Mixed messages from top officials hit SOE reform
Top policymakers are left to resolve conflicting priorities over the scheme
A year ago, then-President Jiang Zemin told a conference in Liaoning that China must promote the reform of the country's ailing state-owned enterprises. But his tone conveyed a more cautious message when he added that 'the labour of the workers must be respected'.
Such pronouncements have put policymakers in the awkward position of trying to resolve two conflicting priorities for SOE reform - improving management and efficiency while making sure there is enough cash to provide a safety net for unemployed workers.
As a result there have been mixed policy messages from the State Council and particularly from the State-owned Assets and Supervision Commission.
Since 1994, China has closed or bankrupted 3,080 firms, written off 200 billion yuan of non-performing loans and relocated 5.3 million former SOE workers. The asset fire-sale has reduced the number of SOEs to 41,900 last year from 77,600 in 1995 - a drop of 46 per cent in a little more than half a decade.
But given recent announcements, there is likely to be some confusion about how reform will proceed. For example, in September, after the Third Plenum of the 16th Party Congress, the asset commission ordered that all state-owned properties be listed on new equity asset exchanges to facilitate their sale. Shortly after, however, a state-asset fair was cancelled after drawing too much publicity.
In a speech in November, asset commission chairman Li Rongrong warned that more than 2,500 state-owned firms and mines were close to bankruptcy and needed to be closed, requiring payment of 240 billion yuan to 5.1 million workers.
Then, last month, the China Securities Regulatory Commission chimed in with a plan to allow the listing of previously non-tradable state shares in public companies on a case-by-case basis.
The fact share prices did not fall after the securities commission's announcement suggests the market did not take the plan seriously.
Zhou Hongli, economic counsellor in China's Singapore embassy, says there are three reasons why China is eager to privatise SOEs - to provide an 'effective' exit for state-owned shares; improve corporate governance; and 'enhance the international business capability' of domestic enterprises.
Goldman Sachs China economist Hong Liang sees two trends for SOE reform. Encouraged by the central government, provincial governments eager for income have rushed to privatise small and medium-sized SOEs under their control. As an example, Ms Liang notes that 90 per cent of provincial SOEs in Changsha, the capital of Hunan province, have been sold.
This is a claim backed up by asset commission figures, which indicate 80 per cent of small SOEs at county level and 60 per cent of municipal SOEs have been privatised.
'While they might be losing money, SOEs remain a primary vehicle through which local governments can get funding from the central government via preferential policies, loans and direct fiscal injection,' said Victor Shi, a political scientist at Northwestern University in Chicago.
Meanwhile, Ms Liang notes that privatisation of big SOEs is complicated by conflicting messages. The government, for example, had said it welcomed foreign investment in large SOEs but issued an edict requiring all sales to be priced above net asset value, which would probably dissuade some buyers.
The one area where most in the government agree some form of privatisation is needed is the banking sector, and the Big Four state banks in particular. The timing of the reform may be fluid but cleaning up the Big Four's bad loans and listing them is clearly a priority.
Given the differing views among top policy-makers, the success of SOE reform may well depend on the asset commission.
When it was formed in 2002, it acquired the crucial power to hire and fire SOE managers. But Mr Li's power in this regard is constrained because he is not the commission's party secretary - a position held by vice-minister Li Yizhong.
The state-owned assets commission is also constrained by a split in its governing board. Barry Naughton, a professor at the University of California, notes that half of the eight commissioners overseeing the body come from the State Council system and half from the Central Committee.
'That means that the composition of [the commission] must represent a balancing act between the Chinese Communist Party and State Council interests,' Mr Naughton said.