State-owned capital should be allocated for the benefits of residents and the national economy, not just where profitable

China's transformation of its development model, to a large extent, depends on the strategic readjustment of the State-owned economy. And the key to changing the economic structure and adjusting and optimizing the investment structure lies in rational allocation of State-owned capital.

Changing the national income distribution pattern to improve interest relations calls for State-owned capital and its profits to become an important source of social welfare. Ten years ago, the central government emphasized the need to realize mechanisms for the flexible entry and exit of State-owned capital so more State-owned capital would be allocated to sectors concerning national security and those constituting the lifeline of the national economy.

Today, although important progress has been made in strategically reorganizing State-owned capital, its role in monopolistic sectors is still too large and widely dispersed. For instance, from 2003 to 2008, the State-owned assets in the real estate industry experienced the most rapid expansion, at an average annual growth rate of 33.5 percent. In 2009, more than 70 percent of the 129 State-owned enterprises directly supervised by the central government were operating in the real estate industry. Nevertheless, the affordable housing they provided only accounted for 13-15 percent of the total housing available.

Changing the State-owned capital allocation pattern means setting public interest as a strategic goal. It should be fully recognized that important achievements have been made in expanding State-owned capital in recent years. But, the operation of State-owned capital is not all in the public interest, and the share of profits and dividends collected from State-owned capital is too low.

In view of the short supply of public goods and services, public interest should be prioritized in the strategic readjustment of State-owned capital allocation. State-owned capital should not just be allocated wherever it is most profitable.

In order to upgrade the industrial structure, the investment structure should also be adjusted and newly added State-owned capital should be mainly invested in naturally monopolistic sectors, public goods sectors and other sectors concerning national security and the development of the national economy. State-owned capital should gradually exit from ordinary monopolistic sectors and enter emerging strategic industries such as energy, resources and high-tech industries so they can take advantage of its strength and compete at a higher level, boosting the nation's competitiveness.

Meanwhile, the dividends from State-owned capital that must be invested in monopolistic sectors should be raised from the present 10-15 percent to 25 percent, and this additional revenue invested in sectors that directly benefit urban and rural residents.

Changing the State-owned capital allocation pattern calls for accelerating the reform of monopolistic sectors. Take the reform of the power sector as an example. As early as 2002, a reform aimed at separating power generation from the grid was proposed. The grid is monopolistic and should be dominated by State-owned capital, but power generation should be a competitive open market. Nevertheless, a mechanism for power to enter the grid at a competitive price has not yet been established.

The purpose of emphasizing the allocation of State-owed capital in public sectors today is to break monopolies and cultivate a fair competitive environment so as to ensure the fittest companies prosper.

My suggestions for breaking monopolies by changing the State-owned capital allocation pattern are as follows: First, separate the government and enterprises in those sectors, such as the railways, where reforms are lagging behind. Second, separate the naturally monopolistic part from the competitive part of industries in areas such as postal services, power, telecommunications, oil and civil aviation. Three, licensing and pricing mechanisms should be established for the urban public utilities sectors, in order to attract the participation of private companies. Advancing the strategic readjustment of the State-owned economy by focusing on breaking the administrative monopolies will create more space for the development of the non-State-owned economy and provide a competitive environment while improving the allocation of State-owned capital in the public interest.

The author is the president of China Institute for Reform and Development.