Asia Insights-China:reportedly launches a more marke-tbased SOE reform
Recently, the CPC Central Committee and China’s State Council jointly issued a document entitled “The guiding opinions on deepening reform of state-owned enterprises”, according to sina.com. With eight sections and more than thirty paragraphs, the 20-page document covers a wide range of topics on SOE reform, including principles and major objectives, as well as listing key areas of SOE reform for which substantial, decisive progress should be made by 2020.
Overall, we feel this is a positive step toward making market-oriented economic reforms. Here are some of our key takeaways.
First, this document of guiding opinions on SOE reform provides a rather comprehensive framework that places significant emphasis on market-based principles and therefore provides local governments or individual SOEs with enough room to explore and experiment for a proper institutional arrangement in SOE reform.
Second, among a wide range of topics, the document highlights concepts such as market mechanisms, hybrid ownership, modern corporate governance and classifies SOE reform tasks by industry, which opens the door to SOEs further exiting from competitive industries and allowing state-owned assets to take advantage of more efficient private property rights in a shareholding system. Notably, the document encourages SOEs to diversify their ownership structures and become publicly listed through a reorganisation. It allows for parts of state-owned capital to be transferred into preferred shares, which implies the authorities would like to exchange management/governance powers for efficiency.
Third, we expect this to result in a merger and acquisition (M&A) boom, which should reduce the number of SOEs in the economy. The document has clearly expressed that the government will “close a batch (of SOEs), restructure a batch (of SOEs), and innovatively develop a batch (of SOEs)” to strengthen SOE performance. We believe the government will try to consolidate SOEs mostly via M&A, especially in industries with significant overcapacity. Moreover, the document encourages a hybrid ownership structure for SOEs in the commercial sector, while allowing private capital to enter SOEs in the non-commercial sector. As such, M&A activities may not be limited to SOEs, but could also occur between SOEs and private enterprises. Such a reform should benefit the economy as a whole, as it could: 1) improve the efficiency of the whole industry chain and eliminate outdated capacity; 2) avoid duplicate and wasteful investment; 3) boost knowledge sharing and avoid disorderly competition, which, in turn, could enhance overall competitiveness and productivity; and 4) promote environmental protection, as smaller-sized enterprises in overcapacity industries usually pay less or even no attention to environmental issues.
Fourth, the government’s management of SOEs will be based more on “capital operations” than the previous “direct management over the enterprises”, which suggests to us that there will be less government intervention into the business operations of SOEs. The document states that “without authorisation by the law, any government agency or institutions should not intervene in (SOE business operations).” The government is establishing and will set up more state capital investment/operation companies, which are very likely to have some features similar to those in Temasek of Singapore - a commercial investment company wholly owned by the Singapore Government. If this is the case, it would also help to promote modern corporate governance among SOEs.
