China’s State Council published its latest opinion on SOE reform over the weekend. It can be summed up as “We still want to do what we said we were going to do before but haven’t yet done”.
It’s not that nothing has been done in the last few years – quite a lot has. In particular, initiatives to have SOEs sell off non-core assets have made progress, and mergers of the national level SOEs into fewer larger entities is also ongoing. It just has not been as radical, and certainly not as market driven, as the soundbites from 2 years ago implied. And so this September 2015 paper reiterates much that had been put forward earlier.
What is new is perhaps a heightened level of concern at the decline in performance of SOEs. There is also a much higher prioritization for SOEs to go international, almost independent of what sector they are in. This creates a real headache for SOE leaders, who fear being criticized if they don’t invest internationally and who also fear being criticized if they go international and are not successful.
I expect the way that this circle may be squared is that SOEs will look to buy well-performing businesses internationally in fairly stable mature markets and let them operate pretty independently. We will see.
Highlights from the State Council’s paper include (my comments in italics):
SOEs will be divided into two categories: for-profit entities and those dedicated to public welfare. The former will be market-based, should focus on commercial operations and should grow in ways which boost the overall economy. The latter should focus on improving people’s quality of life through the provision of public goods and services.
This was clearly laid out in earlier policy papers and is a separation that can really help by focusing the first (and largest by number of SOEs) category much more strictly on market performance.
The government will consolidate more SOEs (mainly by M&A) to achieve better resource allocation.
At the national level this is well underway with the 120 SOEs currently reporting to the State-owned Assets Supervision and Administration Commission (SASAC) potentially being merged down to 40. This consolidation builds on the belief that competition between SOEs in the same sector often wastes national resources.
Supervision of state-owned assets should be improved both from inside and outside SOEs to prevent abuse of power and the erosion of state-owned assets. A mechanism for accountability will be established to track violations, including corruption and embezzlement.
This reinforces the message that the anti-corruption campaign will be ongoing.
Ownership reform is seen to be the best means of improving the efficiency of SOEs. SOEs will be encouraged to bring in multiple types of investors and the government will encourage them to go public, but without a specific timetable. Private firms will be encouraged to buy equity stakes and convertible bonds from SOEs and to conduct share swaps with them. SOEs will also be allowed to sell shares to their employees.
It will be a bold entrepreneur who believes they can influence the operation of a major SOE by taking a minority stake in them. Creating some early visible success cases is going to be incredibly important for this to gain any momentum.
Strengthen boards of directors to prevent unconstrained actions by top executives. SOE boards of directors will have greater decision-making powers, executives will be more tightly supervised, and intervention by government agencies will be forbidden.
A number of SOEs are actively looking for new, well qualified directors, which is good news. However the Party will retain ultimate decision rights in key areas, which may hold back some qualified candidates from accepting roles where they might be able to make an important difference.
Market-based salaries will return to SOEs. Salaries of SOE employees will be in line with market levels and decided by company performance.
Certainly to attract talent, SOEs need to be able to pay market rates and in the last few years they have suffered from not being able to do so. However this has been tried in the past and has not been sustained. When SOE executives are seen to be making a lot of money, paid for by state assets, political reaction has been very negative
When following this going forward, focus on the actual actions taken – how many new qualified directors have joined SOEs, how many private entrepreneurs have taken stakes in SOEs, how close to market have salaries moved at all levels in the SOE – not on restatements of intent.