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Priorities in SOE reform after the 19th CPC Congress

Author: Source: Date:2017-09-23
Upon the release of the Decision on Major Issues Concerning Comprehensively Deepening Reform in 2013, related documents and rounds of pilot programs were spread out from SASAC and local governments. Nonetheless, there has not been a nationwide consensus regarding the outcome of the SOE reform in the past five years. On one hand, the SASAC staffs claim that they have worked rigorously to promote SOE reform; On the other hand, many critics argue that the SOE reform only exists within the government while most enterprises decide to wait and see. Therefore, it is now necessary to look back at the path of SOE reform so far, clarify the goals of the reform, and identify the challenges to solve.

The Decision in 2013 addressed two main problems in SOEs:
-SOEs boosted their presences in a variety of competitive sectors, squeezing the market share for private firms.
-The overwhelming control of SASAC in SOEs restricted the vitality and market competitiveness of SOEs.

The past five years have witnessed improvements in these two aspects of SOE reform. De-leverage in steel and coal industries for instance has improved the situation of SOEs clustering in smokestack industries; While the mixed-ownership reform such as what China Unicom performed recently has signaled meaningful changes diversifying the ownership in SOEs.

I believe that the 19th CPC Congress will continue to emphasize reform, furthering the supply-side structural reform in order to adjust the scale and presence of SOEs in Chinese economy, and ameliorate the management system in SASAC as well as in SOEs. I therefore suggest that we should prioritize the former as it is an integral part of the supply-side structural reform, and that it has already received wide support from the government. Besides, exit of Zombie companies and laggard SOEs in competitive industries are critical to China’s economy. In the wake of the adjustments in the scale and presence of SOEs in the economy, we can then turn to deepening reforms in remaining SOEs, modernizing the corporate structure and increasing competitiveness. In this order, SOE reform can be more effective.

Bankruptcy, exit, restructuring, introducing strategic investors, transferring of stakes, employee stock ownership and so on are measures to adjust the scale and shares of SOEs in China’s economy. The involved SOEs can be divided into four categories:
-Zombie companies in overcapacity industries such as coal, steel, building materials and raw materials industries should exit, in response to the supply-side structural reform. Now that the prices of coal and steel rise up again thanks to the exit of a number of companies in these industries, many SOEs are likely to hesitate, or even abandon the reform plan. It is thus important to keep on the good work of exit of these zombie companies. Otherwise, there would have to be another round of supply-side structural reform soon.
-SOEs that are not competitive in business, logistics, service, trade and manufacturing industries should adjust their priorities and exit the market.
-SOEs that are profitable but do not fit in the national development strategy should exit the market. These SOEs include those operate in the real estate market. Given the piled-up bubbles in the real estate market and the skyrocketing housing prices, SOEs should take the initiative in response to central government’s call to control the housing prices.
-SOEs involving in industries with high risks, such as the medium-small SOEs in financial industries that have a tradition of systematic risks, and SOEs in hi-tech industries that require large investments and bear high risks, should opt to exit the market.
Of course, the reform plans of SOEs are contingent on their own situation. The distribution and utilization of state assets should focus more on the provision of public goods and on industries associating with national strategy.

As for the remaining SOEs, we should carry on mixed-ownership reform to separate the government from capital and corporate. These SOEs should reform their management and operational institutions to fully transform into a modern corporate and to become competitive.

In order to implement the aforementioned adjustments, not only SASAC and SOEs but also the whole society should work together to create a supportive external environment. Many colleagues in SASAC and SOEs are constantly blamed for privatization and loss of state assets along the way of enforcing reform plans. Besides, as the exit of SOEs would inevitably incur employee lay-offs, many in the SASAC are concerned that officials in the judicial departments would punish them once former workers file petitions, regardless of the legitimacy of their claims. Similarly, such large-scale reform will definitely undermine the vested interests of many different parties, from within the SOEs to government officials, involved business entities; practitioners often face untruthful charges and false accusations.

Therefore, we should together create a more supportive and tolerant external environment for the practitioners to carry through the critical SOE reform.

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