China faces SOE reform dilemma

Reform of state-owned enterprises is a battlefield between market forces and central government power, say economists.

China’s new leadership has made a big effort to position the market as a decisive force in its economic reforms. However, the effort may be offset by some reform measures such as the anti-corruption campaign.

Corruption is widely understood to be present in the country’s state-owned enterprises (SOEs) because China has both a planned economy and a free market economy, which may generate two sets of prices.

“A lot of corruption comes from the arbitrage; you can buy from the planned economy (at a lower price via bribery) and sell to the free market economy (at a higher price),” said Brian Murray, chief economist in the investment department of AIA Group. 

Murray, along with other economists, as well as analysts and company executives, talked about China’s major challenges in terms of implementing reforms in a conference held by the American Chamber of Commerce (AmCham) in Hong Kong last week.

Using the metaphor of “bird-cage”, the panelists questioned whether China’s free market economy (the bird) had grown too big while the authorities (the cage) became too restrained.

The birdcage theory was first introduced in the 1990s to describe the relationship of free market and a central five-year plan. With the development of the country’s economy, SOEs gradually become part of the cage to the free market’s bird.

Chinese SOEs, which have benefited from the government’s financial and policy support, have monopolised many substantial industries and occupied the majority of market resources in terms of financing and distribution channels. Unfortunately, the SOE-dominated economy has generated problems such as low margins and efficiency, corruption as well as overcapacity, said the panelists.

Reforms to the SOE model have seen large companies such as Sinopec introduce a hybrid ownership and invite private capital to invest. The latest is PetroChina, which this week said it plans to sell Rmb81.7 billion ($13 billion) of assets in oil pipelines to investors.

The anti-corruption movement, which is supposed to clear up the market and set the bird freer, however, hinders the reform progress in some way. 

China Resources (CR), China’s large state-owned conglomerate in a wide variety of businesses, recently postponed its own reforms due to a probe taken by the central government.

The postponement came one month after China’s anti-corruption agency said it was investigating CR’s former chairman, Song Lin. Song is being probed for “suspected disciplinary violations,” after domestic media reported the state-owned company deliberately overpaid for coal assets.

Two CR pharmacy subsidiaries had to call off their asset restructuring because “the controlling shareholder can’t implement the restructuring plan in the short term given the recent internal and external changes”, according to company statements.

Other potential reforms at CR include a possible spin-off of its renewable power business and asset injection from the parent to the property unit CR Land; but these have also been delayed, according to a Beijing-based coverage banker who has closely worked with SOE financing deals.

“In order to conduct reforms, you have to do the anti-corruption campaign. But as long as the campaign lasts on a very large scale, you will not see serious reforms to happen,” said William Overholt, president of Hong Kong-based think tank Fung Global Institute. 

The anti-corruption movement will impact on different interest groups, which may prevent central government officials and SOE management – who often used to be officials – from pushing ahead with the reforms, said Overholt. “It’s kind of a paradox of the anti-corruption.”

Meanwhile, some panelists believe that the case of CR is isolated and that the change of management has only temporary impact on its reforms. “It [anti-corruption] is a part of SOE reforms and it will make them healthy and better cope with the challenges in the long term,” said Yu Liming, vice president with China Merchants Group, whose former chairman was just assigned to replace CR’s Song.

¬ Haymarket Media Limited. All rights reserved.
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