How will China's SOE reform fare with three-year action?

BEIJING -- As a three-year action plan kicks reform into high gear, changes are gathering steam to remold China's state-owned enterprises (SOEs) -- the country's economic backbone.

The 2020-2022 action plan, part of the decades-long efforts to transform SOEs into competitive, modern enterprises, is expected to leave a strong mark on the world's second-largest economy.

SOEs are active players on China's strategically important and most acclaimed industrial fronts. Those administered by state-owned asset watchdogs, making up only a part of all state firms, account for about a quarter of China's tax income.

As China seeks to develop a modernized economy amid challenges and uncertainties, reforms are the need of the hour. A world baffled by the COVID-19 pandemic, as well as protectionism and unilateralism, only puts this transition to the test.

"In the face of changes unseen in a century, further intensified by the pandemic, it is particularly important to achieve major progress in reform, so that the SOEs could increase their vitality and efficiency and drive broader development of various enterprises," said Liu Xingguo, a researcher with the China Enterprise Confederation.

Despite the impact of the COVID-19 outbreak, centrally-administered SOEs posted a 2.1-percent growth in net profits in 2020, official data showed.

China aims to achieve more than 70 percent of the goals in the three-year action plan by the end of this year and make substantial breakthroughs in key areas, according to Peng Huagang, spokesperson of the State-owned Assets Supervision and Administration Commission (SASAC).

Central authorities deem the 2020-2022 period a "crucial stage" for SOE reform. Making the state-owned economy more competitive, innovative and resistant to risks is among the major goals they have in mind.

BLURRED LINES

A key way to achieve the goals is mixed-ownership reform, allowing SOEs to introduce non-state capital, be it private or foreign. Strategic investors from outside are encouraged to participate in the management of SOEs, injecting not just funds but also ideas.

In some of the most prominent cases in recent years, private investors were brought into telecom giant China Unicom and business units of major SOEs in sectors including energy, aviation and railway.

In 2020, centrally-administered SOEs alone infused over 200 billion yuan (about 31 billion U.S. dollars) of non-state capital through mixed-ownership reform. Meanwhile, a national fund worth 200 billion yuan was set up in December last year to encourage more such moves.

Non-state firms are also drawing investment from state-owned ones. Central SOEs have become shareholders in more than 6,000 non-state companies since 2013, SASAC data showed.

"The two-way mixed-ownership reform has helped all types of enterprises complement each other and grow together," Peng told a press conference recently.

The blending of state and non-state enterprises will increase the resilience of the country's industrial chains, according to Li Jin, chief researcher with the China Enterprise Research Institute.

"The trend will become more prominent in the three-year period. More cooperation between central SOEs, local SOEs and private companies will be forged," he said.

MODERN ENTERPRISES

Bringing in non-state investors is deemed as a catalyst for better corporate governance.

Once publicly owned, China's SOEs have been engaged in corporate reform since the 1990s to turn themselves into limited liability companies or companies limited by shares. This allows the introduction of shareholders, paving the way for the much-advocated transformation into modern enterprises.

So far, such reform has been basically wrapped up, according to Peng.

Authorities are pushing the SOEs to overhaul their payroll and human resource management, set up boards of directors, hire professional managers and provide equity incentives.

To encourage more efficient growth, the SASAC will start to assess performances of SOEs in terms of overall labor productivity this year, along with other market-oriented measurements.

Sinopec Zhenhai Refining & Chemical Company is the epitome of the drastic corporate changes taking place in SOEs. An unknown local refiner in the 1970s, it has become a top-notch industry player globally.

The Zhejiang-based company has streamlined work procedures by 40 percent in recent years and adopted a highly market-oriented incentive system. With better corporate governance and technology, its per capita output surged to 15 million yuan in 2020 from 2 million yuan in 2000.

"Our company's production capacity has tripled since 2000, while our headcount has been reduced and efficiency has been boosted," said Mo Dingge, CEO of the company.

LESS IS MORE

The transition into modern enterprises is imperative as China continues to level the playing field, creating a fairer competition environment. Key industries, such as energy, railway, automobile, telecommunications and public utilities, have been gradually opened for private and foreign investment.

Li expects "significant progress" to be made in further expanding non-state firms' access to state-dominated areas in the three-year period.

Meanwhile, SOEs are downsizing their presence in some fields. They have been asked to exit areas irrelevant to their core business or where their investments lack efficiency and competitiveness.

Central SOEs have divested themselves of such businesses, retrieving 3.45 billion yuan since the end of 2019, SASAC data showed.

In sectors with overlapping investment or homogeneous competition, restructuring between SOEs is encouraged. So far, 41 central SOEs have been regrouped, reducing the total central SOEs to 97.

The capital shake-up is directing state-owned assets to concentrate on key industries related to national security, economic lifelines and public welfare, or those with strategic importance.

Emerging technology is one of them. Weng Jieming, deputy head of SASAC, said more investment from central SOEs will be guided towards 5G, industrial internet, artificial intelligence, data center and other new types of infrastructure.

China Baowu Steel Group Corporation Limited, the world's largest steel conglomerate, was the outcome of reorganizations between several state-owned steel giants. As a result of better allocation of resources, efficiency was improved with innovation fostered.

"We will spare no effort to build ourselves into a high-tech company," said Chen Derong, chairman of the company. "Steel is a traditional product, but we will be a high-tech company in terms of technology, means of production and services."

Cutting regulatory fetters is expected to help SOEs enhance their innovative prowess. Regulators are giving SOE executives more autonomy in making corporate decisions, including drafting annual investment schemes, arranging mixed-ownership reform of subsidiaries, and issuing short-term bonds.

The new regulation approach will effectively prevent excessive state intervention in corporate operations, Liu noted.

"Regulators are receding from the front stage to the backstage," he said. "The SOEs can decide what to do in accordance with market rules, which will make a big difference."