Efficient Temasek-like body still out of reach for mainland China SOEs

PUBLISHED : Tuesday, 01 April, 2014, 1:21am
UPDATED : Tuesday, 01 April, 2014, 3:10am

Reforming state owned enterprises (SOEs) is a cornerstone of President Xi Jinping's plan to overhaul China's economic engine to cut the waste and inefficiency that has fuelled pollution and inflated a shadow banking bubble.

But transforming the agency that oversees the very biggest SOEs, the State-owned Assets Supervisory and Administrative Commission (Sasac), is arguably the toughest task.

Officials have eyed Temasek, the Singapore government's flagship state investment company, as a role model for a decade. Experts say there is still a long way to go before Sasac looks anything like its Southeast Asian counterpart.

"You need to meet several criteria to form a Temasek-type company," said Wen Zongyu, director of the state-owned economy bureau at the Ministry of Finance's Institute of Fiscal Science.

Mixed ownership has done little to improve performance

"First, you need professionals who are good at making investments," he told the South China Morning Post. "Second, the government should decide on the way to manage it and how to select senior managers - whether they are selected through competition or through administrative appointment."

A landmark restructuring announced at the Chinese government's Citic Group could be a sign that change is about to happen.

The HK$283 billion deal that sees ownership of mainland assets being taken over by Hong Kong-listed subsidiary Citic Pacific is a piece of financial and corporate re-engineering that signals Beijing is ready to reinvent stodgy SOEs to make them more profit-centric.

Reform is also coming courtesy of a Ministry of Finance-backed initiative to set up state-capital operating companies.

Wen estimated that registered capital of between 10 billion (HK$12.6 billion) and 50 billion yuan would be needed for China to establish a state-capital operating company.

"The money shouldn't be a big problem for the government," he said. "But Beijing has to decide on a sustainable mechanism for funding such companies."

More private sector financing would be a way to increase the profit motive of SOEs.

Sinopec, the country's biggest oil refiner, said in February it would sell 30 per cent of its marketing business to private investors. Its shares posted their biggest rally since 2009 in response.

But simply giving private investors minority stakes in SOEs without overhauling the structure of governance might not boost efficiency.

The return on assets of all state-controlled firms has not diverged from that of wholly state-owned firms over the past decade, according to research by Julian Evans-Pritchard, China economist at London-based research institute Capital Economics. "Mixed ownership has done little to improve performance," he said.

The Beijing-based Unirule Institute of Economics, an independent research agency, said that without favourable policies and subsidies over the past decade, China's SOEs would have been in the red, reliant for profits on their monopolistic status in strategic sectors like oil and power production or easy access to cheap land and loans.

That tends to reinforce the notion that governance is crucial to efficiency.

And starting with Sasac could be the biggest driver of change.

It looks after China's biggest 113 SOEs, with one Sasac official estimating that there could be as many as 150,000 across the mainland. Those 113 firms generated operating revenue of 24.2 trillion yuan last year, equivalent to about 43 per cent of gross domestic product. Profits grew by just 3.8 per cent last year, compared with nationwide SOE profit growth of 5.9 per cent, according to the Ministry of Finance. Analysts are not impressed.

"Many SOEs still make profits, but the average return on assets fell in 2008 and has stagnated since," economists at Standard Chartered Bank said in a research note. They reckon SOE returns have been stuck in single digits for nearly two decades.

Temasek, meanwhile, has realised compound annual returns of 15 per cent since its 1974 incorporation, offering a rare example of a state-owned company being run efficiently as a commercial entity.

Nine of the 10 members of its board - the exception being chief executive Ho Ching - are non-executive, independent business leaders from the private sector.

In comparison, a majority of the 11 board members at China Investment Corp, the mainland's sovereign wealth fund, are current or former senior government officials from agencies including the Ministry of Finance, State Council, central bank and National Development and Reform Commission.

For Wen the criteria for success in terms of picking SOEs and their managers if the reform plans are to work are simple: "They need to have talent capable of making use of capital and be able to take responsibility for any losses."