China Moves Slowly Toward State-Sector Overhaul

Dec 31, 2013

China Moves Slowly Toward State-Sector Overhaul

This post originally appeared on Real Time Economics.

China’s Communist Party wound up a key policy meeting last month, unveiling a raft of economic reforms and promising to give a “decisive role” to market forces. It said little about plans for the often inefficient state sector, and that led many analysts to conclude that overhauling state companies was not a priority. Powerful vested interests appeared to have  successfully defended their turf.But in the weeks since the Communist Party’s Third Plenum there have been some noises – if not quite a drumbeat – that suggest there might be movement towards reform of state companies.

China’s government holding company – the state-owned Assets Supervision and Administration Commission – earlier this month said it would push forward with the transformation of state-owned enterprises into joint stock companies and encourage private sector investment in some areas. SASAC, which holds controlling shares of 113 companies, says the government would retain 100%  ownership in sectors which are “vital to national security” or “the lifeblood of the economy.”

Authorities are planning to allow differing levels of private ownership in other industries, depending on their strategic importance. Both financial and strategic investors will be allowed to buy stakes, Huang Shuhe, SASAC’s vice chairman, told a news conference this month.

Mr. Huang said that China is still reviewing which of the central government companies will be open to private sector participation and he gave no timetable for putting the reforms in place.

While some of the state companies controlled by SASAC or other state agencies are money-spinners – like telecommunications, oil and banks — there are numerous areas where the state is inefficient and crowding out private competitors.

The SASAC stable of companies includes some that can hardly be described as the lifeblood of the economy. Among them: China Silk Corp., China National Arts and Crafts (Group) Corp, China National Salt Industry Corp and China International Travel Service (CITS).

Meanwhile, Shanghai has signaled that it is getting ready to reorganize its government-run companies – and that its plans are in line with directives from Beijing.

On Friday, China Information News, a newspaper supervised by the National Bureau of Statistics, ran a front-page story predicting a wave of “mixed ownership” companies in what is now the state sector. This report expanded on a theme the paper played up earlier in the week.

This all sounded reminiscent of the early days of the nation’s reform program in the 1980s, when private ownership was still regarded with suspicion. Entrepreneurs claimed they were collectively owned entities, often striking a deal with an existing collective, paying a fee in exchange for political protection in what was known as “wearing a red hat.”

Could state firms now be getting ready to bring in private capital to fend off more substantial ownership changes? While analysts are not quite ready to declare a stampede in this direction, they do see changes ahead.

“I think there has been a signal from the top leadership that there will be a new round of state-owned enterprise reform, but the exact content of that reform is not fully worked out yet,” said Andrew Batson, research director at GaveKal Dragonomics, a Beijing-based research firm. “So you will have some local experimentation and possibly some reorganization at the central level as they try figure out a new regime.”

The local level could be where reforms get interesting. According to some estimates, China still has more than 100,000 state-owned companies at the provincial and local levels, with many of these companies in services like transport, restaurants and hotels.

Zhou Yongliang, head of GFortune Management Consulting, which works with state firms, agrees that ambitious changes are at least on the drawing board.

Mr. Zhou maintains that there are other telltale signs of an effort to reduce the role of the state in the economy overall. A high-profile campaign against corruption is one of them, he says.

Senior executives in the powerful state oil sector – and a former head of SASAC – have come under investigation by anti-graft agencies. While this campaign is aimed at tackling corruption, it also may remove those who oppose overhauls in the powerful state sector.

“Sometimes economic measures alone are not enough to push reforms,” said Mr. Zhou.

Other analysts note that reforms such as interest rate liberalization – allowing the market to set rates- would push up financing costs for state companies. Such changes could make it harder for them to get cheap funds from the state-controlled banking system. This will ultimately create a somewhat more level playing field for the state and private sectors.

One of the more explicit policies that emerged from the ruling party’s Third Plenum calls for state-owned companies to pay higher dividends to the government. China’s leaders set a goal of returning 30% of SOE profits to public finances by 2020. Today, SOEs pay 5% to 15% of profits in dividends, and most of that is funneled back to the state sector itself.

So why did the Third Plenum document have so little to say about state sector reform? Perhaps that’s a reflection of the sensitivity of the subject, suggests Mr. Zhou.

Make no mistake – there is no chance of dismantling big state-controlled oil companies or banks. China’s leaders see a need to keep successful state firms — the national champions — to compete with foreign multinationals. SASAC is unlikely to disappear anytime soon.

“We don’t know which of the reforms will actually make it into policy,” said Mr. Zhou. “But the environment is changing.”