On Sunday, China’s government unveiled a blueprint for reforming and modernizing the country’s state-owned enterprises. The shakeup is wide-ranging and aimed at boosting economic growth. Here’s what you need to know.
There are at least 155,000 state-owned enterprises (SOEs) in China, employing more than 36 million people and managing over $16 trillion in assets.
Virtually all countries have at least some SOEs. They can be run by the central government — think of the U.S. Post Office or Veteran’s Affairs — or local governments (such as a Department of Motor Vehicles, which in the U.S. is run state by state). Utilities, like water and gas, can also fall under these categories.
In 2013, there were 52,000 centrally-administered SOEs in China, and another 103,000 owned by local governments. They cover all sectors [paywall] of the economy, from oil to tap water to hotels to airlines, and are considered to be the country’s economic backbone. They range vastly in size, from local organizations all the way up to China Mobile, the world’s biggest network by subscribers.
China’s SOEs have been tasked with driving the country’s strategic sectors such as power, telecommunications, aviation, machinery, and electronics. But they’re often found to lack innovation and market competitiveness. Compared to their private sector counterparts, they’re consistently less profitable, with a spread of 14 percentage points between average private (25.6 percent) and SOE (11.6 percent) profitability in 2013.
As a result, deep reforms were viewed as a necessary move.
The guidelines call for China’s SOEs to modernize, reduce bloat, better manage assets, and form market-oriented operating systems. They include the following recommendations, which we organized into broad categories:
Ownership and assets:
- Move towards mixed-ownership by bringing in private investment from non-state businesses.
- Improve management of state assets.
- Establish a flexible, market-based salary system.
- Employees will be able to experiment with buying company shares.
Management and leadership:
- Boards of directors will have greater decision-making powers.
- Intervention by government agencies will be forbidden.
- Supervision will be intensified both from inside and outside to prevent abuse of power and of wasting funds.
- Systems for boards of directors to prevent unrestricted influence by top executives will be strengthened.
- The CPS’s leading role will be strengthened.
Structure and operations:
- The SOEs will be divided into two categories: for-profit or public welfare and services. The for-profits are to transition to becoming market-based and stick to commercial operations with the goal of boosting the economy.
- Modernize operations.
The government plans to achieve many of these reforms by 2020. “The initiative should be carried out steadily in accordance with the actual situation of the enterprises and the market,” Lu Yongzhen, deputy director of the research center of State-owned Assets Supervision and Administration Commission, said. “The process will only move ahead in those enterprises that go with the plan. Otherwise, this could have the opposite effect.”
Chen Xingdong, chief China strategist at BNP Paribas, told China Daily that a key issue in the SOE reform is to draw a line between corruption and mistakes in business decisions.
“SOE reform is the most important among all reforms in China. But its implementation would also need to allow for enough room for corporate executives to take action and to be creative,” Chen said.
Reporting includes wires from Xinhua, CCTV News, and China Daily.