SOE’s to move toward the free market (but not too fast)

The Main Point

China announced details relative to planned reform of state-owned enterprises. The new steps are encouraging but not necessarily decisive.

Key Events

China issued details on plans to reform state-owned enterprises (SOEs):

 

  • “Mixed ownership”: Private investors will be encouraged to buy stakes in state firms (minority ownership). New policy includes measures to curb corruption during reforms.

 

  • New Comp Plan: The plan calls for a flexible and market-based compensation system at state firms by linking pay with company performance.

 

  • Maybe mergers: Plans to “clean up and integrate some state firms,” which probably means consolidation of some SOE’s.

 

  • Avoiding full-scale privatization: Government aims to “cultivate a large number of state-owned backbone enterprises with innovation capability and international competitiveness”.

 

  • Relatively fast roll out: Government said it expects decisive results by 2020

 

NOTE: China’s state enterprises are dominated by 111 central government-owned conglomerates, which account for about 60 percent of SOE revenue and are overseen by the State-owned Assets Supervision and Administration Commission (SASAC). Another 25K state-owned enterprises are owned by local governments.

Commentary

Good steps but not enough.

 

All of the proposed changes will help. But the two reforms that will have the most impact are as follows. First, make SOE’s compete by allowing foreign and Chinese private enterprises to enter their markets. Secondly, limit SOE access to loans from SOE banks. The first forces SOE’s to compete. The second makes SOE’s financially accountable. Without these changes the others will have less impact and will not fundamentally change SOE performance.

Sources for this Story:  

China issues state-firm reform plans, expects results by 2020

http://www.reuters.com/article/2015/09/13/china-economy-reforms-statefirms-idUSL4N11J07X20150913