Aug 13, 2014 04:32 PM

SOE Reforms Would Ease Pressure on Economy

A new round of state-owned enterprise (SOE) reforms is gaining traction. On July 15, the State-owned Assets Supervision and Administration Commission (SASAC) unveiled four reforms to be implemented in six centrally administered SOEs: reshuffling their constituent state-owned capital investment firms, building an amalgamation of mixed ownerships, changing board powers and having discipline groups stationed in their midst.

At local levels, relevant SOE reform plans have been introduced in about half the provinces across the country. Those unveiled in the capital have been rather progressive. On the stock markets, shares of SOEs included in pilot reform plans are soaring. Shares of many state-backed enterprises have been suspended from trading to prepare for "major events."

However, the actual extent of these reforms has been far less than those announced during the third plenum of the Communist Party's 18th Central Committee.

This round of SOE reforms is being rolled out against a particular economic backdrop. China's economy is entering a transition period after more than 30 years of rapid growth. Therefore, it is a top priority to improve the quality and efficiency of the economy.

Academic studies domestically and abroad have shown that productivity in China has been lower than in other economies engaged in catching up. One of the reasons is that a mismatch in resources between state-owned and non-state-owned sectors in the manufacturing industry has incurred serious losses of productivity. Based on fixed targets such as return on equity, SOEs are not performing very well. Some studies have even found that, if there had been no direct and indirect subsidies, SOEs would be running at a loss as a whole. The future of China's economy now lies in how resources can be redirected from inefficient state-owned sectors and SOEs to efficient ones.

Therefore, it is not some impromptu or merely cosmetic move on the part of policymakers to implement mixed ownership and lift the non-state shareholding parameters in SOEs. In the near term, accelerated SOE reforms – instead of printing more currency or boosting investments – would be a better way to stop economic growth declining too quickly or to gain the biggest reform bonus for the economy. In the long term, focus should be put on whether reforms can go further and goals such as building China into an innovative country can be achieved.

"Mixed ownership" has become a buzzword for SOE reforms. Despite this, no real progress has been made in terms of fair market access, property rights reform and the development of modern corporate governance.

Take the mixed ownership pilot reform scheme launched by SASAC. Two centrally administered SOEs that have been included in the reforms – China National Pharmaceutical Group and China National Building Materials Group – have proposed carrying out mixed ownership only at the level of their subsidiary business segments, although the two have implemented a mixed ownership regime for many years. This could indicate that reform plans may not only fail to meet expectations, but also lag what the centrally administered SOEs have been doing.

So far, what SOEs are mainly doing through the mixed ownership liberalism is to bring in more private investors to help reform their secondary or tertiary subsidiaries, some of which are listed businesses. This will not help reduce the proportion of state-owned stakeholders in SOEs. If parent companies do not carry out reforms, private enterprises will not be heard at meeting tables and problems with SOEs will not be addressed, making the mixed ownership reforms a sham. Some industry experts have pointed out that mixed ownership could just be a ploy for SOEs to draw in money.

SOEs blur the lines between government and market. Therefore, mixed ownership as a means to reform SOEs must be carried out concretely with the focus put on results. Reforms must be done in the parent companies so that new governance frameworks can be created, and open and competitive procedures must be adopted.

Thought must also be given to the role of SOEs, especially when they are functioning in a competitive arena. In 2010, it was decided that state capital should be withdrawn from competitive areas. However, in the past decade, this was not followed clearly or resolutely.

Although many of them were badly managed with corruption rampant and declining business results, they not only managed to gain huge resources, but also squeezed up-and-coming small and medium-sized enterprises out of the market.

SOE reform is a tough nut to crack. Since downward pressure in terms of economic growth has been mounting, SOE reforms need to be implemented soon. Now is the time when we need to see real breakthroughs.

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