26 October 2016
China is attempting to overhaul the nation's bloated state enterprises, but the task won't be easy. Photo: Xinhua
China is attempting to overhaul the nation's bloated state enterprises, but the task won't be easy. Photo: Xinhua

Corporate governance key to SOE reform

China’s state assets regulator, the State-owned Assets Supervision and Administration Commission (SASAC), has disclosed implementation plans on the previously-released pilot reform initiative for state-owned enterprises (SOEs).

The root cause of the problems in the SOEs is poor corporate governance. To change the bureaucratic system in SOEs, some top-down thinking is necessary.

SOEs are the children of years of planned economy. Even today, the mainland economy is still dominated by the state firms.

The enterprises are owned by the country but are run by individual executives. With problematic supervision mechanism, some top managers misuse the firms to serve their personal interests.

The serious oversupply in many industries is closely related to the existence of SOEs. Private companies will not allow long-term losses and will do everything to get out of the troubles.

But in industries like iron and steel, coal, cement and some others, which suffer a lot from overcapacity, many are SOEs with inflexible governance system.

They don’t dare to lay off employees, not to mention shutting down unviable plants. So the problems become bigger and bigger, while the balance sheets are always in red.

Whether it is supply side reforms or SOE reforms, a key thing is to improve industry efficiency and encourage competition to filter out incapable players.

Mainland media had in the past talked a lot about “exit of state-backed companies and allowing the private sector to dominate the market”. But such discussion has been heard less recently.

That is because the central government doesn’t expect it to happen. Instead, they hope the SOEs can become stronger and more efficient.

It’s certainly a difficult way to go. In recent years, the SOE reform has focused on adopting a mixed ownership arrangement. But that won’t improve the situation if corporate governance standards remain the same.

Fortunately, a big part of the newly released plan is about reforms in corporate governance, and the government has been striving to combat corruption in the SOEs. This should pave the way for reform measures.

As long as the central government makes its attitude clear, SOE reform still holds promise, though it might be time-consuming.

It may take 4 to 5 years to see some improvement.

Investors can seize short-term speculation opportunities in the stocks, but are advised not to expect too much by way of substantial change in the state firms.

This article appeared in the Hong Kong Economic Journal on Feb. 26.

Translation by Myssie You

[Chinese version 中文版]

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