OECD slams lack of solid SOE reforms
Beijing has not done enough to improve the management of its state-owned enterprises (SOEs), says a new report on mainland reforms published by the Paris-based Organisation for Economic Co-operation and Development (OECD).
However, the report says the prospects for change are better than a few years ago.
The 100-page report details progress to date and predicts that, in the medium term at least, SOEs' performance should improve and provide a 'modest impetus' to economic growth.
The report continued: 'Considerably more needs to be done . . . if the reform process is to be sustained and ultimately succeed.
'In many areas, reforms undertaken so far provide necessary structures and mechanisms for improving enterprise performances, but the conditions required for their effective functioning are often lacking.'
The report warns faltering or undue delay in reform efforts can only aggravate apparent tensions between the financial demands imposed and the scarcity of government revenues.
It is too early to tell, the report cautions, whether present reform efforts will prove successful. Not enough has been done to improve enterprise governance because the key conditions for better management are not yet in place.
The OECD wants the mainland to lift constraints on mergers and acquisitions, end government interference in SOE management, and reduce policy lending by state commercial banks.
'In retrospect, the gradual approach adopted until 1999 in dealing with bank non-performing loans allowed the loans to accumulate and delayed progress in reforming lending standards,' the report said.
The report's authors do not believe the mainland can keep prime-pumping economic growth because its public finances are too shaky.
Over-reliance on fiscal stimulus could jeopardise future resources needed to directly support reforms, the report argues.
The OECD recommends the mainland narrow its broad definition of what constitutes strategic 'core' sectors where SOEs should continue to dominate.
The report says the experience of the Organisation of Petroleum Exporting Countries demonstrates that except for natural-resource monopolies, SOEs often become chronic loss-makers absorbing excessive government attention and resources.
Although in theory the case for SOEs is stronger in developing countries, the report claims that practice has shown that 'the scope is narrower than was previously believed'. It forecasts a strong development of bond markets over the next 10 years as a way of reducing dependency on state-bank lending.
The OECD report is 'not all certain' the development of small banks and the entry of foreign banks will be sufficient to deal with the problems of the banking sector.
More radical measures, such as the division of one or more of the 'big four' banks along regional lines, should be considered, says the report.