25 October 2016
The reform of state-owned enterprises is important to drive innovation in China. Photo: Xinhua
The reform of state-owned enterprises is important to drive innovation in China. Photo: Xinhua

SOE reform to determine success of China economic restructuring

Beijing unveiled the long-awaited SOE reform plan on Sept. 13, setting the direction for the reform of state-owned enterprises for the next five years.

Five key points are outlined in the reform plan.

First, SOEs will be divided into two main categories, commercial and social enterprises. The authorities would adopt different approaches in the reform, supervision and assessment of these two groups of SOE companies in a bid to integrate SOEs into the market economy.

Second, improve the modern enterprise system as well as the corporate system and shareholding structure of SOEs. Group-level reform will be enhanced, and multiple types of investors will be brought in to achieve mixed ownership of SOEs.

Third, develop a mixed-ownership economy and prompt SOEs to transform their operational systems. Those that already have mixed ownership as a result of shareholding disposal or public listing should focus on optimizing the modern enterprise system to improve capital efficiency.

Fourth, improve the management system of state-owned assets, switching from “managing companies” to “managing capital”.

Fifth, the authorities will oversee state-owned assets and prevent their, and enhance internal supervision of SOEs. The responsibilities of supervision, auditing, discipline inspection and supervision as well as the inspection, legal and finance departments should be clarified. This will help improve internal supervision and bolster capability to execute plans and policies.

The guidelines focus on integrating public ownership with the market economy while company operations center on marketization.

The authorities will establish state capital investment operation firms, which will serve as key platforms for driving SOE reform and encouraging consolidation and listing of SOEs.

Meanwhile, the government will encourage diversified ownership and introduce non-state investors. Beijing intends to draw lessons from Singapore’s Temasek model, while shutting down or cultivating SOEs.

The highlight of the reform plan pertains to key changes in SOE ownership. It aims to introduce non-state capital and diversify the shareholding of SOEs.

The public listing of SOEs will not only improve their operational transparency but also enhance their corporate governance and profitability.

The diversified shareholding structure will help in establishing a corporate governance structure that checks and balances the powers of shareholders, board members and management.

The reform plan will also push the market operation and management of the board system, as well as split the ownership and operation of SOEs.

That would put an end to a long-standing issue, namely, that there is a lack of delineation between the functions of the government and enterprises and their rights and liabilities.

SOE reform is a critical part of China’s economic restructuring, which means that its success will determine the fate of the country’s overall economic reform.

Over the last couple of years, China has entered a “new norm” of economic growth.

As a modern enterprise, an SOE will be effectively monitored by the board of directors or shareholders, and hence the issue regarging the use of its capital or cashflow for investment will be resolved.

If there is no board system or the company has no effective external supervision from shareholders, the management will ramp up investment using company earnings in order to increase market share or asset size for the purpose of window-dressing.

SOE reform lacks incentives for innovation because of the system design.

Premier Li Keqiang has encouraged people to start up their own businesses and pursue innovation.

However, China has so far achieved limited success in innovation. Under the current system, an SOE employee will only get an award for his/her innovation.

This cannot be transformed into a personal patent nor could in result in huge economic benefits like in private companies.

This article appeared in the Hong Kong Economic Journal on Sept. 22.

Translation by Julie Zhu

[Chinese version中文版]

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Senior Associate Dean, School of Business and Management, Hong Kong University of Science and Technology

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