How China's Singapore-like plan will 'boost growth' by shaking up state-run behemoths
Long-awaited blueprint to expected to ring greatest changes to sector in a decade
PUBLISHED : Saturday, 08 August, 2015, 7:04pm
UPDATED : Tuesday, 11 August, 2015, 6:15pm
Chinese Premier Li Keqiang (left) presides over a symposium attended by multiple ministries and key state-owned enterprises in Beijing in April this year. The Communist Party first outlined plans for the SOE overhaul two years ago. Photo: Xinhua
The State Council has finally approved an ambitious – and long-awaited – blueprint to overhaul China’s sclerotic state-owned enterprises in a Singapore-inspired quest for desperately needed new growth, sources close to the decision-making process said.
The shake-up is expected to be the biggest of its kind in more than a decade and once it’s done two new Temasek-style sets of companies will channel funds to SOEs and pressure them to turn a profit.
In return, SOEs will be able to make more of their own business decisions and their boards of directors will be able to hire and fire managers.
While party leadership in SOEs, sent by the State Council’s State-owned Assets Supervision and Administration Commission (Sasac) and the central organisation department, remains unchanged, Sasac will no longer directly intervene in the running of most SOEs.
The new system will aim to put greater distance between government and the day-to-day commercial operations of state firms, with the Sasac no longer directly intervening in the running of most SOEs.
The Communist Party first outlined plans for the overhaul at its agenda-setting annual plenum two years ago but progress was stalled by vested interests in the firms and various government departments.
Details of the blueprint are still scant but it is expected to change the way SOEs – which account for a quarter of the mainland’s economy – are supervised and financed to give them more flexibility to make their own operational decisions.
It will also elaborate on the previously released principles to push for mergers of some state firms to enhance competitive power in global market, cut perks for top executives, and give private capital more room to invest in SOE projects and offshoots.
It was hoped the changes would light a fire under the state sector to counter a slowdown in economic growth, analysts said, adding that policymakers were keep to push ahead despite the strong internal opposition.
A government source told the South China Morning Post that “ state-owned capital operating companies” would be set up to allocate state funds to monopolistic SOEs in mission-critical sectors, and manage investment, financing and construction with the state assets.
Some market-driven SOEs would be changed into state-owned capital investment firms to allocate state funds and mainly manage the SOEs' stock rights rather than run the businesses directly. Sasac could be left in charge of several vital companies but the final decision had yet to be made, the source said.
Under the reform guidelines released after the party's third plenum in late 2013, the state-owned capital investment companies could be formed through transforming one SOE or restructuring several SOEs, while the state-owned capital operating companies will be mostly established from scratch.
Sasac could be left in charge of several vital companies but the top leadership had still not made a final decision, the source said.
“Nevertheless, under the new system, the source of funding will be clearer than ever and the capital investment and operating companies will have to generate certain returns to preserve and increase the value of state assets.”
Li Jin, a leading expert studying SOE reform at Sasac's think tank, the China Enterprise Reform and Development Society, said the restructure would cut government intervention and give SOEs more scope to chart their own commercial course.
"It's an efficient way to separate political and business goals," Li said
One SOE executive said the new companies were modelled on Temasek, Singapore’s government-owned investment company. Under the new system, SOEs would be under the pressure to perform and be more attractive to private sector investment.
“It will introduce a significant change to state-asset management and give private money a chance,” the executive said. “The market and the SOEs’ performance will determine where the capital flows.”
The shake-up is expected to be the biggest of its kind in more than a decade and once it’s done two new Temasek-style sets of companies will channel funds to SOEs and pressure them to turn a profit.
In return, SOEs will be able to make more of their own business decisions and their boards of directors will be able to hire and fire managers.
While party leadership in SOEs, sent by the State Council’s State-owned Assets Supervision and Administration Commission (Sasac) and the central organisation department, remains unchanged, Sasac will no longer directly intervene in the running of most SOEs.
The new system will aim to put greater distance between government and the day-to-day commercial operations of state firms, with the Sasac no longer directly intervening in the running of most SOEs.
The Communist Party first outlined plans for the overhaul at its agenda-setting annual plenum two years ago but progress was stalled by vested interests in the firms and various government departments.
Details of the blueprint are still scant but it is expected to change the way SOEs – which account for a quarter of the mainland’s economy – are supervised and financed to give them more flexibility to make their own operational decisions.
It will also elaborate on the previously released principles to push for mergers of some state firms to enhance competitive power in global market, cut perks for top executives, and give private capital more room to invest in SOE projects and offshoots.
It was hoped the changes would light a fire under the state sector to counter a slowdown in economic growth, analysts said, adding that policymakers were keep to push ahead despite the strong internal opposition.
A government source told the South China Morning Post that “ state-owned capital operating companies” would be set up to allocate state funds to monopolistic SOEs in mission-critical sectors, and manage investment, financing and construction with the state assets.
Some market-driven SOEs would be changed into state-owned capital investment firms to allocate state funds and mainly manage the SOEs' stock rights rather than run the businesses directly. Sasac could be left in charge of several vital companies but the final decision had yet to be made, the source said.
Under the reform guidelines released after the party's third plenum in late 2013, the state-owned capital investment companies could be formed through transforming one SOE or restructuring several SOEs, while the state-owned capital operating companies will be mostly established from scratch.
Sasac could be left in charge of several vital companies but the top leadership had still not made a final decision, the source said.
“Nevertheless, under the new system, the source of funding will be clearer than ever and the capital investment and operating companies will have to generate certain returns to preserve and increase the value of state assets.”
Li Jin, a leading expert studying SOE reform at Sasac's think tank, the China Enterprise Reform and Development Society, said the restructure would cut government intervention and give SOEs more scope to chart their own commercial course.
"It's an efficient way to separate political and business goals," Li said
One SOE executive said the new companies were modelled on Temasek, Singapore’s government-owned investment company. Under the new system, SOEs would be under the pressure to perform and be more attractive to private sector investment.
“It will introduce a significant change to state-asset management and give private money a chance,” the executive said. “The market and the SOEs’ performance will determine where the capital flows.”
The concepts have already been given trial runs in more than a dozen provinces over the last six months and two central government SOEs – State Development and Investment Corp and food and agricultural commodities conglomerate Cofco, (China National Cereals, Oils and Foodstuffs Corp) – will be among the first to test the waters under the new regime, according to Xinhua.
Li said it was likely that SOEs would be grouped into various industries and each would have its own rules for privatisation.
“Once the overall blueprint is released, guidance on changes in specific areas will come out,” he said.
Hang Seng Bank senior economist Andy Yao Shaohua said developing mixed ownership was key to the future of state enterprises.
“Introducing private capital can rebalance the status quo because now the proportion of state-owned shares is still too high,” Yao said.
Nevertheless, the changes to the massive state sector – which encompasses enterprises and employees – will not be easy, if precedent is any guide.
The last time the party sought to reinvent state-owned enterprises on such a vast scale was in the late 1990s under the stewardship of then premier Zhu Rongji .
Between 1998 and 2002 Zhu took a huge gamble on social stability as about six million people lost their jobs during a restructuring drive that shut down thousands of state firms.
Li, from the China Enterprise Reform and Development Society, said the dust had still not settled over the proposed changes.
“There will be disputes everywhere since the plan will change the current distribution of power, money and resources," he said. "There are disputes between state departments, within SOE management, between government agencies, and between central and local state-owned enterprises.”
The blueprint is expected to be discussed by party leaders gathering at the seaside resort of Beidaihe, government sources said.
Li said it was likely that SOEs would be grouped into various industries and each would have its own rules for privatisation.
“Once the overall blueprint is released, guidance on changes in specific areas will come out,” he said.
Hang Seng Bank senior economist Andy Yao Shaohua said developing mixed ownership was key to the future of state enterprises.
“Introducing private capital can rebalance the status quo because now the proportion of state-owned shares is still too high,” Yao said.
Nevertheless, the changes to the massive state sector – which encompasses enterprises and employees – will not be easy, if precedent is any guide.
The last time the party sought to reinvent state-owned enterprises on such a vast scale was in the late 1990s under the stewardship of then premier Zhu Rongji .
Between 1998 and 2002 Zhu took a huge gamble on social stability as about six million people lost their jobs during a restructuring drive that shut down thousands of state firms.
Li, from the China Enterprise Reform and Development Society, said the dust had still not settled over the proposed changes.
“There will be disputes everywhere since the plan will change the current distribution of power, money and resources," he said. "There are disputes between state departments, within SOE management, between government agencies, and between central and local state-owned enterprises.”
The blueprint is expected to be discussed by party leaders gathering at the seaside resort of Beidaihe, government sources said.
This article appeared in the South China Morning Post print edition as Plan to shake up state-owned firms 'to boost growth'
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