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November 21, 2013

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Home » Business » Biz Commentary

Market force decisive in SOE reform

By Wang Yanlin | November 21, 2013, Thursday | Print Edition

Many China watchers have concluded that the nation’s reform movement embarked at a new starting line at the conclusion of the recent plenary session of the 18th Central Committee of the Communist Party.

One target of the latest round of reforms is state-owned enterprises. But policies to restructure them aren’t particularly new and are never easy to implement.

Indeed, any acceleration in the reform of state-owned companies that dominate the economy depends more on the strength of implementation than on any new ideas about how to do it.

It would be fair to say that the reform of state-owned enterprises has been on the national agenda since China began its market-opening policies in 1978. It has been a painful process. Some companies with venerable histories were driven to bankruptcy, while others expanded their dominance and became virtual monopolies.

The strongest of state-owned enterprises were pushed to adopt modern corporate structures and practices, leading to many of them listing on stock markets and opening their balance sheets to public scrutiny.

These were welcome signs in a country aiming to give market forces freer rein and encourage more competition.

The global financial crisis was a setback for reforms. Many state-owned enterprises benefited from the government’s massive stimulus package and looser credit. In the past five years, state-owned companies have generally thrived, while their privately owned counterparts have been choked for capital.

The nation’s leaders want that to change, if the text of the 21,500-word report of the Party’s recent conclave is anything to go by. The plenary session produced a guideline of China’s reforms in the next five to 10 years.

In it, Chinese leaders said the state sector asset management system and the operating system of state-owned enterprises must be reformed.

Certain of the companies will be encouraged to transform themselves into state-owned holding companies, which require only the majority of shares to belong to the state. Also, more state-owned assets will be transferred to the Social Security Fund. State-owned companies will be required to pay the government 30 percent of their profits by 2020, compared with zero to 15 percent now.

Furthermore, state-owned enterprises will be encouraged to continue the process of adopting modern corporate structures, and public capital will be more directed to provision of public services. This policy opens the possibility of cross-holdings and integrated ownership structures.

Public capital, collectively owned capital and non-public capital are likely to be part of the investment in state-owned enterprises, enabling them to share in the profits of lucrative businesses.

Zhu Haibin, chief economist for China at JPMorgan, said the policy outlines imply that state-owned enterprises will mainly focus on improving the operational efficiency of the sector.

Xue Jun, an analyst at CITIC Securities Co, said there were few novel ideas concerning reforms of state-owned enterprises in the report, but it did represent a shift of focus back to clipping the wings of powerful state-owned enterprises.

Only strategic sector

Theoretically, state-owned enterprises under market socialism should either relate to strategic industries vital to the country’s social and economic security, or link with a nation’s welfare system. Military companies or salt producers tick those boxes; property developers do not.

Also, with the market playing a bigger role in the economy, state-owned companies shouldn’t be allowed to operate on a privileged plane compared with other enterprises. It all sounds reasonable, but in reality, there are obstacles — visible and invisible, said Li Shuguang, a professor at China University of Political Science and Law.

The biggest hurdle for state-owned enterprises is to integrate themselves into the modern corporate structure of the real world, which most efficiently allocates resources, Li said.

Although many state-owned enterprises have been restructured into share holding companies, the change has been only skin deep and their governance style remains largely one of the market playing second fiddle to the whims of top bureaucrats.

Second, the method of selecting the corporate hierarchy in state-owned enterprises needs changing. It is not reasonable for important positions to be given to people with little or no background in a company’s core business.

Also, state-owned companies should establish an effective compensation system to stimulate productivity and creativity. That would address the common complaint that employees in state-owned companies earn high salaries for doing plodding, unimaginative work.

The final report of the third plenum said the market should play a “decisive” role in determining allocation of resources. Use of the word “decisive” could signal some sweeping changes if policies are seriously implemented.

Since 1986, when Shenyang Explosion-Proof Equipment Factory became the first state-owned enterprise in China allowed to go belly-up, change has been pretty dramatic.

Market players seem to be pinning their hopes on that continuing. Witness the positive reaction in China’s stock markets when details of the policy reforms were recently released. There is strong public sentiment for an end to the privilege and power of state-owned companies.

Time will tell whether this latest reform campaign, the boldest in nearly three decades, will produce the desired results. But after Party leaders also announced a relaxation of the nation’s one-child policy and the dismantling of labor camps, optimism about real reform is certainly on the upswing.

 

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