China has a large untapped source of further growth: its vast state-owned assets, including enterprises, resources and land. Privatising these assets would unleash the wealth effect and boost domestic consumption. This reform would transform China’s growth model from being investment and export-driven to being led by domestic consumption. It would reduce its over-dependence on industry and stimulate its service sector. At a time of a global slowdown, such reform is timely.

When reform started in 1978, almost all productive assets were state-owned in China. But reforms since then have not included privatisation. Today the government owns more than 70 per cent of China’s productive wealth. During the first 20 years of reform, concentrating the country’s assets in government hands served a good development purpose, allowing the creation of infrastructure and expansion of industrial capacity. If state assets had been privatised, it might have been difficult for China to mobilise resources during the rapid industrialisation of the 1980s and 1990s. To the government’s credit, the initial marketisation-without-privatisation approach has paid off. A robust infrastructure has emerged and China is an industrialised economy.

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In the 1980s and 1990s, these consequences of state ownership were growth-enhancing. Now, the over-investment in industry is a negative. It is fundamental for China to dis­tribute ownership rights of the remaining state assets equally among its citizens. This private ownership would return the missing wealth effect to millions of families. In the short run, it would help maintain growth during a ­global slowdown. In the long run, it would improve China’s industry/service sector mix, reduce its dependence on exports and also create more employment.

Yes, privatisation has created short-term disappointments in eastern Europe. However, it ran into challenges because it occurred in former socialist countries that had no prior experience with capital markets, mutual funds and the associated legal and regulatory structures. China has nearly two decades of experience in these. Its mutual fund industry manages more than 100m accounts. China is operationally ready.

The writer is professor of finance at the Yale School of Management and visiting professor at Cheung Kong GSB.

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