China’s leaders laid out a road-map for reform in November, and some of the key proposals were concerned with changes to state-owned enterprises (SOEs). These huge entities have dominated certain sectors of the Chinese economy, and many believe they have crowded out more efficient private-sector companies.
They are also problematic because of their potential for corruption. Intimate state involvement in directing day-to-day operations means that state-owned enterprises are often managed for personal and political gain, and not in the best interests of the public — supposedly these companies’ ultimate beneficiaries and most important stakeholders.
Shanghai Sets the Pace
The city of Shanghai has taken the lead in implementing these reforms, announcing guidance on December 17 for how the state-owned enterprises under its jurisdiction are going to be reformed and restructured. This guidance was prepared under direct supervision by President Xi Jinping, so observers believe that it is basically a pilot program to show how the central government thinks the reforms should proceed nationwide.
The main focus of the reform is on separating government from direct management of SOEs.
Reformers aim to achieve this goal by transferring ownership of SOEs to state asset management companies, while leaving corporate strategy and tactics to the SOE’s management.
In short, the state will set macro policies and regulate market activities; the asset managers will look after the interests of shareholders (and the public); and the SOEs’ executives and directors will concentrate on daily operations. These divisions, reformers hope, will allow the SOEs to be governed more in accordance with market principles — and they may also help reduce opportunities for corruption.
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SOEs in Different Sectors
The Shanghai administration is dividing SOEs into three groups, which will have different organizational structures: a group of competitive SOEs, which will focus on maximizing returns; a group of functional SOEs, which will work on major government-sponsored projects; and a group of public service SOEs — basically utilities concerned with day-to-day city operations. The real challenge will come in reforming the management structure of these companies and reducing any legacy of cronyism and corruption. The competitive SOEs are being directed to separate management positions from board positions; since the board chairman can be the company’s Party secretary, this is a move to reduce direct Party influence on operations. Other management changes include modeling compensation on international best practices; hiring senior executives on a limited-time, contract basis, and evaluating management according to their success in implementing reform (something that has been an issue in previous reform drives).
Returning Profits to the Public Sector
The reforms target a return of 30 percent of SOEs’ profits to the state by 2020. These proceeds are to be divided evenly for industrial development, infrastructure, and social welfare.
Reasons for Reform: China’s SOEs Not Delivering the Goods
Source: The Economist
SOEs Will Still Have a Powerful Role
The present reforms are not backing down from the central role played by SOEs in the Chinese economy — but they are aimed at shifting the management of SOEs to be more market-oriented, and to provide greater returns to shareholders and to the public. Giant, inefficient SOEs have prevented the entrance of more nimble and productive private companies, and have failed to return profits to the public, exacerbating the growth slowdown as China transitions to a more diversified consumer-driven economy.
These reforms are certainly a positive. However, the deeply entrenched corporate culture will be difficult to shift. We will watch the progress in Shanghai, as well as the spread of reforms to other jurisdictions.
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