Taking Care of China Inc.

Taking Care of China Inc.

ALEX FRANGOS

Nov. 18, 2013 9:07 a.m. ET

China’s corporate behemoths are here to stay, but some of their advantages are set to erode a bit. There may even be something in it for investors. President Xi Jinping‘s grand plan for reform—announced late last week in a document following an important Communist Party meeting—treads softly on China’s biggest state-owned companies, who many say are rife with overcapacity, corruption and distortions that disadvantage private-sector players. The aim seems to be not to loosen the grip of the state-owned enterprises to create a level playing field, but to make them work better to maintain the Communist Party’s hold on power.There were no broad-based calls to reduce the role of state-owned enterprises in the economy, as some hoped. Dreamers envisioned breaking up the biggest players and consolidating wasteful industries such as steel and autos. There have also been frequent calls to get these giants out of distracting noncore businesses such as real-estate development and hotels. No such measures made it into Mr. Xi’s proposals.

Not all is lost. The plan envisions state-owned companies boosting dividends so that 30% of after-tax profit—up from around 15%—goes to the government purse by 2020. Much of that income would be redistributed to households, rather than kept bottled up with bloated state companies.

The national social-security fund could gain cash and end up with larger equity stakes in companies. While still cozy, a government fund serving as a shareholder with a motivation to boost profit rather than conduct policy would be an improvement.

Ordinary shareholders would also benefit. It will be hard for state-owned enterprises to deliver on the 30% target without forcing their listed subsidiaries to make dividends available to all investors. Energy giant PetroChina and telecom provider China Mobile sport dividend yields above 4%. Payouts could rise if President Xi’s plan comes to fruition.

Broader reforms, if implemented, will attempt to make state-owned companies more efficient and profit-oriented. Market-determined interest rates will hurt the state-owned banks, but instill discipline in their lending practices and in the investment decisions of their state-owned borrowers. Elimination of price controls on commodities could clear out unneeded players and remove supply bottlenecks.

State-owned enterprises make up more than 80% of the value of Chinese-listed companies, so exposure to Beijing’s policies are part of the game. For the past four years, that hasn’t been a very profitable one, with the Shanghai composite down 33%.

Much will hang on whether the reform plans are followed through with actions. Done the right way, the market, rather than Beijing, may have an opportunity to pick some winners.