China recently unveiled long-awaited guidelines to overhaul bloated state-owned enterprises (SOE), the latest move from Beijing to reinvigorate the sector amid the Chinese economy’s slowest growth in 15 years.
The guidelines, issued on September 13 by the ruling Communist Party and the State Council, call for more private participation and management changes in SOEs, with the goal of modernising and improving efficiencies.
“The SOE system should be more market-oriented and corporate-centered…It should aim for higher economic vitality, higher control, greater influence and SOEs will be more risk-resistant,” the guidelines said.
China currently has approximately 155,000 state-owned companies. About 113 of the largest SOEs, including behemoths such as China Mobile and PetroChina, are directly managed by the Stated-owned Assets Supervision and Administration Commission (Sasac) due to their strategic significance. SOEs which operated outside Sasac's purview are governed by local governments and operate in non-strategic sectors.
Prodigal enterprises
In spite of government policy support and preferential bank loans, state-owned firms have for years been known for being less efficient, robust and innovative than peers in the private sector.
According to estimates by CICC, a large Chinese investment bank, the average net margin of SOEs was 2.8% last year, compared with 8.4% for private-sector peers. Meanwhile, the ROE of state firms was 8.4% in 2014, well below that of private players on 13.3%.
This latest SOE reform package therefore becomes a major challenge for China’s policymakers, who have tried hard to stave off the risk of a hard economic landing, in particular with Beijing’s 7% growth rate target for 2015 under growing pressure.
Cao Yuanzheng, the departing chief economist at Bank of China and a long-time government advisor on state sector restructuring said the current round of SOE reform could greatly boost efficiencies and financial returns, as the core part of the programme is to transform the government’s role from “managing people and business” to “managing state-owned capital”.
"In this round of reform we are adopting an approach similar to Central Huijin Investment, [a state investment company] which only manages capital, not assets," Cao told FinanceAsia. "Although [Central] Huijin is the main shareholder in several [state-owned financial] institutions" it is not particularly interested in day-to-day operations "as long as it receives dividends every year," Cao added.
Central Huijin was set up in 2003 as a government-backed investment company under the auspices of the State Council, China's Cabinet. It holds stakes in the country’s biggest state-owned banks, brokerages and insurance companies which it views as purely financial investments, neither seeking nor carrying out a management function.
SASAC's conundrum
In contrast, the Sasac, established in the same year as Central Huijin by the State Council, takes an active role in the administration of the country's biggest SOEs.
“Although the Sasac has ‘supervision and administration’ in its name, there are essential differences between it and other government regulatory commissions, such as the CSRC and CBRC,” Guan Qingyou, director of research at Minsheng Securities, a domestic broker, said in a note on September 13.
“The Sasac is not only the regulator of SOEs, but also their investor and owner. To put it in simple terms, it is like [in sports], the Sasac is not only the umpire, but also the coach,” he added.
“To let the coach umpire a match, it’s difficult to guarantee the fairness of the match and the objectivity of the coach, as he might appoint players by favoritism.”
Under the new reform guidelines, the Sasac itself is set to be revamped to draw clear distinctions between its investment, oversight and operational functions. Government-backed investment firms and management companies will be established as part of the revamp to avoid direct government intervention, with the Sasac acting as the investor or the regulator, though details on this aspect of the reform are pending.
“In the future, Sasac’ role and influence will be weakened,” said Cao at Bank of China.
Two-track reform
According to the guideline, SOEs will be categorized in two groups - profit-oriented entities and those dedicated to serving the public interest.
Meanwhile, the new plan emphasizes support for SOEs’ restructuring and listing, including the listing of the parent companies and the disposal of less-profitable assets through stock exchanges and property rights exchanges.
Guan at Minsheng Securities said all such changes would boost the securitisation of state-owned assets, which could be “the best way” to achieve the SOE reform.
“On the one hand, it can solve the problem of who buys and revitalises the state-owned assets,” he said. “On the other hand, it could help avoid the loss of state-owned assets through public bidding, and accelerate the government-enterprise separation [as it will be multiple parities, not just the government, that own the SOEs’ property rights].”
