Transparency, managerial accountability can help cure problem of SOEs’ overseas losses

A guideline that took effect on Tuesday governing outbound investment by State- owned enterprises ( SOEs) is likely the start, not the end, of a new campaign to clamp down on financial risks after a wave of failed projects and deals led to a surge of debts among China’s SOEs.

Low transparency in the operation of overseas projects and weak accountability of executives have led to many lossmaking deals among SOEs. Following regulations announced in recent years to enhance the supervision of overseas proj- ects, which could increase transparency and uncover potential financial risks via thorough investigation, Tuesday’s guideline told SOEs to give specific executives responsibility for problems. One focus of the next stage of China’s campaign to strengthen financial management of overseas investment will be recouping earlier losses of SOEs, an effort that can be organized through the following points.

First, if there is a corruption scandal involving a lossmaking deal, the Stateowned Assets Supervision and Administration Commission ( SASAC) must penalize those responsible and confiscate their ill- gotten gains.

Second, SOEs usually prefer to participate in mature projects in overseas markets, a strategy that became popular in recent years as the SASAC tightened controls on outbound investment.

However, many mature projects were actually initiated by small and medium- sized private enterprises that concealed problems and financial risks in order to unload them at a profit. Those private firms should be jointly liable for the future losses of the projects.

Third, China has been stepping up infrastructure investment in countries and regions along the route of the “Belt and Road” initiative. However, those projects may be affected by political unrest, so China needs to exert its political influence over the relevant local governments if overseas projects undertaken by SOEs are the targets of unfair treatment.

China’s efforts to penalize those responsible for SOEs’ losses and the amounts recov- ered should be made public. These disclosures will serve as a warning for other SOEs to be more careful about overseas investment. China’s outbound investment fever may cool as the government tightens financial management of SOEs’ investment abroad, but this may just be the price the nation must pay to curb financial risks.