Oct 16, 2018 01:50 PM

Editorial: Fear of ‘State Asset Drain’ Must Not Get in Way of SOE Reform

State-owned enterprise (SOE) reform is once again at the top of China’s policymaking agenda. On Oct. 9, China began a national conference on SOE reform, at which attendees highlighted the central position of SOE reform. The conference cited Karl Marx, who wrote that “every step of real movement is more important than a dozen programs,” showing policymakers’ sense of urgency. But why have there been so many more “programs” than “real movements” in this area of reform?

In recent years, the central government and the responsible departments have rolled out multiple policies and documents regarding SOE reform, and there have been many case studies, including the mixed-ownership reform of China Unicom. However, on the whole, SOE reform has not lived up to expectations. There are three main reasons: obstruction from vested interests, rigid views and the powerlessness of SOE managers who actually want change. SOE reform is a key aspect of economic reform. At the same time, it is part of the general process of deepening reform. The recent conference called for the Chinese government to “support and encourage the SOEs that have taken on responsibility.” There are many ways to provide support — praise from leaders, citing an SOE as an exemplary case in the media — but the most reliable mechanisms are those that protect SOEs’ rights and put into place appropriate incentives. Most importantly, China must correctly handle the problem of the “draining of state assets” and achieve the rational pricing of assets.

Mixed-ownership reform is a core part of SOE reform, and asset pricing is one of the most difficult areas of mixed-ownership reform. At the conference, attendees stressed the “need to realistically transform enterprises’ operating systems, strengthen internal constraints and incentives, protect the legal rights of various types of ownership, and conduct rational pricing of assets.” This statement was clearly made with specific policies in mind. The slowdown of mixed-ownership reform in recent years is closely related to the difficulty of asset pricing. SOE managers have been burdened by the fear of being accused of “draining state assets.” More than 10 years ago, management buyout reforms, which were in fact a useful experiment, were basically halted due to criticisms from some quarters. In the process of mixed-ownership reform, accusations of “draining state assets” will also not subside. But just as farmers shouldn’t let the fear of pests stop them from planting crops, China should persist in pushing forward mixed-ownership reforms.

It is indeed true that some state assets have been sold at unfairly low prices. The government and SOE managers’ cautious attitudes toward mixed-ownership reform are understandable. However, these attitudes should not be allowed to cause SOE reform to stall. Asset pricing is not an unsolvable problem. The third plenary session of the 18th Central Committee clarified the “decisive function of the market in allocating resources.” Undoubtedly, when it comes to the problem of SOE mixed-ownership reform, China should also take advantage of the market’s function and respect the prices decided by the market. Most SOEs have entered the capital market by now, so there is now a more-objective and more-reliable frame of reference for the valuation of their assets. The relevant laws and regulations, as well as systems and measures, are also more robust now. We should also note that, since the time of the 18th Central Committee, the nationwide anti-corruption campaign has laid the foundations for a favorable atmosphere in which officials “don’t dare to be corrupt” and a system in which they “can’t be corrupt.” This has major benefits for the promotion of SOE reform.

In relation to this, the recent conference mentioned the need to “fully develop the role of entrepreneurs and carry out the ‘separation of the three areas.’ ” The “separation of the three areas” refers to the need to distinguish between knowing violations by cadres and genuine mistakes that were made because of inexperience; between mistakes made in the absence of instructions from superiors and those made in defiance of existing instructions; between accidental errors made with the intention of promoting reform and violations made for personal gains. In late 2016, after top leaders first proposed this important principle, the Central Commission for Discipline Inspection’s special State-owned Assets Supervision and Administration Commission team issued a “guidance opinion” to promote this principle. But there have been no clear results to date. The recent conference called for “the bold use of entrepreneurs who want reform, want to take on projects, and are skilled at operations, and the nurturing of thoughtful and energetic young people with potential, to promote the continued strengthening of SOEs’ ranks.” Deepening SOE reform requires SOE managers who dare to take on the task. But more importantly, it requires the accelerated reform of salary management and an overall plan to use employee stock ownership, listed companies’ shareholding plans and other long-to-medium-term incentive measures.

Reform also requires the appropriate public mood. The essence of SOE reform is the resolution of problems inherited from the planned economy, including the mixing of politics and business, paternalistic thinking and “soft” budget constraints. The test of SOE reform is whether these old problems have truly been eradicated, and whether SOEs have become market-economy entities with “clearly defined responsibilities and property rights, separation of politics and business, and rational management.” SOE reform should not carry too much ideological flavor. SOEs are enterprises, after all. They don’t just have to participate in market competition within China; they must also “go out” and abide by international norms when doing business abroad. Outdated and rigid concepts and conflicting goals are also important reasons why SOE entrepreneurs have felt like they can never get anything right.

Perhaps it is also worth reflecting on the methodology of SOE reform. The top-level planning for SOE reform was completed long ago. In recent years, SASAC has issued multiple documents on the topic. An important lesson from China’s 40 years of reform has been the importance of developing grass-roots-level creativity. The country’s many regions each have their own unique circumstances, and each SOE is also unique. Now, while China is in the process of implementing detailed rules, it must distinguish between those that are truly useful to reform, and those that are in fact hindering SOE managers’ reform efforts. Does the abundance of official documents prove the overreach of the relevant departments, or is there indeed “rigid demand” from SOE managers? Does this demand reflect a multitude of worries?

At the turn of the century, China made great progress in SOE reform, which in turn contributed to economic progress. However, the deepening of SOE reform is a long and difficult struggle, and should not be slowed down simply because some SOEs have seen their conditions improve. Only through deepening SOE reform can China guard against and resolve financial risk, promote the optimization of its industrial structure, become an innovative country, and achieve high-quality development. As the recent SOE reform conference pointed out, SOE reform is currently at a stage where “every step of real movement is more important than a dozen programs.” This is also the stage at which the “multiplier effect” of reform is at its greatest. In some senses, supporting and encouraging SOE reform at this key time is equivalent to supporting and encouraging the Chinese economy.

Translated by Teng Jing Xuan (

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