Editor's note: This is the final part of an article by Shi Zhengfu, director of Center for New Political Economy, Fudan University and chairman of Comway Capital Group.

Read: The first part

            The second part

"Capital-debt" management practices

Public finance in modern Western countries mainly functions management for revenue and spending on public services. But China's finance also has to manage national capital and sovereign debt. In other words, apart from payment balance in public services, the Chinese government also needs to manage revenue and spending in infrastructure development. Hence, China's finances are more complex.

An audition of local debt is necessary at this stage. Controlling the asset-liability ratio has to be well implemented. At the national level, the ratio is still within a reasonable range, but the essential issue is not how much debt China owes but the risk management mechanism.

A worker checks wheels at the assembly line of CITIC Dicastal Wheel Manufacturing Co. Ltd., a leading global manufacturer of aluminum wheels, in Qinhuangdao, north China's Hebei Province [Photo: Beijing Review]

There have been discussions on how to reform China's three-dimensional market system, which consists of the central government, competing local governments and enterprises. The following is an analysis.

1. State-owned enterprises (SOEs) lack practical proprietors and hold monopolies. Perfect competition does not exist in these sectors. But China's SOEs are not to be blamed for the historical reasons that have made them so.

The replacement for the "absent proprietors," as it is termed, is the State-owned Assets Supervision and Administration Commission (SASAC) under the State Council, though in the United States the replacement is usually various investment institutions. The central government's intervention has ensured efficiency, as evident in the growth of the SOEs over the years.

Their monopoly, which is often criticized, also follows economic laws. Central SOEs are mainly in the energy, aviation, railway, and telecommunications sectors only a small number of giant competitors are capable of even in the international market. The fewer the competitors, the higher the profit, compared with sectors that feature natural market competition.

An essential difference between Chinese and Western SOEs is how the "monopolistic" profit should be allocated. In a private ownership system, the profit goes to individual owners; but in China, a country based on public ownership, a portion of the SOEs' earnings, after tax, goes to the state.

This is why the future of SOE reform does not lie in privatization or perfect competition, but in realistic innovation.

2. The media has said the Chinese government is too large, resulting in extravagance in contrast to major Western powers. But empirical studies have shown the reality is actually the opposite. The proportion of the population who work as public servants is far smaller than the international average, especially in developed countries.

Competition and cooperation between countries requires departments for strategic leadership, while the management of a modern market calls for various regulators engaging in respective yet miscellaneous sectors, meaning that a modern government needs to be on a proper scale to match its function.

Low efficiency, as opposed to size, is a more pressing issue for the Chinese government.