to enrich social insurance funds; and the third is to develop diversified ownership.
Capital management reform is at the basic level, and aims to reform State-owned assets for business operation, he said. SOEs will transform from entity form to value form, thus realizing the separation of government and enterprises, of government and funds, and pushing for a modern system for SOEs.
Besides, after the capitalization and securitization of State-owned assets, the ownership of State-owned investment institutions is separated from the property rights of corporate legal persons. This frees the tied relationship between State-owned assets and specific enterprises and liberates the liquidity and efficiency of State-owned assets.
Finally, under the system of managing capital, the government can be placed in a position of detachment and can correctly handle the relationship with the market. This also liberates the government.
After the keynote speech, guests discussed modern enterprise theories and insights in SOE reform from their perspectives based on the speeches by Hart and Chen.
Xu Chenggang, professor from Cheung Kong Graduate School of Business, said the reason why a large number of SOE reforms have failed lay in the fact it was impossible to design the internal incentive mechanism without changing the ownership. This is the core of Hart's property rights theory. The fundamental difficulty for SOE reform arises from ownership. Although private owners own some of the property rights, they do not have the right to control. If this is the case, this reform will not succeed.
Li Weian, professor from Nankai University, pointed out that under the assumption of incomplete contract theory, the State-owned property rights of SOEs obviously have the nature of residual control rights, and shareholders have a strong control power over SOEs, directly affecting the driving force behind the development of SOEs. The core of the allocation of the two powers, namely residual income rights and control rights, is the arrangement of corporate governance. The core of the reform of SOEs in China is the establishment of a modern enterprise system. The general logic is the transformation from administrative governance under government control to economic governance based on market mechanisms.
Huang Qunhui, director of the Chinese Academy of Social Sciences' Institute of Industrial Economics, said he believed there are two contradictions that need to be resolved in the progress of SOE reform. On the one hand, it is necessary to pursue efficiency in accordance with market logic, and on the other hand, it cannot be completely promoted in accordance with modern property rights theory. Thus, classification reform is a good method, but there are also many complex issues that need to be resolved in the classification process. It is a long process to seek the coordination between modern enterprise theory and China's SOE reform.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
Economists and entrepreneurs at home and abroad exchanged thoughts on the reform of SOEs in China at the 4th Great Minds China Forum co-hosted by the National Economic Foundation and National Academy of Development and Strategy, Renmin University of China, on May 12.
Nobel laureate Oliver Hart shared his thoughts on incomplete contracts and control with Chinese economists and entrepreneurs in his keynote speech.
Hart, who is the Andrew E. Furer professor of economics at Harvard University, won received the 2016 Nobel Prize in economics together with Bengt R. Holmstrom.
In his speech, he said the long-term contracts written by companies are inevitably incomplete, while the residual control right goes with asset ownership. This explains the advantage of independence and the root of many entrepreneurial behaviors.
Hart further pointed out the importance of the concept of residual control rights in corporate finance, and said the theory of incomplete contracts help us understand the relationship between startup entrepreneurs and venture capitalists.
The British-born American professor said he believes a debt contract is a simple way to make the control state contingent. With a debt contract, the control rights remain flexible between entrepreneurs and venture capitalists.
For companies that have a social purpose, they can adopt dual class shares rather than a one share-one vote system that prioritizes monetary returns. Companies like Alibaba, Google and Facebook have a superior class of votes held by insiders.
Speaking after Hart, Chen Qingtai, former Party secretary of the State Council's Development Research Center, focused on SOE reform and introduced possible reform plans.
He said the reform SOE calls attention to three aspects: The first is the shift from managing enterprises to managing capital; the second is to allocate State-owned capital to enrich social insurance funds; and the third is to develop diversified ownership.
Capital management reform is at the basic level, and aims to reform State-owned assets for business operation, he said. SOEs will transform from entity form to value form, thus realizing the separation of government and enterprises, of government and funds, and pushing for a modern system for SOEs.
Besides, after the capitalization and securitization of State-owned assets, the ownership of State-owned investment institutions is separated from the property rights of corporate legal persons. This frees the tied relationship between State-owned assets and specific enterprises and liberates the liquidity and efficiency of State-owned assets.
Finally, under the system of managing capital, the government can be placed in a position of detachment and can correctly handle the relationship with the market. This also liberates the government.
After the keynote speech, guests discussed modern enterprise theories and insights in SOE reform from their perspectives based on the speeches by Hart and Chen.
Xu Chenggang, professor from Cheung Kong Graduate School of Business, said the reason why a large number of SOE reforms have failed lay in the fact it was impossible to design the internal incentive mechanism without changing the ownership. This is the core of Hart's property rights theory. The fundamental difficulty for SOE reform arises from ownership. Although private owners own some of the property rights, they do not have the right to control. If this is the case, this reform will not succeed.
Li Weian, professor from Nankai University, pointed out that under the assumption of incomplete contract theory, the State-owned property rights of SOEs obviously have the nature of residual control rights, and shareholders have a strong control power over SOEs, directly affecting the driving force behind the development of SOEs. The core of the allocation of the two powers, namely residual income rights and control rights, is the arrangement of corporate governance. The core of the reform of SOEs in China is the establishment of a modern enterprise system. The general logic is the transformation from administrative governance under government control to economic governance based on market mechanisms.
Huang Qunhui, director of the Chinese Academy of Social Sciences' Institute of Industrial Economics, said he believed there are two contradictions that need to be resolved in the progress of SOE reform. On the one hand, it is necessary to pursue efficiency in accordance with market logic, and on the other hand, it cannot be completely promoted in accordance with modern property rights theory. Thus, classification reform is a good method, but there are also many complex issues that need to be resolved in the classification process. It is a long process to seek the coordination between modern enterprise theory and China's SOE reform.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
