SOE reform, restructure looks set to pick up pace

China is expected to speed up reforms of State-owned enterprises in the coming year with SOE restructuring high on the agenda of local governments.

Economists and analysts are predicting a leaner and healthy SOE sector after a string of new “guidelines”.

“An array of new government guidelines and announcements, along with some high-profile pilot cases, suggest that SOE reform will likely accelerate in the coming year,” Wang Tao, an economist at UBS, said in a research note.

Analysts stressed that the emphasis on reforms by authorities at the recently concluded 19th National Congress of the Communist Party of China reinforced the notion that the country was determined to make SOEs leaner and healthier.

Overcapacity, poor corporate governance, and low labor productivity had dragged down profits since 2015.

Realizing the significance of SOEs to the country’s sustainable growth, China launched a series of reforms, including changing shareholding structure, spinning off noncore assets and calling for more innovation.

So far, two groups in industries ranging from electrical services to civil aviation are experimenting with a mixed-ownership scheme, which allows private or even foreign investment in particular companies.

Li Jin, deputy head of the China

Wang Tao,

Enterprise Reform and Development Society, said more local SOEs would likely be included in the third group of pilot companies.

This is expected to be revealed in the next few months.

Some local governments have already rolled out plans to speed up reform.

The authorities in Shenzhen, for example, have made plans to identify SOEs in competitive sectors in preparation for ownership diversification.

By 2019, mixed-ownership reform of commercial SOEs in the city will be basically completed.

The local government in eastern China’s Shandong province recently released guidelines to support the securitization of assets.

By 2020, it plans to bring at least three SOEs or their core businesses onto the capital market and raise the securitization rate of provinciallevel State-owned enterprises to more than 60 percent.

Previous efforts to revitalize the sector have paid off.

Latest data from the Ministry of Finance showed that combined SOE profits increased 24.9 percent yearon-year to 2.2 trillion yuan ($332 billion) in the first three quarters. That was higher than the expected 21.7 percent expansion seen in the first eight months.

Local SOEs outperformed central ones, with combined profits up 40.3 percent year-on-year.

“Judged from the perspective of cost cuts, spending discipline and higher returns on equity, and more importantly, how SOE behavior may be changing, one can point to notable progress,” Wang said.

She pointed out that the improvement in balance sheets in general was good for banks, as more than half of the credit to the corporate sector was to SOEs.

“Going forward, while large-scale privatization or closure of SOEs is unlikely, there will be more consolidation through mergers and acquisitions, disposal of non-core assets, mixed ownership reform, and increased employee incentives,” Wang said.

An array of new government guidelines ... suggest that SOE reform will likely accelerate in the coming year.” economist at UBS