China plans to overhaul sluggish state sector

China's SOEs had combined assets of over 100 trillion yuan as of July last year. (Right) A worker cycling through a Sinopec refinery in Beijing. The firm is China's largest SOE, with an income of 2.83 trillion yuan last year. An ICBC employee working
China's SOEs had combined assets of over 100 trillion yuan as of July last year.PHOTO: REUTERS
China's SOEs had combined assets of over 100 trillion yuan as of July last year. (Right) A worker cycling through a Sinopec refinery in Beijing. The firm is China's largest SOE, with an income of 2.83 trillion yuan last year. An ICBC employee working
A worker cycling through a Sinopec refinery in Beijing. The firm is China's largest SOE, with an income of 2.83 trillion yuan last year. PHOTO: BLOOMBERG
China's SOEs had combined assets of over 100 trillion yuan as of July last year. (Right) A worker cycling through a Sinopec refinery in Beijing. The firm is China's largest SOE, with an income of 2.83 trillion yuan last year. An ICBC employee working
An ICBC employee working at her desk in Shanghai. ICBC is the world's largest bank by assets and was the single most profitable Chinese company last year, recording 262.6 billion yuan in profit.PHOTO: REUTERS

But experts say CCP's unwillingness to relinquish control over state-owned firms could hamper reform efforts

China has unveiled plans for the biggest overhaul of its lumbering state sector in more than two decades but experts say the Communist Party's (CCP) desire to retain a firm grip on the sector despite pledging to make it more market-led sends a "mixed message" that could frustrate reform efforts.

Beijing on Sunday outlined plans to introduce mixed ownership into the sprawling state sector that dominates the US$10 trillion (S$14 trillion) Chinese economy by introducing private investment. The long- awaited plan also called for management changes to reduce losses and improve efficiency.

The guidelines, jointly issued by the CCP's Central Committee and the State Council, or Cabinet, are seen as one of the country's most urgent tasks as growth sputters in the world's No. 2 economy.

Reform of state-owned enterprises (SOEs), often criticised for their inefficiency as they enjoy subsidies and easy credit, could raise growth by at least 0.33 of a percentage point a year, according to researchers affiliated with the State Council.

But while the new reform plan, which reportedly took two years to draft, is said to be the most ambitious since former premier Zhu Rongji's overhaul in the 1990s led to tens of thousands of weak SOEs privatised or liquidated and millions of workers laid off, experts say many challenges remain. The document calls, for instance, for better corporate governance but yet emphasises the need to "strengthen the leadership of the Party over SOEs".

CONTRADICTORY GOALS

On the one hand, the CCP has reiterated that it wants to keep control over SOEs but on the other, it also maintains that it wants to diversify ownership and make them more market-led.

ECONOMIST CHEN LONG

  • CHINA INC

  • Some facts and figures on China's state-owned enterprises (SOEs)

    NUMBER OF STATE-OWNED ENTERPRISES

    • There are more than 155,000 SOEs across China in all sectors, from banking and hospitality to airline and oil refining.

    • Some 110 of the largest and nationally strategic ones, such as Bank of China and oil company Sinopec Group, fall under the purview of the central government. SOEs make up China's top 10 largest firms by revenue.

    COMBINED ASSETS

    • They totalled more than 100 trillion yuan (S$22 trillion) as of July last year, with central SOEs controlling about half of these assets.

    • About half of all SOE assets, however, is sitting in non-strategic sectors such as restaurant, retailing and low-end manufacturing.

    PROFITABILITY

    • At the end of 2011, SOEs had combined revenues of 39.25 trillion yuan, and profits of 2.6 trillion yuan, or 43 per cent of China's total industrial and business profit.

    • The profitability of state firms has been sliding. Since 2008, returns for private firms have surged to 11 per cent while those for SOEs have fallen and stagnated at around 5 per cent.

    GIANT FIRMS

    • Sinopec is China's largest SOE, with an income of 2.83 trillion yuan last year.

    • The Industrial and Commercial Bank of China (ICBC) is the world's largest bank by assets. Last year, it was the single most profitable Chinese company, recording 262.6 billion yuan in profit.

    • Telecommunications firm China Mobile is the world's biggest network by subscribers with about 820 million currently.

    • Other giants include firms in the finance and infrastructure sectors, such as China State Construction Engineering with a revenue of 800 billion yuan, automaker SAIC Motor with an income of 630 billion yuan, and the Agricultural Bank of China with 521 billion yuan.

    EMPLOYEES

    • SOEs employ more than 30 million workers.

Beijing-based economist Chen Long of consultancy Gavekal Dragonomics said these contradictory goals will throw up challenges in reform efforts. "On the one hand, the CCP has reiterated that it wants to keep control over SOEs but on the other, it also maintains that it wants to diversify ownership and make them more market-led," he noted.

This mixed message could see SOEs using their private equity arms to buy assets from one another instead, Dr Chen said, adding that this trend has already been observed among some state firms.

China has more than 155,000 SOEs, employing more than 30 million people. More than 100 large, nationally strategic firms, including ICBC, the world's biggest bank by assets, are controlled by Beijing.

At a press conference yesterday, the deputy head of the country's state-owned Assets Supervision and Administration Commission Zhang Xiwu pledged to restructure SOEs that are performing poorly and vowed to make the state sector "stronger, better and larger".

China will work to reorganise and merge SOEs in order to centralise state-owned capital in key industries, while restricting state investment in sectors not in line with national policies, he added.

"We will make more efforts in reforming... long-time loss-making enterprises and in disposing... non-performing assets," said Mr Zhang. Decisive progress should be achieved by 2020.

But with representatives from five government agencies, including the trade and labour ministries, as well as the top economic planner presenting their own documents at the briefing, the sheer complexity of the task was clear.

Some experts also say that while moving in the right direction, the latest reforms are limited and slow, with any real change likely to take years. The plan, for instance, stopped short of recommending full privatisation for SOEs.

Moreover, Beijing is a long way from cutting the apron strings. National Development and Reform Commission vice-chair Lian Weiliang said the state will continue to hold controlling stakes in firms whose operations involve sectors key to "national or economic security".

But UOB's China economist Suan Teck Kin said the pace of reform efforts is consistent with China's playbook of gradual change. Many SOEs have already embarked on the merger process and are attracting private capital, he noted.

A version of this article appeared in the print edition of The Straits Times on September 15, 2015, with the headline 'China plans to overhaul sluggish state sector'. Print Edition | Subscribe