China’s New Push to Reform the State Sector: How Far Can It Go?
By Sarah Y Tong

China’s New Push to Reform the State Sector: How Far Can It Go?

Jul. 11, 2016  |     |  0 comments


A recent article which appeared in the 求是 (“Qiu Shi”) journal has stirred up a new round of heated discussions on the direction of China’s state-owned enterprise (SOE) reforms. Authored by the Party Committee of China’s State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, the article is titled “Strengthen party building in the comprehensive deepening of SOE reforms”.1 Most conspicuous in the text is the recommendation that “major decisions (of the SOEs) must first be examined by the party committees (or the leading party group) of the enterprises, which then propose their opinions and suggestions. SOEs’ major operational and managerial matters involving regulations of national macro-economy, national strategies, national security and so on must first be discussed and approved by their party committees (or leading party groups), before a decision is made by the board of directors and the executive team.”


The issue of reforming China’s SOEs has received much attention since late 2013, when a grand reform blueprint was promulgated by the Communist Party of China’s (CPC) Central Committee, the “Decision on Major Issues Concerning Comprehensively Deepening Reforms.” SOE reform was evidently among the most significant and difficult tasks listed, for a number of reasons. One is that the leadership seems ambiguous regarding the interplay between the state and the market. As such, the role of SOEs in the economy and society remains unclear and ambiguous. Consequently, SOE reforms lack both a clear direction and practical details. Moreover, China’s SOEs are large in number and have great variations in size, sectors, and administrative arrangements. Reforming these SOEs will also involve many different government institutions in many locations. Indeed, SOE reform “embodies the triple challenges of ideological conflicts, vested interests, and bureaucratic obstacles”.2 Another complication concerning SOE governance and reform is the role of the party (and its organizations) in SOEs’ corporate governance, as well as its relations with government agencies and the managerial teams.


The all-inclusive comprehensive reform plan of 2013 left many questions unanswered concerning SOE reforms. Two years later, in September 2015, the government announced the “Guideline to Deepen Reforms of the SOEs” (hereafter the Guideline), aiming to provide clearer direction and further details. However, this new document was not able to clear the doubts and confusion arising from the earlier plan and instead generated new anxieties on whether the leadership was committed and serious about SOE reforms. The latest article by SASAC further heightened these concerns by suggesting that SOEs will remain under the direct control of the party, rather than business entities with business objectives.


China’s SOE reforms started more than three decades ago but the most significant was that of the 1990s, which succeeded in bringing down the total numbers of SOEs and improving their competitiveness. However, compared to non-SOEs, Chinese SOEs remained poorly governed and hugely inefficient. For example, SOEs have a significantly higher incidence of loss-making and are much less efficient in capital utilization.


Moreover, the government agency set up in 2003 to oversee the development and reform of the SOEs has not been very successful in achieving the various objectives. SASAC was tasked with three responsibilities: the owner and the regulator of the SOEs, and the institution responsible for promoting SOE reforms. First, as a representative of state ownership, SASAC has not strongly pushed profitable SOEs to surrender more of their profits to the state treasury, even as many centrally administered SOEs have become hugely profitable. Second, as a regulator, SASAC and its leaders were not given sufficient authority to supervise some powerful SOEs for two reasons. One is its ranking. At the vice ministerial level, SASAC and its leaders were at a lower rank than some minister-level SOEs. The other is the recruitment of its top executives. They are appointed not by SASAC, but by the party’s organization department. Third, as the supervisor of the SOEs, SASAC has little incentive to reform the SOEs and to reduce their size and influence.


While their number has declined, China’s SOEs have grown considerably larger. The average number of employees has more than doubled between 1996 and 2013. Total assets per firm surged even more drastically, from RMB 60 billion per firm in 1996 to nearly RMB 2 trillion per firm in 2014. Some have also become highly profitable, especially the centrally administered SOEs due in large part to their monopolistic position and generous government financing. In 2013, SOEs’ total profits amounted to RMB 2.6 trillion, from less than RMB 500 million in 2003. Meanwhile, the share of the central SOEs rose from 61 percent to 66 percent. In 2014 and 2015, as total profits declined, to RMB 2.5 trillion and RMB 2.3 trillion, the share of central SOEs grew further, to 70 percent.


State firms have grown in size thanks to the government shift towards “making the SOEs larger and stronger” and absorbing more investments, but generating relatively less profit. Meanwhile, there has been little progress in SOE reforms already identified in the late 1990s, such as the further “separation of enterprises from government” and the elimination of administrative ranking of top SOE executives. In addition, China’s large SOEs are also known for their high incidence of corruption, further prompting public demands for reinvigorating SOE reforms.



Great uncertainty remains in the future of China’s new round of SOE reforms. Most importantly, the conceptual dilemma regarding the role of the SOEs seems unresolved.



Despite the comprehensive deliberation in the two government documents on reforming China’s SOEs, important issues remain unclear. First, the documents send conflicting signals on the role of the market and the state: while encouraging the market to play a decisive role in the allocation of resources, it stresses that the state sector will remain the pillar of the economy. Second, the documents identified “new” emphases for SOE reforms, such as a shift from asset management towards capital management and the advancement of mixed ownership, which were not entirely new. The lack of specific measures raised doubt on whether the reforms could overcome difficulties encountered in previous reform efforts. Third, it is not clear whether SOEs are to be pure business entities or they have to also shoulder certain political responsibilities such exercising administrative control over strategic industries.


One central concern is the role of the Party in SOEs. The Guideline indicates that the authority intends to curb corruption by strengthening the party’s influence and direct participation in SOEs’ governance. It also calls for “the full play of party organization’s political central role in the SOEs and a clear designation of party organization’s legal status in SOEs’ corporate governance structure.” Efforts to consolidate the party’s direct participation in SOEs’ governance seems inconsistent with the overall reform direction. It is also unclear how widely applicable these principles will be as the government also promotes mixed ownership reforms for SOEs. In fact, the Guideline stipulates that “the establishment of party organizations and the carrying out of party work is the prerequisite for SOEs’ mixed-ownership reforms.”


Nonetheless, the Guideline has made progress in several areas, including the promotion of rule-based corporate governance as a way to reduce excessive government interference in SOEs’ business operations and the introduction of a dual track system which applies to both the firms and the management teams in SOE governance. In particular, the SOEs will be categorized into two groups, commercial ones and those in public services. Commercial SOEs will be further divided into those in competitive sectors and those in special sectors. Likewise, top managers will also be recruited from the market or through Party and government recommendations, each with different pay packages and career prospects.


Progress has also been made to shift from asset management to capital management with the setting up of state capital investment companies and state capital management companies. By inserting a layer of investment companies between SOEs and government agencies, such as the SASAC, the reform aims to enhance SOEs’ market orientation and reduce bureaucratic meddling. As these investment and management companies are considered more market-oriented and entrepreneurial, the proposed arrangement is to better avoid the government’s interventionist tendencies towards SOEs.


The shift from asset management to capital management also aims “to dispose state assets with fair market-valuation, to change the form of state assets, and to reallocate the cashed out assets toward more desirable sectors and industries.” This indicates that, in the future, more state-owned assets may be transferred or sold to pay debt or fill the shortfalls in the government’s social security system.


The Guideline suggests that the government will “promote the concentration of state capital toward important sectors and key areas concerning national security, national economic lifelines, and people’s livelihood, as well as key infrastructure projects; toward forward-looking and strategic industries; and toward SOEs with core competitiveness.” More mergers of centrally administered SOEs, leading to further reduction in their numbers, could be expected.


Great uncertainty remains in the future of China’s new round of SOE reforms. Most importantly, the conceptual dilemma regarding the role of the SOEs seems unresolved. Moreover, as SOE conglomerates become larger and influential with entrenched interest groups, any serious reform will become operationally difficult and politically risky. Furthermore, as China’s SOEs are under the management of many different organs and at different levels of government, reforms can easily be side-tracked by either bureaucratic infighting or indifference. Meanwhile, the government has also pledged that the new round of SOE reforms will not lead to a large number of lay-offs, as happened in the late 1990s. As such, reform will be a gradual process, with trials and errors along the way.


Pilot reforms in several central SOEs have been started, while provinces such as Shandong, Shanghai, Hubei, Guangdong, Shaanxi, Gansu, and Jilin have also proposed reform plans for local SOEs. Given time, these differentiated local efforts to reform and reinvigorate local SOEs could yield lessons and experiences useful for China’s state sector moving forward. In the process, however, local leaders and SOE executives have to be given space for make business mistakes, especially when the sustained anticorruption campaign has dampened the enthusiasm and confidence of the bureaucracy.


Notes


1. Zai quanmian shenhua guoyou qiye gaige zhong jiaqiang dang de jianshe gongzuo [Strengthen party building in the comprehensive deepening of SOE reforms]. (2016, May 31). qstheory.cn. Retrieved from http://www.qstheory.cn/dukan/qs/2016-05/31/c_1118938354.htm


2. Liu, S. (2015, 15 September). Quoqi gaige: qie xing qie zhenxi [SOE reforms to tread a delicate path]. Caixin.com. Retrieved from http://opinion.caixin.com/2015-09-15/100850116_all.html#page2


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