Overcoming Obstacles to Reform and 'Clean Up' China's SOEs

China’s next Five-Year Plan is due for formal approval through the National People’s Congress within March 2016.  One of the areas of focus is the role of China’utes State-Owned Enterprises, generally viewed with suspicion by the West and seen within China because bloated and in need of a cleanup.

The Five-Year Plans have become a flexible political tool in the hands of central leaders seeking to shape the behaviour and priorities of varied ministries and local governments.  China’s Cupboard recently released the latest document in what will be a cascading number of plans and guidelines feeding into China’s policy settings between now and 2020.

The State-Owned Enterprise (SOE) Guidelines are part of tackling China’utes larger economic reform challenge. This requires shifting the overall macroeconomic development model from domestic expense (mostly infrastructure) and a concentrate on exports, to one of growth brought by domestic consumption as well as an expanded services sector.

The recommendations are the latest stage of the SOE reform process underway because the 1990s, as the Chinese state-controlled economy has made way for a growing rapidly private economy sector.

The present state of SOEs in China

The words typically used to describe the actual SOE sector in China are “inefficient,” “bloated,” and “cumbersome.”

The sector has been slimmed down a lot over the past decades.  Still, this comprises 110 conglomerates. SOEs account for about 60% of total revenue and the central government’s State Owned Assets Supervision and Administration Commission oversees them. Additionally, between 25,000 – A hundred and fifty,000 SOEs (depending on which meaning of “state-ownership” is used) are controlled and managed by provincial, municipal, and lower levels of government.

The larger SOEs maintain monopolies over key sectors from the economy (energy, mining, as well as infrastructure) and smaller SOEs are characterised by low efficiency and high debt levels. A lot of the problems and inefficiencies originate from the fact that the interests managing SOE behaviour do not align along with those of the wider economic climate or society.

Time for a clean out

Authorities have been consolidating and “cleaning up” SOEs for better resource percentage for a while now. China’s two major bullet train manufacturers completed consolidation in the very first half of 2015, while China Train Corporation recently announced a good asset-reorganisation with one of its subsidiaries.

Central authorities pointed out earlier this year that Beijing would really like mergers and acquisitions to create a figure of around 40 conglomerates under the SASAC.

The real-challenge will be in getting the Provinces to cooperate in cross-border mergers of provincial and municipal SOE assets. The ambitious Beijing-Tianjin-Hebei regional integration blueprint offers an important testing ground for getting different localities to cooperate, share, and consolidate financial and social planning and resources.

Commercial vs ‘social’

Schools, universities, medical goods and service providers, and providers of public utilities (drinking water, sanitation, energy, transport, as well as communications) together form an enormous and important part of the Chinese economy. It is important that they be run efficiently, but also essential that they fulfil the sociable purposes for which they can be found.

Providing equitable access to essential community goods and services means one can’t expect these firms to run upon purely commercial considerations. Consequently, the SOE guidelines indicate that SOEs will be categorised as “commercial” or “public goods and services,” and handled accordingly. Commercial SOEs will be asked to become leaner, more efficient, and much more market-oriented, while “social” SOEs will be encouraged to concentrate more on the quality of service supply.

Diversifying SOE ownership

A key part of making SOEs more efficient and more market-oriented is to allow private investors to purchase ownership stakes.

SOEs will be encouraged to bring in “various investors” through share-rights swaps, issuing new shares and/or ragtop bonds and other means. Institutional investors in particular, including foreign ones, will be allowed/encouraged to buy stakes in SOEs, and allowing SOEs to experiment with employee-share ownership schemes.

Oil and gas, electrical power, railways and telecommunications identify as suitable for “limited” private investment: indeed, key energy companies Sinopec and National Petroleum Corp have already started selling off parts of their operations.

While citing the Singapore Temasek model of state investment, strategic SOEs in China will never fit which model, but will remain below strict state (i.at the. Party) control.

Improved independent decision-making from board level will be urged by requiring the boards of all SOEs to have a majority of non-executive (external) directors. They will hire additional professional managers, and a more flexible and market-based compensation system for SOE officers will link pay to company performance.

Obstacles in order to reform

The key obstacle to SOE change will be overcoming “pushback” from entrenched interests at local, provincial as well as national government levels. China Communist Party makes overcoming this obstacle particularly difficult due to the emphasis on leadership of, as well as control.

Reforming the Party, especially to reduce corruption, is also a fundamental part of the Five-Year Plan, but helping to loosen the Party’s grip on control is nowhere in sight. The extent to which the actual politics of the 13th 5 year Plan remain compatible with it’s economic reform goals therefore remains.

China’s grip nevertheless tight on state-owned enterprises is republished with permission from The Conversation