Adviser calls for SOEs to exit competitive markets

A senior member of the Chinese People's Political Consultative Congress has called for a dramatic reduction in the number of state-owned enterprises, the most high-profile call for reform since the country's leadership change last month.

Huang Mengfu, a vice-chairman of the nation's top advisory body, told a financial forum hosted by Caijing Magazine in Sanya, Hainan, yesterday that the vast majority of market-dominating SOEs should exit competitive markets to make way for private companies.

"SOEs should retreat from the areas where private companies are able and willing to play, while remaining in some 'key areas' concerned with national security and fields where private companies are unwilling to enter," said Huang, who also heads the All-China Federation of Industry and Commerce.

Huang did not say exactly how the SOEs numbers should be reduced. But his remarks represent the clearest call for reform of the powerful state-owned sector since Hu Jintao vowed last month to "unswervingly" stick to the system of dominant public ownership in his final report as leader of the party.

Beijing overhauled SOEs in 1990s by closing poor performers, merging smaller firms, cutting redundant staff, and introducing a modern stock-holding system.

The sector, with easy access to bank loans and government contracts, has since prospered, especially after the 2008 global financial crisis, when much of a four-trillion-yuan (HK$4.9 trillion) stimulus package went to fund construction projects.

However, a side-effect of the stimulus, as many economists have noted, has been overcapacity in many industries, including steel, cement and non-ferrous metal industries.

Huang said that SOEs dominance in competitive markets has put private companies at a disadvantage.

"The current development mode of SOEs is very problematic," he said. "If the change is not made right now, China will be forced to reform the SOE sector again in five to 10 years."

In addition, government representatives should not participate in the daily operation of SOEs, but only guide their strategic direction as a stakeholder, he added.

There was a flurry of discussion over the the roles of SOEs and private companies after Hu's report to the party congress was seen as sending mixed signals. SOE chiefs welcomed his remarks about public ownership while free-market advocates cheered his talk about equal treatment.

Grace Ng, senior China economist at JPMorgan Chase, said a move to reform SOEs would likely encounter resistance, which would slow its progress relative to the other reform goals announced, such as urbanisation and resource pricing.