China’s state-owned enterprises
A whimper, not a bang
China’s plan to reform its troubled state firms fails to impress
Sep 19th 2015 | SHANGHAI |
IF EVER there was a moment for China to pull a rabbit out of the hat, this is it. The Chinese government has lost a great deal of credibility in the eyes of the world over the past few months thanks to its bungled devaluation of the yuan and clumsy attempts to prop up its plunging stockmarkets. Investors are worried that a weakening Chinese economy and debt-laden state firms may push the world back into recession. This week China National Erzhong Group, a machinery firm, said it might miss an interest payment on $150m of debt.
So when rumours surfaced recently that China’s State Council, the ruling body, and the Communist Party’s Central Committee had decided to go ahead with a long-awaited reform of state-owned enterprises (SOEs), many were hopeful. After all, these bloated behemoths represent much of what is wrong with the Chinese economy. As the charts show, their performance has long been deteriorating. Leverage has soared. Returns at state firms do not even cover the cost of capital.
Alas, the dream of bold market reform has been crushed. The scheme unveiled by officials on September 13th will do little to fix what ails the SOEs. The very way in which the plan was unveiled explains why it may prove unworkable: officials from five competing agencies gave speeches at its launch.
Optimists had hoped that the reforms would move China towards the successful approach taken by Singapore to managing its SOEs. Temasek, the agency that holds the state’s stakes in such firms, focuses on maximising long-term returns rather than meddling in operational details. The new plan does call for the creation of new state asset-management companies, which sounds Temasek-like. China’s ministry of finance, which is keen to raise the dividends paid to the exchequer by SOEs, is pushing for this market-minded approach.
Unfortunately, resistance from the State-owned Assets Supervision and Administration Commission (SASAC), which currently micromanages the biggest Chinese SOEs, has hobbled that effort. A radical embrace of the Temasek model would put SASAC out of business. Rather than remain hands-off, it wants the new asset-management firms to get their hands dirty by forcing consolidation of the biggest SOEs into gargantuan national champions. And it looks likely that the agency will continue supervising many of the mega-SOEs created by such mergers.
The new plan also calls for some positive-sounding steps toward “mixed ownership.” China’s leaders have ruled out wholesale privatisation, but sales of minority stakes and the listing of shares seem to be on the cards. Such moves could inject a dose of market discipline, as outside investors push for greater transparency and better corporate governance at SOEs.
However, while the reform plan advocates “mixed ownership”, it also vows to “prevent the loss of state assets”. This suggests that a chunk of the minority stakes in SOEs will be sold to other state firms, rather than just to private investors. Lu Wenjie of UBS, a bank, observes that the conservative approach to privatisation means “poorly-run SOEs may have little chance of turning profitable quickly.” The plan also says “leadership by the party” will be strengthened at state enterprises, making a mockery of the idea that outside investors will have an influential voice.
Andrew Batson, a keen observer of the SOE scene at Gavekal Dragonomics, a consulting firm, sums up the plan thus: “an ungainly mishmash of bureaucratic compromises that sets no clear goals and is riven by internal contradictions.” China’s best chance to rein in the excesses of state capitalism is yielding a whimper, not a bang.
From the print edition: Business
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