18 September 2018
China aims to bring more competition to state firms
China aims to bring more competition to state firms

POLICY WATCH: State firms to retain dominant role

Beijing has outlined plans to step up competition for the nation’s state-owned enterprises (SOEs) and enhance their efficiency through market-oriented reforms, but still made it clear that the firms will continue to play a dominant role in key strategic sectors in the years to come.

Following deliberations at the recent Communist Party plenum, authorities unveiled a long-awaited roadmap for reforming the bloated state sector, mainly focusing on ramping up competition with private firms. However, there were enough hints that there won’t be any significant loosening of the government enterprises’ grip on key national resources and industries.

Even on the reforms that have been promised, there is lot of skepticism among observers as to how much the government can deliver, given the resistance from vested interests.

In a document issued after the third plenary session of the Communist Party’s 18th Central Committee, Beijing spelt out major initiatives to bring about changes among the state behemoths.

SOEs are required to channel 30 percent of their profits into public finances, principally social security. That compares with a previous ratio of 10-15 percent. Also, private companies will be allowed into government projects and take stakes in state firms. The nation will proactively pursue a “mixed ownership economy”, according to the document released on Nov. 15.

The rhetoric is not very new. Dai Xianglong {戴相龍}, chairman of the National Council of Social Security Fund, said in 2012 that more state-owned assets should be transferred to the national pension fund to enlarge the latter’s reserves. China’s existing pension system could face a 68.2 trillion yuan (US$11.2 trillion) pension shortfall by 2033, as a result of rapidly aging population.

Reform will help improve the governance of SOEs and improve their efficiency in the long run. However, they will suffer more competition and higher resources costs in the near term, according to economists.

There is a view that as the profit transfer usually applies to parent companies of the listed SOEs, it will prompt the listed arms to increase dividend payment to shareholders. Meanwhile, state-owned big banks might struggle to meet the capital adequacy ratio if they are ordered to turn over more profit to the central government.

More importantly, the blueprint failed to pinpoint a more aggressive state-sector reform or privatization program, with economists saying they are not very hopeful that “competition” will touch the real issues. 

Under the policy blueprint, the State-owned Assets Supervision and Administration Commission (SASAC), the watchdog of 117 centrally-controlled SOE groups, will shift from managing state assets to managing state capital. And the government will set up several state-level investment vehicles on the lines of Singapore’s Temasek Holdings.

This shift of emphasis is significant. In recent years SOEs have been obsessed with building up huge mountains of assets, with little regard to the financial return on those assets. Forcing state firms to pay attention to their capital rather than their assets implies a much stronger emphasis on efficiency, observers say.

Nevertheless, Beijing is unlikely to loosen state-run companies’ control of key national security sectors, key infrastructure and natural resources sectors, as well as emerging industries. SOEs may, in the end, only exit from non-strategic sectors while cementing their position in key industries.

– Contact the reporter at [email protected]


Freelance journalist

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