Forget privatisation, Xi has other big plans for bloated state firms
More private investment is designed to improve their efficiency, but critics say the measures will prop up the huge, bloated and protected firms, stifling competition
China’s government is speeding up a massive ownership change among its largest state-owned enterprises designed to make them richer, bigger and stronger, a process that may reshape the future landscape of the Chinese economy by cultivating a group of influential “national champions”.
The government is encouraging state financing institutions and the country’s private technology giants to invest in weak state enterprises grappling with debt and inefficiency under its “mixed ownership reform”.
The state parent of China Unicom, the weakest of the country’s three telecom operators in profitability, sold a combined 35.2 per cent equity stake to more than a dozen investors as part of a 78 billion yuan (US$11.9 billion) deal. Among the new investors are Tencent Holdings, JD.com, Baidu and Alibaba Group, which owns the South China Morning Post.
China Railway Corp, with outstanding debt of more than US$700 billion, says it wants to undergo similar mixed ownership reform and it has sent “invitations” to a number of potential investors, including FAW Group, the country’s state-owned car maker. Private courier SF Express said it would “seriously study and proactively participate” in the railway firm reforms.
The Chinese government is also asking the big “dinosaur” state enterprises to swallow up the smaller ones. Poly Group, a defence and property conglomerate with US$95.7 billion in assets, took over the smaller Sinolight Corp and China National Arts & Crafts Group last month.
The country’s biggest coal miner Shenhua Group was also told to merge with power generator China Guodian to form the world’s biggest energy juggernaut sitting on US$270 billion worth of assets.
The deals are taking place in answer to President Xi Jinping’s call for China to have a a group of powerful and loyal state enterprises. Unlike the former Soviet Union in the 1990s when Moscow decided to fully privatise former state assets and the ongoing privatisation push in Brazil, Beijing’s latest shakeup of ownership of its state industrial enterprises is intended to be anything but a loosening of the Communist Party’s party’s grip on state assets.
However, it remains to be seen whether a league of state giants can serve Xi’s economic vision of letting market forces play a more “decisive” role in the firms, while retaining state control, according to analysts.
“There’s no ready model to copy from for China’s socialist market economy,” Renmin University finance professor Zhao Xijun said.
Zhao said China under Xi’s leadership was wary of the free market model of Western countries, dotted with financial crisis and economic downturns.
“China is developing along a unique road where no other country has embarked – letting the market allocate resources and meanwhile making the ‘visible hand’ of government control yield better results,” he said.
At the centre of China’s state capitalism model, which has served the country well over the past three decades, helping turn the mainland into the world’s second biggest economy, is an army of state-owned enterprises.
A province, city or even a rural county will have its own state-owned enterprises. China in theory had 133,631 entities registered as an “SOE” by the end of 2015, according to China’s National Bureau of Statistics.
The most important are the 98 industrial conglomerates under the direct control of the State-owned Assets Supervision and Administration Commission. After the commission was created in 2003, it took over 196 enterprises from various governmental and military institutions. The number was later halved after mergers took place.
China had planned to cut the number to 100 by 2010, but the target was only achieved seven years behind schedule after Xi’s efforts to make the enterprises bigger and stronger.
The target now is to eventually reduce the figure to 40 and each will be a giant.
State Grid, and the oil firms Sinopec Group and China National Petroleum, for example, are already the world’s second, third and fourth largest companies by revenue according to one Fortune 500 list.
The 98 enterprises account for about 40 per cent of China’s total industrial assets and enjoy a monopoly or limited competition in key sectors. However, many of them are not in good financial shape and have incurred huge amounts of debt, endangering China’s financial system and arguably the whole economy.
Liu He, the top economic aide to Xi and a deputy chairman at the economic planning agency the National Development and Reform Commission, urged in a meeting earlier this year for China to deliver a number of cases of mixed ownership reform and to accumulate “experiences that can be applied and copied”.
The reform at China Unicom is a typical case. The company’s ownership change plan technically violates a rule made by the China Securities Regulatory Commission in February this year, which states that a company’s private placements cannot exceed 20 per cent of total ownership.
China Unicom initially made announcements about its ownership scheme on August 16, but all corporate filings were withdrawn within five hours, creating confusion among investors. It republished the same filings on August 20 after it received a “special approval” from the securities watchdog.
The commission said in a statement on its website that it “deeply recognised and realised the significance of the trial scheme of China Unicom for state-owned enterprise reform” and decided to bend its rules to give the telecom firm deal approval.
The case highlights how China’s top leadership is involved in the reforms and is determined to shake up the state sector, according to Zhou Fangsheng, the vice-chairman of the China Enterprise Reform and Development Society.
“The special approval means the go-ahead was endorsed by the top leadership,” said Zhou, who previously worked as an official at the state assets commission.
However, Sheng Hong, a long time critic of China’s SOE reform, said in an interview with the South China Morning Post that mixed ownership was “window dressing” to soothe public discontent over the country’s bloated and inefficient state firms.
“It’s just wrong to make the SOEs bigger and stronger,” said Sheng, the director of the Unirule Institute of Economics, a Beijing-based independent think tank.
Sheng added that the minority stakes owned by private investors would have little use in corporate governance because the final decisions still lay with their Communist Party committees.
“There’s no use you getting one or two seats on the board of directors because all the major decisions must go through the communist party committee,” said Sheng.
Hu Xingdou, an economist at the Beijing Institute of Technology, said it was debatable whether a successful and stronger state sector would be good for China’s overall economy.
“The reform will not change the nature of opaque finance, excessive administrative intervention and officialdom governance which are prevalent” in state businesses, said Hu. “A bigger SOE sector will further deteriorate the economy’s structure, leaving smaller private companies as the biggest losers.”
Alfred Schipke, the senior resident representative of the International Monetary Fund in China, said the objectives given to state firms seemed confused.
China state firms “have so many objectives that it becomes difficult to evaluate if are you doing a good job or not – sometimes you are supposed to make profits, sometimes you are supposed to keep labour, or social functions,” he said.
Additional reporting by Wendy Wu