22 February 2019
There may be more mergers in the defense, airline and shipping sectors as the SOE reform progresses. Photo: Reuters
There may be more mergers in the defense, airline and shipping sectors as the SOE reform progresses. Photo: Reuters

China’s SOE reform to accelerate in second half

China’s GDP growth has stabilized at 6.9 percent in the first half of this year, beating market expectations.

The upbeat economic growth has paved the way for various reforms. The reform of state-owned enterprises (SOEs), one of the nation’s key tasks, is likely to accelerate in the second half.

Chinese SOEs reported their combined profit rose by 24.3 percent to 1.4 trillion yuan (US$208.39 billion) in the first six months of this year, according to data from the Ministry of Finance. Central SOEs had a combined profit of 935.2 billion yuan, up 18.5 percent from the year before. Regional SOEs reported a 37.5 percent jump in their first-half profit to 472 billion yuan.

Improving SOE profitability has resulted from recovery in resources prices. Steel and non-ferrous sectors have swung back to profit. Coal and oil companies have also seen rapid profit growth. However, coal-fired power generators have suffered a steep fall in earnings.

State firms have enjoyed short-term benefits from cyclical factors, but their long-time low efficiency has yet to be resolved. Chinese authorities have been actively rolling out measures to improve their corporate governance and resources allocation.

Currently, central SOEs are managed directly by the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, while regional SOEs are controlled by local SASACs.

Direct management by government could easily lead to corruption an slow efficiency. In order to avert excessive government intervention, China has started to set up state capital investment and operation companies in recent years.

Several provinces and cities have also followed suit in the last couple of years. It has been reported that the blueprint for a pilot program for central SOEs will be unveiled this year.

Under the plan, central SOEs will be divided into three categories, including 50 strong industrial firms, 20-plus investment companies and two to three operation companies.

There are 101 central SOEs at present, which means their number will be slashed to around 80 through mergers and acquisitions.

The central SOE reform is focused on merging companies in the same industry and reducing competition, such as the merger of China’s two rolling stock manufacturers, CNR and CSR. Also, the potential merger between Shenhuan and Guodian is aimed at cutting costs through horizontal consolidation. We might see more such deals in the defense, airline and shipping sectors.

The reform of regional SOEs has attracted a lot of attention. Regional SOEs own a number of “zombie companies”, and this has continued to erode their profitability. Authorities are considering a plan to let these “zombie companies” go bankrupt.

Guangdong has moved ahead of other provinces in SOE reform. The local SASAC is said to be planning to cut the number of provincial SOEs from 36 at present. Local authorities announced in May that the state’s 100 percent stake in Guangzhou Guangri Group will be transferred to Guangzhou Electric Equipment Group for free.

This article appeared in the Hong Kong Economic Journal on Aug. 4

Translation by Julie Zhu

[Chinese version 中文版]

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