State monopolies face a shake-up

Dismantling of 2,000-year-old table salt system signals further reform to lessen administrative intervention in the market

China is to end a monopoly over the production and sale of table salt, dismantling a system that has been in place in various guises for more than 2,000 years and run by a state monopoly since 1950. The disbanding of the salt monopoly will start in 2016 and be complete by 2017.

It is a good move that will further propel market-oriented reform. State monopolies are not necessarily evil; in certain industries they are needed to maintain the smooth running of the economy. For example, subway systems and water supply networks should be constructed by the State, because hardly any private funds could afford the costs or would be attracted by the low returns. These are what economists call natural monopolies and they apply generally to infrastructure construction, rare resources and industries of strategic importance.

But it should be noted that even natural monopolies need open and just competition for bidding and a lack of transparency will lead to corruption. The latest case of Mao Chaoqun, a town-level tap water official in Hebei province who was found to have 120 million yuan ($19.6 million) in cash at home, is best evidence how corrupt a closed system of monopoly can be.

The monopoly on salt does not belong to any of the natural monopolies. The nation has ample supplies of salt, which is produced at low cost and has nothing to do with any of its strategies. Similar monopolies exist in many other industries, such as tobacco and alcohol, and they are improper, too.

Commodity prices are pushed higher by these improper State monopolies. According to a 2013 study by the Unirule Institute of Economics, the cost of producing a ton of edible salt is around 750 yuan, but monopolies sell salt at about 3,000 yuan per ton. Residents might fail to recognize this because edible salt accounts for a quite low percentage of their living costs, but salt monopolies at all levels harvest 17.7 billion yuan annually from the higher price.

Many economists argue that State monopolies increase State finances. But let the facts show how pale that excuse is: According to the National Bureau of Statistics, some monopolistic State-owned enterprises directly commanded by the central government have not contributed a single yuan to the State finances for a decade; on the contrary, they reported heavy losses.

Worse, many State monopolies use natural resources and State-owned lands for free, which could bring in more than a trillion yuan in rent a year. In other words, such kinds of State monopolies are a heavy burden, rather than a contributor, to State finance.

Therefore both the ordinary people and the State finances suffer as a result of monopolized industries; their losses are taken away by monopolies that become new interest groups. By absorbing improperly high profit, State monopoly managers pay extremely high salaries and shareholding returns to themselves, and consume luxuries in the name of "business needs".

As early as the first half year of 2003, managers of Sinopec, a monopoly over oil, were reported to have divided a bonus of 1.2 billion yuan among themselves; the same group spent 240 million yuan decorating a single office building in 2009.

The profit is derived through its dual role in the market economy: On the one hand, they are State agencies invested with power; on the other hand, they are enterprises seeking profit in the market. Raising the prices of monopolized products is only one of their measures for seeking improper profit; the others include renting monopoly rights to smaller businesses, issuing fines, and charging unnecessary fees, all of which increase the business costs of the whole society.

Worse, as managers of State monopolies belong to the same bureaucratic order as government officials, they often exchange each other's posts; in a certain national ministry, half of the officials had the experience of working in State monopolies. Thus monopoly intermingles with administrative power and strengthens itself in the process; that's also where resistance comes from every time there are calls for breaking State monopolies.

The central leadership recently vowed to rule according to the Constitution. From the constitutional view, the State should not set unnecessary monopolies, either; instead it should offer public products and collect equal, transparent tax, in order to ensure its neutrality in the economy. If the State participates in profit-taking industries, there is the danger it will use its power in hand to intervene the market and hurt other competitors, thus violating the basic principles of a market economy.

The principle of refraining from State intervention in the market has been recognized by not only Western economists, but also ancient Chinese scholars. As early as 2,000 years ago, in a debate on economic policy held at the royal court of the Han Dynasty (202 BC - 220 AD), scholars quoted a sentence from Confucianist scripture: "The State's role is not to seek profits, but to promote justice." It is time we acquire some wisdom from our ancestors.

The author is director of Unirule Institute of Economics, a Beijing-based independent think tank.