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Plan highlights focus and interpretation of SOE reform

Updated: Sep 16,2015 9:33 AM

China unveiled a comprehensive plan on reforming State-owned enterprises (SOEs) on Sept 13. The comprehensive guideline set out the goal and reform measures in a number of aspects, including the general goal of SOE reform, the establishment of a modern enterprise system and the management system of State-owned capital. In addition, the blueprint highlights the role of the government in managing SOEs’ capital, instead of the entity itself.

Highlight 1: Results to be achieved in key sectors by 2020

The guideline requires that crucial results should be achieved in key sectors by 2020. For instance, a State-owned capital management system that is market-oriented and in line with China’s economic system, a modern enterprise system and a market-oriented operation system should be established before 2020, and the vitality and counter-risk ability of SOEs should be strengthened.

Interpretation: The plan sets the tone for the next reform step

Bao Jianyun, a professor of international politics and economics at Renmin University of China, said the plan is a major breakthrough in SOE reform.

He said although the SOE reform has moved forward in some aspects since the reform and opening-up, some SOEs are still running inefficiently, State capital is losing out and property rights are unclear.

Previous SOE reform plans, mostly designed by local governments, were being carried out slowly because they lacked a top design from the central government, and this is where the new blueprint comes in, he said.

Highlight 2: SOEs divided into two types: public welfare and commercial ends

The blueprint divided SOEs into two types, for public welfare and commercial ends, and these two types of enterprises have respective reform plans, supervision, and a responsibility and evaluation system.

Interpretation: Different management leads to joint development

Zhang Chunxiao, a research fellow at the consultancy center of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), said it is a good decision to manage SOEs differently, and different management can lead to joint development.

Zhang said the goal of SOEs for commercial ends is to accumulate State capital and enhance the vitality of SOEs, while the main goal of SOEs for public welfare is to provide public services to improve people’s life.

The assessment of SOEs for commercial ends, he said, is based on their ability to make profits, vitality and other factors, while the assessment of SOEs for public welfare is based on their ability to provide public goods.

Zhang noted the division of SOEs should be flexible and adapt to market changes.

Highlight 3: To diversify stakeholders by attracting market investors

The blueprint pledged to attract more market investors to diversify the spectrum of SOEs stakeholders. It also pledged to encourage more SOEs to list.

Interpretation: Diversified stakeholders reduce opportunities of corruption

Xu Baoli, a research fellow at the SASAC vision and Administration Commission of the State Council, said the diversification of the SOEs stakeholders will contribute to combating corruption.

Xu said SOEs have to take part in market competition, make profits and take the consequences of market competition — either development or bankruptcy. He said when State capital is controlled by a small group of people, its budget constraint is less effective, its operation will be affected and the leaders of the enterprises may have opportunities to take bribes.

The diversification of stakeholders, he said, can strengthen the constraint of company budgets, and the reform will see more nongovernmental investors included as stakeholders.

Highlight 4: No timetable set

The development of the economy of mixed ownership is to magnify the influence of State capital and improve its efficiency in the market. Such development will be based on the characteristics of individual enterprises, according to the guideline, so no timetable is set for the reform, and the reform will be carried out case-by-case.

Interpretation: 1+1 > 2

Zhang, from the consultancy center of the SASAC vision and Administration Commission of the State Council, said the economy of mixed ownership will be beneficial for State capital to play a bigger role and improve its vitality. In addition, State capital should be mixed with nongovernmental capital to complement each other and realize more gains. Otherwise, the mix will probably lead to loss of State assets and then affect the development of the non-State economy. He said the supervision over State assets should be strengthened and a transparent, fair platform is required during the reform.

Zhang said the economy of mixed ownership is not to cut out a piece of cake from the original State assets, but to invite investors to make a bigger cake.

Highlight 5: Government’s role changed to the management of capital

The role of the SASAC vision and Administration Commission is to manage the capital, instead of managing the enterprise.

Interpretation: To delegate power and step up supervision

Zhang said the separation of the right of ownership and the right of operation will make SOEs more independent and market-oriented, which will improve the vitality of State capital and its ability to counter risks.

The reform, he said, will make a fundamental change to the operation and supervision of State enterprises and State capital. The State-owned Assets Supervision and Administration Commission, established in 2003, is to reinforce the management of State capital, talent and the operation of enterprises, but this management method has changed into the management of capital in its current reform.

In the previous method, Zhang said, the leaders of the SOEs only have the right of operation, and it is likely to be overcautious since the SASAC is overlooking its management.

According to the current reform plan, the leaders at the SOEs are likely to have more say, which will lead to better performance of the enterprises.   

Highlight 6: The Party’s leading role in SOEs

The guideline requires integrating the leadership of the Communist Party of China and corporate governance. It requires clarifying the Party’s leadership and responsibility in the operation of the enterprise, strengthening the supervision and evaluation of SOE leaders and incapable leaders will be removed and an anti-graft system established.

Interpretation: The efficiency of SOEs will be reduced if the role of the Party diminishes

The leadership of the Party has to be reinforced during the current SOE reform, since the inspection groups dispatched by the central government to local enterprises have found that an enterprise with consolidated Party leadership usually outperforms those without good leadership of the Party.