Reform plans for Chinese state firms underwhelms
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Beijing's long-awaited guidelines for reforming state-owned enterprises (SOEs) were recently unveiled. China has more than 155,000 SOEs, employing tens of millions and widely regarded as plagued by inefficient management and aversion to innovation.
Hopes were high that the new reforms would address these shortcomings, as for several years now the Chinese government has been stressing the need for the private sector to play a greater role in the economy, while requiring state firms to contribute more to government revenue.
So when official news agency Xinhua reported early this month that Beijing would soon be announcing detailed reform plans, there was great anticipation, including speculation of game-changers such as the merging of many of the biggest state firms to create “national champions”.
Unfortunately, what was eventually announced was somewhat underwhelming.
According to Xinhua, China “will modernise SOEs, enhance state assets management, promote mixed ownership and prevent the erosion of state assets”.
The government will also encourage SOEs to go public, although there is no timetable for this. SOEs will also be allowed to experiment with selling shares to their employees.
While the latest guidelines are moving in the right direction, they could have gone further. Sceptics are not surprised by the slow pace of reform, saying Beijing’s approach reflects contradictions inherent in the Communist Party’s 2013 reform blueprint, which called for giving markets a “decisive role” in resource allocation while still preserving a “dominant role” for the state sector.
One of the unanswered questions is whether incremental changes, including sales of minority stakes, stock-market listings and changes to how directors and executives are appointed will be sufficient to fundamentally reshape the state sector. Another important aspect, which remains unclear, is whether performance of SOEs will in the future be based on clear and measurable financial as well as non-financial targets, and how underperforming SOEs will be handled.
Freeing-up the state sector would be very positive. Not only would it unlock massive economic value for the Chinese economy, but it would help to boost China’s image abroad. This has been dented recently following Beijing’s ad-hoc attempts in recent months to combat stock market volatility and its obvious frustration at not being able to do so – which may have been behind the timing of the guidelines’ release.
We await further updates with great interest. While the details to date have been underwhelming, real progress in this area would greatly bolster confidence in China’s commitment to market-led reform and help it to recover from recent rocky times.
