STATE FIRMS ON ‘UNIQUE PATH TO REFORM’
Firms are shifting gears by putting focus on innovation, research and supply-chain security to stay competitive and boost earnings, analyst says
China’s state-owned enterprises (SOEs) are “shifting gears” to raise their game and boost earnings by adding innovation, research and supply-chain security to their focus and performance yardsticks, an industry analyst said.
The new approach, spelled out by Beijing earlier this year, represented a “distinct departure” from past efforts to increase the operational efficiency of these central government-controlled entities, said Zhou Lisha, research director of the Institute for State-Owned Enterprises at Tsinghua University.
“Today, in addition to staying profitable and competitive among their peers, SOEs need to develop an edge in innovative and strategically important areas such as renewable energy and artificial intelligence,” she said at a conference organised by China Securities in Beijing yesterday.
They also needed to “make sure their supply chains are safe and controllable”, she added.
China’s SOEs reported a 42 per cent drop in net profit to 1.1 trillion yuan (HK$1.19 trillion) last year, according to the Stateowned Assets Supervision and Administration Commission. Its economy grew by 5.2 per cent, compared with 3 per cent in 2022, aided by the end of its zero-Covid policy.
In a directive issued in late January, the commission emphasised income and value-add from “strategic innovative sectors” as the key performance evaluation metrics for listed SOEs this year.
Besides innovation and R&D, it said it would include “market value management” as part of its overall assessment of listed SOEs and their executives.
“The market has historically undervalued SOEs because a lot of these firms were focused on public welfare-related and positive social impact agendas,” Zhou said. “As you can see now, SOEs are shifting gears.”
Morgan Stanley, in a report late last month, said measures to revamp the SOE appraisal system could “structurally improve” the investment potential of China’s stock market in the long term.
As SOEs improved their profitability and dividend ratios, the MSCI China Index was expected to see a 50-basis-point increase in return on equity and a 200basis-point gain in dividend yield, the report said.
“With China’s population ageing faster than expected, improving the return on assets for SOEs will help relieve pressure on social security and maintain social stability, all of which can support the investability of the Chinese market,” Laura Wang, chief China equity strategist at Morgan Stanley, said in the report.
The latest SOE reform was a contrast to changes over the past decade and unlike the more recent tweaks between 2020 and 2022, Zhou added.
“Raised on Western economic theories, we tend to think that only when companies are privatised, and only when the market is free, can we optimise the allocation of resources,” she said. “But China’s SOEs are embarking on a path for reform that is uniquely its own and unlike anything that we have seen in the West.”