China's SASAC: spurring the shift to privatization or holding on?

Competing pressures have created a hybrid.

Last week, the chairman of the State-owned Asset Supervision and Administration Committee (SASAC), Li Rongrong, started a whirlwind tour of China's three northeastern provinces, previously China's heavy industry base, but now mired in high levels of unemployment and poverty.

The visit has raised a typically subtle set of issues about the role of an entity, set up last year to bring order to what was becoming a pell-mell sell-off of state assets in the more independent provinces.

On the most recent stopover in the province of Heilongjiang, Li visited one of the fallen industrial giants, No.1 Heavy Industry Group, a maker of steel and heavy machinery. The group is one of 53 concerns nationwide directly affiliated to the central government, and one of only two in Heilongjiang.

The local Heilongjiang branch of SASAC oversees 25 provincial level companies, with assets of Rmb 66 billion, and debt of Rmb 51 billion. Such a crushing debt-to-equity ratio is typical of the extreme circumstances of the northeast after 50 years of communist operations.

And such a visit seems symbolic of SASAC's attitude towards such entities: The desire to save them is still strong, rather than selling them in a fire sale to the local private sector or foreign investors.

Thus Li expressed support for an improved bankruptcy framework to provide hard budget constraints to SOE managers. By this he means the transition of the bankruptcy process from being a highly administrative process, requiring myriad approvals from a series of different agencies at local and provincial level, to a more straightforward, court-based process. Li set a target of four years for this transition to occur.

He also spoke about the need for improved corporate governance via setting up boards of directors; blocking the outflow of state assets through underpricing; making progress as regards carving out the non-core functions of SOEs, such as the hospitals and schools they often run; and carrying out proper audits to gauge true enterprise value.

Heilongjiang and Jilin lag the northeastern province closest to Beijing Liaoning, which has stripped out the 80% of the province's non-productive assets. In the other two provinces, just 7% of non-productive assets have been separated from the company - a sure sign of the overwhelming presence of the state.

Such aspirations are laudable, but the comments did not seem to indicate that the Li is interested in speeding up the privatization of China's economy - a topic being followed closely by foreign investors and observers.

Nobody uses such a word lightly in China. It still has an enormous ideological charge and private enterprises are referred euphemistically to as 'people's enterprises' (compared to 'state enterprises') rather than the more individualistic expression for 'private enterprise'.

Such terminology is more than a detail.

SASAC seems to be stemming the charge to re-sculpt China's large corporate landscape through a transfer of assets to the private sector, as it once appeared to be occurring. In some ways it seems to be on the road to becoming simply another ministry holding sway over a huge portfolio of assets.

"When you create a bureaucracy, you run into the problem of the bureaucracy not wanting to 'work itself out of job," comments one foreign consultant in Beijing about SASAC's attitude to the sale of state assets.

One of the big advantages of privatization in Eastern Europe is that it weakened the power of the state, points out Stephen Green, a China expert at the British think tank, the Royal Institute of International Affairs.

The mainland government has equally-clearly realized that the dangers, leading to SASAC increasingly adopting the role of a super SOE holding company.

It already had 187 of the country's biggest companies under its direct control and supervision from Beijing, and it is slowly building a provincial level network of offices as well.

Paradoxically, it seems as these SASAC entities will reverse some of the privatization process already underway.

In Guangdong, for example, one of the most dynamic and advanced provinces, the SASAC entities will take over control of companies that have already become joint stock companies. Through the process of issuing shares, the state (or provincial government) shifted from being the operator to being the owner of the assets.

By taking over these assets from local asset management companies, and reversing the trend of the state being a passive shareholder, SASAC seems to be reverting to the old model of a more hands-on role for the state.

It's possible SASAC is reacting to intense pressure about the sale of under-priced state assets, a hugely contentious debate in China.

The preferred vehicle for this has been management buy-outs, accounting for half of all asset transfers.

While clearly the kind of issue that is can whip up a firestorm of protest from those feeling let down by the privatization process, there are good reasons, within limits, not to be too concerned about the phenomenon, suggest many observers.

Thus, many of the small to medium enterprises that have been taken over by management buy-outs were so decayed as to be uninteresting to anybody but the management.

The RIIA's Green also believes that in the greater scheme of things, it's more important that privatization takes place, and that the assets come onto the market relatively quickly, than possible under-pricing. Many local experts agree with him.

Despite such criticism, SASAC has played an important role in selling off a large amount of the SME sector, with the number of SMEs going down from 65,000 to 43,000 between 1998 and 2002, according to official statistics. The restructuring of the remainder into joint stock companies has reportedly increased profits from Rmb 74 billion to Rmb 236 billion in the same period.

However, its apparent decision to stand by so many former national champions suggests that the preferred role of the 'non-governmental' sector is as an auxiliary to the public sector rather than vice versa.

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