Beijing Weighs Bigger Private Role in State Firms; Reforming State-Owned Enterprises Has Been Thorny Because of Their Size, Political Clout

Beijing Weighs Bigger Private Role in State Firms

Reforming State-Owned Enterprises Has Been Thorny Because of Their Size, Political Clout

Nov. 11, 2013 11:26 a.m. ET

BEIJING—China is considering letting private investors take larger stakes in state-controlled firms, according to one official, in what would be a modest move toward greater private-sector involvement in areas of the economy dominated by Beijing. “We welcome private capital to invest in the state-owned enterprises. And there are many ways to do that,” said an official from the State-owned Assets Supervision and Administration Commission, or Sasac, in response to queries following a report by the state-run China Daily newspaper on Monday that said Beijing will allow private investors to hold up to 15% of state firms.The person at Sasac—which oversees more than 100 of China’s largest state enterprises—said the size of stakes allowed hadn’t been decided yet. The person also didn’t name sectors that may be affected.

The comments come as top leaders of the Chinese Communist Party are meeting in Beijing to sketch out an economic road map for the world’s No. 2 economy. China’s state-owned enterprises are widely believed to be one topic leaders will consider at the gathering, known as the Third Plenum. Potential changes believed to be under discussion include lower barriers for private-sector players in industries dominated by state-owned firms, or raising the share of profits the companies direct back to the government.

In the months leading up to the party meeting, as Chinese leaders have discussed potential reforms and drafted documents for discussion, a number of possible policies have been leaked or floated as trial balloons. A government think tank, the Development Research Center, published a 200-page blueprint of liberal-leaning reforms with recommendations ranging from interest-rate liberalization to giving farmers the right to sell their land.

How to reform state enterprises has been a particularly thorny issue because their size and revenues give them enormous political clout, but as China’s growth slows some economists say it has become more important to address what they see as the protected businesses’ inefficiencies.

Sasac said last month that reform of state firms could include giving private investors greater access to market segments that have been dominated by the state.

What ends up winning endorsement by the party’s Central Committee won’t be clear until Tuesday when the nearly 400 members end their meeting and release a communiqué. That document, if past practice holds, is likely to contain broad policy directions, with the details to be filled in by senior officials in coming months.

Chinese state-owned companies dominate industries ranging from energy to banking to telecommunications. Economists say their dominance thwarts private-sector development and leads to inefficiency and poor service.

Currently, private investors are able to buy shares in major state-owned companies listed on a stock exchange, but that normally amounts to small holdings distributed among many investors. Larger stakes could potentially give private investors a seat at the table of some of China’s key industries as the companies look for ways to increase efficiencies or improve corporate governance. Such measures would also give state enterprises a way to tap private capital.

Still, analysts said Beijing is unlikely to give up significant control. “Even for listed state-owned companies that are more transparent in corporate governance, private investors don’t have a say in them,” said Lu Zhengwei, economist at Industrial Bank.

“The key is not how much private investment is allowed,” Mr. Lu said. “The key is to improve governance of these state companies.”

The proposal would also depend on details such as whether it would apply to state-owned enterprises that have already listed shares on public markets, he said.

Many economists predict only modest changes, due to the political connections of China’s state-owned enterprises. “We expect little clarity on areas where the political economy is an obstacle, such as leveling the playing field with SOEs,” said Louis Kuijs and Tiffany Qiu, economists with RBS, in a note last week.