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A Transcript Of Reform
State-owned enterprises are being vitalized by recent reform measures
By Zhang Shasha  ·  2020-02-10  ·   Source: NO.6-7 FEBRUARY 13, 2020
Workers of FAW Co. Ltd., a central SOE, inspect vehicles at an assembly factory in Changchun, capital city of Jilin Province in northeast China, on April 9, 2019 (XINHUA)

Every January, Chinese central state-owned enterprises (SOEs) hold dozens of work conferences to map out plans for the new year. Employee stock ownership, mixed-ownership reform, reshuffling, innovation and reform are the buzzwords at this year's meetings.

ChemChina and the Sinochem Group, two central SOEs, announced the merger of their agricultural assets on January 5. The move is expected to not only integrate the two SOEs' industrial chain, but also change the landscape of China's agricultural and chemical industry.

China Electric Power Research Institute (CEPRI), a scientific enterprise under the state-owned electric utility company State Grid, started a dividend policy in 2017, a year after the government issued a document to encourage corporate dividends in scientific research-related areas.

"The incentive stabilized the researchers as the retention rate of core talent has increased to 98 percent since 2018," Wang Jiye, Vice President of CEPRI, said. "The earnings are correlated to scientific payoffs, which is conducive to generating new technologies."

Employee stock ownership has been initiated in mixed-ownership enterprises, with government capital holding the majority shares and employees purchasing equity and pledging assets, tying up their personal benefits with corporate development. Thus, the SOE salary system has been stably optimized since income is now associated with productivity and economic benefits.

These measures are medium- and long-term incentives that SOEs adopted to stimulate endogenous power as part of overall SOE reform. In recent years, SOE reform has made consistent progress. In 2019, the net margin of central SOEs was 1.3 trillion yuan ($185.2 billion), up 10.8 percent year on year.

"Reform is of critical importance to enhance the vitality of micro entities and strengthen SOEs," Hao Peng, Director of the State-Owned Assets Supervision and Administration Commission (SASAC) of the State Council, said at a conference held on January 14-15, adding that in recent years, SASAC has implemented reform to enhance the clout and efficiency of central SOEs.

Bearing fruits

Along with incentives, mixed-ownership reform has become a breakthrough for SOE reform. "Performance has improved tremendously since August 2017, when we first implemented mixed-ownership reform," Zhu Kebing, chief accountant of China Unicom, one of China's three state-owned telecommunications operators, said.

He added that reform has allowed the integration of different types of capital and has created a checks-and-balances ownership. From the perspective of the business sector, reform is also beneficial for resource coordination, promoting the company's business transformation. In the first three quarters of 2019, China Unicom's industrial Internet revenue saw a 40-percent growth.

According to SASAC, newly added central SOEs with mixed-ownership, including their branches, surpassed 1,000 in 2019, while more than 150 billion yuan ($21.4 billion) of social capital was introduced through the capital and property rights markets.

In the past five years, reform has led to over 70 percent of central SOE subsidiaries achieving profit growth.

Reorganization and integration also play a significant role in SOE reform. Li Mingxing, Director of SASAC's research center, said they are important measures to accelerate the structural adjustment of the state-owned economy and realize high-quality development. It is an inevitable requirement to strengthen and expand state-owned capital and cultivate world-class enterprises.

Forty-one central SOEs have reorganized and integrated their companies since the 18th National Congress of the Communist Party of China in 2012, adopting various means.

For example, shipbuilding giants China State Shipbuilding Corporation and China Shipbuilding Industry Corporation merged in November 2019, establishing the trend of large-scale central SOE mergers after two previous cases.

"The international financial crisis has led to a cold winter for the global shipping industry. And despite the recovery in the past two years, the situation is not optimistic. Mergers and reorganizations in shipbuilding companies have become an international trend," Li Jin, chief researcher at the China Enterprise Research Institute, told People's Daily.

He said the new company will benefit from complementary advantages and resource allocation. It has made China the owner of the world's largest-scale shipbuilding enterprise and given it confidence of becoming a world-class power.

In addition, central and local SOE mergers became a new trend last year. In May 2019, Anhui Provincial SASAC, the controller of Shanghai-listed Maanshan Iron and Steel Co. Ltd., or Magang, announced it would transfer 51 percent of its stake in Magang for free to China Baowu Steel Group, the world's second largest steel producer, so Magang can develop on a larger platform and avoid a steel glut.

"Central and local SOE mergers are based on company development needs and are conducive to promoting the adjustment of the industrial structure," Peng Huagang, Secretary General of SASAC, said.

Moreover, the regulatory approach of central SOEs has been optimized. In 2018, SASAC issued a list to clarify the supervision rights and responsibilities of investors. The list was reformulated in June 2019, stipulating which items can be managed directly by investors and which can be decided independently by enterprises.

Li Mingxing said the list will help to designate the responsibilities of investors and better mobilize and stimulate enterprises.

Future plan

In 2020, a three-year action plan on SOE reform is expected to be rolled out to optimize the use of state-owned assets and spur innovation. Under it mixed-ownership reform will be expanded and strategic restructuring strengthened in sectors such as coal and electricity, steel and non-ferrous metal, making 2020 a crucial year.

The Central Economic Work Conference held in December last year pointed out that it is important to improve the comprehensive effectiveness of state-owned capital and SOE reform, and optimize the environment for the development of private enterprises.

Zhou Lisha, an associate researcher with SASAC's research center, said deepening SOE reform will provide room for the development of private enterprises. With the advancement of mixed-ownership reform, major sectors will be gradually opened to social capital. Since reform has made inroads on multiple sectors including electricity, petroleum, transportation, civil aviation and telecommunications, there will be more possibilities for non-public sectors of the economy.

"In the following three years, reform will be further deepened, making this first year key," Li Jin told Xinhua Finance, adding that in 2020, reform will focus on the marketization of enterprises to invigorate micro entities and stimulate companies' potential for development.

"In 2020, we will emphasize the development of advanced manufacturing and the revitalization of the real economy, optimize the allocation of state-owned assets and improve the allocation efficiency and overall function of state-owned capital," Hao explained.

In addition to advancing mixed-ownership reform and mutual beneficial cooperation, Li Jin stressed it is essential to accelerate the formation of a state-owned asset supervision system focused on capital management to comprehensively enhance the competitiveness, innovation, influence and anti-risk ability of the state-owned economy.

He added that in the future, more state-owned capital will be invested in important industries, key sectors and emerging sectors of strategic importance, and there will be even more moves toward mergers and reorganizations.

Copyedited by Rebeca Toledo

Comments to zhangshsh@bjreview.com 

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