Three years on, SOE reform stalled

As Beijing fails to break up monopolies, some officials call for "state capital" to replace private equity in state-owned enterprises.
Liu Shijin, Development Research Center, State Council
Liu Shijin, Development Research Center, State Council

Reform of state-owned enterprises has stalled and will require a different strategy, as private investors broadly refuse to participate in efforts promoted by Beijing to accept minority stakes in SOEs.

The Third Plenum of the Communist Party Conference in March, 2012 set out the Party’s vision under newly installed chairman, Xi Jinping. It upheld the idea of SOEs to provide public goods and promote a national agenda in strategic industries, such as natural resources, military security and technology, but it also called for partial private ownership to provide modern governance and management.

Importantly, the Third Plenum decree even said the private sector could have the controlling stake, said Liu Shijin, vice minister of the Development Research Center, a think tank attached to the State Council. Liu spoke at last week’s Boao Forum for Asia.

But while the Third Plenum may have provided a roadmap, “There is a sense that private capital is not willing to play,” said Xiao Bingren, former vice minister of the State Commission for Restructuring the Economy.

Xiao was the government’s point man for the massive privatization and restructuring of SOEs in the 1980s and 1990s. He sounded a bitter tone at the lack of progress under the regimes of Hu Jintao and now Xi Jinping.

“We had a consensus in the 1990s but SOE reform has gone backwards,” he said, reinforcing monopolies as big but inefficient state champions. Ultimately they are costing the state in terms of resources and are a hive of corruption.

Xiao argued the seniormost managers at big SOEs, whether or not they meet a strategic need, are paid as if they are private-sector bosses but enjoy the protection and command the treatment of state ministers. There are also no clear lines about who supervises the biggest SOEs, with both line ministries and the State-owned Assets Supervision and Administration Commission (Sasac) claiming a role. SOE bosses are adept at playing regulators off one another.

The government can’t improve SOE behaviour until it first breaks the vested interests enjoying the privileges of state monopoly, Xiao said. “The Third Plenum advanced good ideas from the 1990s, but these will fail if we don’t break vested interests,” Xiao said. “There needs to be a strong message.”

Chen Zhiwu, professor of finance at Yale School of Management, said the idea that the government must summon the “political will” is misleading. “The political will was expressed at the Third Plenum,” he said.

He drew a distinction between today’s situation and restructuring in the 1980s and early 1990s. That earlier wave saw mass firings and the closure of many inefficient manufacturing businesses. The resultant loss of tax revenues prompted the government to set up the stock market, in order to channel retail money into listed SOEs.

Today’s SOEs are much bigger and are often backed by local governments, rather than by Beijing. An infusion of private capital could help local governments continue to build urban infrastructure.

“But we can’t let SOEs become fatter and fatter,” Chen said, suggesting local governments should sell inefficient assets. But he acknowledged that most officials are reluctant to do so because it would mean opening their books and exposing them to the ongoing anti-corruption campaign launched by Xi upon his taking the presidency.

Chen’s conclusion: Mixed ownership “makes no sense.” Instead he calls for “social” or “state” capital to move in – meaning allocations from state-run institutional investors such as the National Council for Social Security Fund.

Liu seconded this idea, saying the allocations to SOE shares by the NSSF “must become much bigger”. Railways, for example, may not be sufficiently profitable to attract private capital. “If it only benefits the country, then only the state would want to invest,” he said. “Mixed ownership requires a reason; if corporate governance can’t be improved, then private capital won’t be interested.”

According to a January research report by law firm Skadden, China has more than 155,000 SOEs valued at around $17.4 trillion.

The presence on the Boao panel of Wu Yibing, a senior managing director at Temasek and former head of Citic Private Equity, showed a desire to ape the city-state’s approach. Temasek owns shares in Singapore’s biggest companies. Wu said it works because from the board level down, hiring is done on market principles, with clearly defined statutes regarding roles, responsibilities and goals.

That is a long way from how SOEs operate in China. Mixed ownership is not about capital anyway, as China has plenty of that. It should be about infusing SOEs with the talent and flexibility to compete more effectively.

Charles-Edouard Bouee, CEO at Roland Berger, said China’s SOEs “need a cost culture, not an investment culture…Is mixed ownership going to help SOEs become more competitive in the face of new technology and digital challengers?”

The answer is no, said Xiao. “The only way to get private capital to considering playing with SOEs is to break their monopoly power,” he said.


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