SOEs in search of strat­egy for change amid re­form drive

State-owned en­ter­prises are los­ing com­pet­i­tive­ness and the sup­port fromin­vestors, but the way for­ward is still far from clear, re­ports Shi Jing in Shang­hai

China Daily (Canada) - - BUSINESS -

Even as the cen­tral govern­ment called for fur­ther re­form of China’s mas­sive State-owned en­ter­prises, a pol­icy that could un­der­mine their dom­i­nant mar­ket po­si­tions, in­vestors were pulling funds from their shares.

A sur­vey by Bloomberg News in late Fe­bru­ary found that oil pro­ducer PetroChina Co Ltd ranked only 14 on a list of the top 20 emerg­ing­mar­ket stocks in terms of mar­ket cap­i­tal­iza­tion, down from fourth place a year ear­lier. It was the only Chi­nese com­pany to make the top 20.

SOEs are also los­ing their mar­ket com­pet­i­tive­ness. Ac­cord­ing to re­search by the world’s largest brand con­sult­ing firm, In­ter­brand, re­leased in Novem­ber, China Mo­bile Ltd’s brand value slumped even though it man­aged to re­tain its top po­si­tion in the list of Best China Brands. How­ever, pri­vate-sec­tor In­ter­net gi­ant Ten­cent Hold­ings Ltd saw its brand value in­crease by 84 per­cent.

“China Mo­bile, of course, re­al­ized how tough the com­pe­ti­tion is and mod­i­fied its mar­ket strat­egy,” said Tang Yaqian, deputy strat­egy di­rec­tor of In­ter­brand China.

In many in­dus­tries, nim­ble pri­vate com­pa­nies are forc­ing SOEs to change. Ex­am­ples can be found in re­cent moves: Shang­hai-based Dazhong In­sur­ance Co Ltd ob­tained ap­proval from the China In­sur­ance Reg­u­la­tory Com­mis­sion for a change in its eq­uity own­er­ship. China Petroleum and Chemical Corp, known as Sinopec, an­nounced on Feb 19 that it will open its highly prof­itable oil re­tail busi­ness to pri­vate cap­i­tal par­tic­i­pa­tion.

Zhuhai Gree Group Corp, wholly owned by the Zhuhai State-owned As­sets Su­per­vi­sion and Ad­min­is­tra­tion Com­mis­sion in Guang­dong prov­ince, an­nounced a day later it would trans­fer its as­set stake in Gree Real Es­tate Co Ltd to a newly es­tab­lished com­pany, and sell an eq­uity stake of less than 49 per­cent via pub­lic ten­der to in­tro­duce strate­gic in­vestors.

“In our view, the cur­rent wave of SOE re­form started with qual­ity com­pa­nies and qual­ity as­sets. We think this is the right ap­proach and ex­pect it to be ex­panded. We think lo­cal gov­ern­ments, fac­ing ris­ing fi­nanc­ing costs, in­creased reg­u­la­tion of the shadow bank­ing busi­ness, pres­sures to roll over debt and the need to cut over­ca­pac­ity, will be ac­tive in seek­ing op­por­tu­ni­ties to re­struc­ture lo­cal Sta­te­owned en­ter­prises,” said Jian Chang, chief China econ­o­mist at Bar­clays Plc.

How­ever, this is far from enough. Ac­cord­ing to it­sMin­istry of Fi­nance, China has more than 100,000 SOEs at all lev­els, with com­bined as­sets of about $13 tril­lion. Re­form­ing that many en­ter­prises in a man­ner that sat­is­fies ev­ery­one “will be dif­fi­cult and will take some time, no­tably be­cause that part of the Chi­nese econ­omy in­creased quite sig­nif­i­cantly dur­ing the fi­nan­cial cri­sis,” ac­cord­ing to Pas­cal Lamy, for­mer di­rec­tor-gen­eral of the World Trade Or­ga­ni­za­tion.

China started its re­form of the SOEs in 1997 in prepa­ra­tion for join­ing the WTO. Based on Min­istry of Fi­nance fig­ures, the to­tal num­ber of SOEs fell from 262,000 in 1997 to 146,000 in 2003, when the Sta­te­owned As­sets Su­per­vi­sion and Ad­min­is­tra- tion Com­mis­sion was founded. The num­ber of SOE em­ploy­ees dropped from 70 mil­lion to 42 mil­lion over the same pe­riod.

How­ever, An­drewBat­son, di­rec­tor of China re­search at GaveKal Drago­nomics, an in­de­pen­dent eco­nomic and fi­nan­cial re­search firm, said China’s pol­icy for SOEs has in­creas­ingly di­verged from its path since 2003, and the en­vi­ron­ment has been fur­ther com­pli­cated since 2008 by a dra­matic loos­en­ing of mon­e­tary pol­icy and low­er­ing of lend­ing stan­dards, as well as the govern­ment’s mo­bi­liza­tion of many SOEs to en­gage in pub­lic-sec­tor stim­u­lus projects.

“SOE as­sets are not, in fact, be­ing con­cen­trated in the sec­tors the govern­ment wants. The re­turns on SOE as­sets have sharply de­te­ri­o­rated. As a re­sult, a sig­nif­i­cant part of the Chi­nese econ­omy is un­der­per­form­ing,” Bat­son said.

Con­se­quently, the prob­lems are in­creas­ingly ev­i­dent in China’s State sec­tor: fall­ing re­turns, ris­ing debt and a loss of strate­gic fo­cus, he added.

As noted by Bat­son, since 2003, the cen­tral govern­ment has be­come ex­tremely re­luc­tant to al­low any SOE— large or small, cen­tral or lo­cal — to shut down or change own­er­ship. In com­bi­na­tion with loose mon­e­tary pol­icy and po­lit­i­cal pres­sure on SOEs to sup­port short-term growth, this shift has wors­ened the in­cen­tives for the man­agers and su­per­vi­sors of State-owned firms.

“China’s govern­ment does have the abil­ity to im­prove the fi­nan­cial per­for­mance of its SOEs. An­dit can helpthemto ful­fill their orig­i­nal­man­date­whileal­so­boost­ingth­e­p­o­ten­tial for fu­ture growth across the en­tire Chi­nese econ­omy. The best so­lu­tion is to re­turn to the pol­icy ori­en­ta­tion of the 1997-2003 pe­riod, when the govern­ment en­cour­aged the exit of un­der­per­form­ing SOEs,” he said.

Bat­son also added that a so­lu­tion can be achieved by re­quir­ing a set of in­ter­re­lated changes, which in­clude a more flex­i­ble ap­proach to man­ag­ing the govern­ment’s SOE as­sets and a clearer strate­gic fo­cus for the SOE sec­tor over­all, with per­for­mance tar­gets that are cal­i­brated to var­i­ous goals that dif­fer­ent SOEs must meet.

Other as­pects of re­form could in­clude the cre­ation of a clear process for un­der­per­form­ing SOEs to close down or be trans­ferred to pri­vate own­er­ship or in other words, an “exit” mech­a­nism, and re­duced po­lit­i­cal in­ter­fer­ence in SOE in­vest­ment de­ci­sions, Bat­son said. Con­tact the writer at shi­jing@chi­

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