Shanghai weighs in on SOE ownership reforms

Shanghai is welcoming private investors to participate in a State-owned enterprise stockholding reform that it hopes will be completed within the next five years.

The municipal government unveiled its opinions - a de facto action plan - on the knotty reforms on Monday, the first of their kind among local governments and what should serve as an important reference for the central authority, many believe.

The purpose of the reform is to improve the performance by SOEs in both the marketplace and in serving the public.

Analysts believe private investors stand to benefit from the opening-up of markets that were formerly dominated by lackluster SOEs, if the government can translate its words into deeds.

The Shanghai government has classified SOEs into four categories and created a different reform plan for each. Promoting mixed ownership is a direction that was decided on by the central government last year.

First, Shanghai is turning two SOEs into professional asset management firms, completely owned by the State, by diverting the rest of their business to the other SOEs.

The two firms will openly handle all affairs relating to SOE assets in the stock and property ownership markets.

The second category involves infrastructure construction and public services, and the government should be the sole owner or at least the largest shareholder in these SOEs.

The government also should be the leading shareholder in the third type, which includes emerging industries, advanced manufacturing industries and modern service industries.

State-owned assets can partly or even completely withdraw from the fourth kind of SOE, which involves companies in "common competitive fields" to play up the role of private capital.

The government is encouraging qualified SOEs, whose land will be counted among their assets, to apply to be listed in the stock market and to give its key employees stock ownership incentives.

Private equity funds and venture capital firms are welcome to participate in the SOE stockholding reforms.

Shanghai also will reform its public service SOEs through granting franchises to qualified private bidders.

The SOEs are expected to seek strategic partners with resources, marketing and advanced management, not just money. A government representative did not specify any restrictions on foreign capital in the SOE reform.

One noteworthy point is the government has made a risk-control mechanism a must to avert losses of State-owned assets and to curb possible corruption.

Independent financial auditing, scrupulous asset value assessments, reports by an expert review panel and legal opinions issued by law offices are also requisites for restructuring the SOEs' ownership.

The Shanghai government is giving SOEs considerable autonomy regarding the reform of their branch enterprises. But the reforms of key branch firms and all reforms of big SOEs must still be decided and supervised by Shanghai's State-owned assets supervision and administration commission and the government.

Shanghai Party chief Han Zheng hinted that opinions are a good beginning for the difficult reform, saying, "I hope the 'second half of the game' can be even more fruitful" after a vice-mayor explained the opinions item by item to representatives of SOEs and private businessmen in Shanghai.

SOE reform has been occurring sporadically in various fields since the early 1980s, when China's planned economy came to an end.

The process, accompanied by major losses of undervalued State-owned assets, produced tens of millions of laid-off workers, as well as approximately 100 large-scale SOEs, thanks to their industries' "strategic importance" to the national economy.

Yet huge government subsidies, preferential policies in taxes and land, and abundant supplies of natural resources allow many to lead in terms of revenue but trail when it comes to net profits.