Private investors in China's state companies still face too many hurdles
Hu Shuli says Beijing must show it is sincere about market reform, to ease investor concerns over corporate governance and shareholder influence
The feasibility of allowing private enterprise to play a greater role in China's economy has been the topic of much debate of late.
One example that has drawn attention is state-owned oil giant Sinopec's plan to sell up to 30 per cent of its retail oil business in a multibillion-dollar restructuring deal. That news has sparked a lot of interest among private investors. One senior Sinopec official said: "As time evolves, all this will become history", showing that there is room for even greater private investment down the road.
However, the private-public ownership model has yet to gain momentum in China. Trial projects have not all been plain sailing. For example, the southern Sichuan intercity rail project failed to draw any private capital, even after trying to entice investors for six months. This embarrassed both the local government and the railway authorities and shows that many problems still need to be solved.
Following the third plenum's decision to allowing the market to play a "decisive" role in allocating resources, more attention has focused on the benefits of a mixed economy. Just as the decision makes clear, it should not only be seen as the basis for a sound economic system conducive to the expansion of state capital, while maintaining values and strengthening competitiveness - it can also lead to the development of various ownership systems.
All this should have led to the loosening of policies and implementation of reforms. But progress has been slow. Some experts have pointed out that this is because state enterprises will only seek private investment when they are in difficulty.
There are currently two main obstacles to moving towards an economic system of public and private enterprise. One is that state firms are normally controlled by particular shareholders, meaning private investors are still unable to gain an equal footing or influence in state firms, even after ploughing in large amounts of capital. The other barrier concerns corporate governance. Problems often emerge regarding the company's governance structure and accountability once private investors come on board.
In fact, these two problems can be boiled down to one: how private investment should be viewed. In other words, should we still consider it only as a tool for use by state firms, or something that can foster diverse forms of ownership?
Nowadays, many state firms are undertaking shareholding reforms, and many have become listed companies. However, since state shareholders have absolute control of these firms, there has been no marked improvement in their governance structure.
Take PetroChina, the country's biggest oil producer by output, as an example. Its parent company, China National Petroleum Corporation, has absolute control, holding more than 86 per cent of the shares. So it's impossible for smaller shareholders to make their voices heard when it comes to governance or operational issues.
Such problems lie at the heart of corruption involving officials at state-owned enterprises, as evidenced by the current probe into several senior management figures at PetroChina. All this prompts the public to ask: if even a listed state company cannot improve its governance structure, what about those that are not listed?
In an effort to solve the problem, some have suggested that the National Council for Social Security Fund and large insurers should be encouraged to invest in state enterprises, or that SOEs should transfer their ownership shares to the social security fund, which represents the interests of all people in China. However, the experience of the Beijing-Shanghai High Speed Rail Company, formed in 2007, suggests it may not be feasible. In 2011, the National Audit Office found many problems at the rail company, including not complying with tenders, misappropriation of funds and falsifying receipts. In 2012, institutional investors Ping An Asset Management Company and the social security fund demanded that their stakes be bought back by the majority stakeholder, China Railway Investment Company, as they had no say in company policies.
So, what now? The answer is to allow the market to decide how resources are allocated, thus ensuring that only the fittest survive. The State-owned Assets Supervision and Administration Commission has insisted on categorising industries into three types - basic, pillar and hi-tech - while deciding the amount of state firms' power within these industries. This old-fashioned mindset will only hinder economic development and transition. There can be no breakthrough until central state-owned enterprises, and not just their subsidiaries, welcome in private investment. It's clear that thorough reform is truly needed.
Some experts say successful examples are needed more than mere policy provisions. These will boost confidence and show that the government is sincere about its pledge to allow the market to play a bigger role in the economy. We look forward to seeing this happen.
This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caing.com