China SOE reform back on track amid concerns

Reform of China's state-owned enterprises is back on track after a decade. [Special coverage]

During the landmark third plenum of the 18th Chinese Communist Party Congress held in 2013, China announced an overhaul of its state-owned sector.

Pilot programs have since been carried out in six of the country's SOEs. In the currently ongoing legislative meeting, the National People's Congress (NPC), reform also took up a paragraph in the government work report delivered by Premier Li Keqiang.

The legislators, some of whom are working in the corporate sector, yearn to see where this new round of reform is leading to.

Reform as the "new historic mission"

China's state-owned firms generated a total of gross revenue of 48 trillion yuan (around US$7,680 billion) in 2014, up 4 percent year on year, according to data released by the Ministry of Finance.

But the return on assets, an indicator gauging asset performance, was around 6 percent lower than their private peers, according to figures compiled by economists. The SOEs also have a higher liability rate than their private counterparts.

"China's SOEs have contributed to the country's economic development throughout its history, but their shortcomings are emerging now, especially after the global financial crisis which forced the Chinese economy to transform its growth mode. The new historic mission for the SOEs, if there is one, is its own reform." said Bai Liqun, a deputy to the NPC, in an interview with China.org.cn on March 12. Bai is also president of Lianyungang Port Group, a city-level SOE.

"China's SOE reform has been an important task since reform and opening-up, but it is a regrettable one, as an approach to make a breakthrough has never been found. Reform of the SOEs lags far behind the reform of the entire Chinese economy." Bai said.

"If we do not make strides in SOE reform, they will impact on the stable development of the Chinese economy and society." Bai added.

Xu Guoping, chairman of the Jiangsu State-owned Assets Supervision and Administration Commission (SASAC), analyzed the difference between this round of SOE reform and the previous round, which took place in the late 1990s. "During the last round of reform, the SOEs were going one of their most difficult periods. Many of them were in the red, and could not even afford their employees' salaries. But this round of reform is mainly concerned with the inefficiency of the companies and preventing further losses in state-owned assets," Xu said in an interview with China.org.cn on March 13.

"Easier said than done"

Though a national reform plan is yet to be announced, major reform measures have been indicated in various documents, which include mixed-ownership reform, reform of corporate management structures, separating business from politics and so on.

Mixed ownership, which means inviting private investment into SOEs, is one of the most talked about reforms and is nothing new for the state sector. Statistics show that some 45 percent of China's SOEs are already "of mixed ownership," but 92 percent of all the SOEs hold more than 50 percent of their own stock, meaning that most of the SOEs have a controlling stake.

Since China pledged to overhaul its SOEs in 2013, the private sector has been concerned about whether their stake -- if they invest -- would be secure and whether they could take a controlling stake.

Xu Guoping, chief of the Jiangsu SASAC, thinks that the private and even foreign firms can take a controlling stake, as long as it is within the "competitive industry."

But in Bai Liqun's opinion, the crux of the problem lies not in the ownership of stock, but in the nature of China's economic system and related laws.

"Only when the private sector is seen as the main body of China's real economy and related laws are formulated and enforced can there be a way out for the reform of the SOEs." said Bai.

Even if the private sector had a controlling stake, they might not have a major say in company-related decisions if they were not in the same position as their state counterparts, Bai said. " SOE reform is easier said than done."

Apart from the mixed ownership, Xu Guoping said that the reform would be "a systematic project" and hence a "coordinated effort" is required to reform the corporate governance structure, the mixed ownership system, the selection of company chiefs and so on. He said that it remains to be seen whether reform can take place in these areas when the national SOE reform plan is released.

Previous reports said that an overarching national reform plan is to be announced soon after the legislative meeting, which concludes on March 15.