A long march ahead for China's lumbering state giants

China's state-owned enterprises are powerful but hugely inefficient. Beijing has made tentative steps towards reforming the bloated sector, but it won't be easy.

Chinese state-owned enterprises are known as the elder sons of the People’s Republic. They are afforded an exalted status in the country’s economy: they have access to cheaper state credit and reap the benefits of being a government-sanctioned monopoly in different strategic sectors.

Some of their powerful chief executives hold ministerial ranks and are members of the central committee of the Chinese Communist Party, the body that elects the politburo, which effectively rules the world’s most populous country. 

Their collective assets are worth about 84 trillion yuan or $15 trillion, or ten times the Australian GDP. State-owned enterprises account for 44 per cent of all industrial assets in China and employ about 40 million workers.

It is one of the biggest stumbling blocks for the country’s economic reform, which is anchored around the idea of using the market to reallocate resources. Beijing wants to reform this powerful and inefficient sector of the economy.

Last night, the State-owned Assets and Supervision Administration Commission unveiled its pilot program for reforming state-owned enterprises.

The party has selected six state-owned enterprises to try out three different models of reforming these lumbering state giants. The first model is to turn state-owned companies into capital management companies, which is similar to the Singaporean style of managing state assets.

Singapore has created large holding companies such as Temasek to control largely state-owned listed companies such as Singapore Power. This model offers operational autonomy to companies while the state ultimately retains control.

The State Development and Investment Corp and COFCO Corp, which has numerous Australian investment projects, has been chosen to implement the first model in the pilot program.

The second model is to experiment with a hybrid ownership structure, which essentially means inviting private and foreign capital to take equity stakes in state-owned companies. Or, to put it more simply: partial privatisation. Beijing has already started on this process.

Sinopec, one of the big three state-owned oil majors in China, has announced a far-reaching program to privatise 30 per cent of its best performing assets. The total value of assets on the auction block is about 100 billion yuan. The sale reportedly includes 30,000 petrol stations, pipelines, storage units and 20,000 convenience stores.

The chairman of Sinopec, Fu Chengyu, told Caixin that he wanted to bring in outside investors to invigorate the company. “We don’t need the money -- we need vitality and dynamism,” he said. He even promised 30 per cent of board seats for outside investors and to sell down the state’s share in Sinopec further when circumstances permit.

Ning Gao NIng, chairman of COFCO Corp (the largest agribusiness group in the country) is another vocal supporter of hybrid ownership structure firm. He said at Tsinghua University’s graduation ceremony back in April that previous efforts to reform state-owned enterprises had failed because there were no changes in ownership structure.

He attributed COFCO’s recent rapid developments to its experiment of introducing private sector investors to its subsidiaries including its real estate arm, which was 60 per cent owned by a private dairy company.

He said the hybrid ownership structure would make the company more market-oriented, international and that it would strengthen corporate governance as well as the incentive structure. A senior official of the Commission said at the press conference yesterday the new scheme would specifically focus on how to build a corporate structure that would protect private sector investors and create a professional manager system.

The third model is to delegate more power to the board of Chinese state-owned enterprises. Despite the introduction of the Western-board system to state companies, they are still controlled by the party.

Richard McGregor, the author of the acclaimed The Party: The Secret World of China’s Communist Rulers, said that despite the commercial appearance of state companies , “ backstage, however, the Party sat quietly out of sight, tugging on the reins when need to be, safe in the knowledge it retained all the levers needed to control the company”.

Under the new experiment, state-owned company’s board is allowed to appoint a deputy chief executive, chief financial officer and as well a company secretary. It would get a greater say in selecting the chief executive.

The newly empowered board is also given specific power to set its own corporate strategy to complement the objectives set by the party. The new scheme also allows the board to remunerate executives and managers according to their market value in order to attract and retain best talents.  

Reforming China’s powerful state-owned sector is not an easy feat. Beijing has started with six relatively smaller companies to try out three different models to make them more efficient and accountable. This is the beginning of the long march to reform the country’s lumbering state giants. 

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