Government must stop micromanaging for state enterprise reform to succeed

PUBLISHED : Sunday, 20 September, 2015, 4:58am
UPDATED : Sunday, 20 September, 2015, 4:58am

The mere prospect of genuine reform of China's bloated and sclerotic state-owned enterprise sector should be enough to cheer jittery markets amid concern over the health of the mainland's economy.

The authorities have tantalised the investment community on and off for 30-odd years with talk of transforming sector-dominant SOEs into modern enterprises with clear business and operational structures. The recent market turmoil, following a botched official markets rescue attempt and currency devaluation, seemed to present a good time for reform action.

Beijing seemingly had this in mind when detailing reform plans last Sunday, ahead of the reopening of markets after the weekend.

They saw it as positive for sentiment and played it up to boost the market. But investors remained underwhelmed.

The document did not contain all they expected. It had been watered down, reflecting undiminished resistance from SOEs themselves and vested interest groups.

The authorities need to release more details on how they are going to go about it.

That said, the guidelines issued by the Communist Party Central Committee and the State Council, do make the right noises.

In future, the government plans to switch the emphasis of control of SOEs from micromanagement to the concept of managing capital.

This would give more power to an appointed board of directors to make decisions, leaving executives to get on with the job of implementing them and less room for interference by officials. The guidelines make it clear that significant progress towards these goals is expected by 2020.

This raises the question of the future role of the State-owned Assets Supervision and Administration Commission, which micromanages right down to personnel appointments.

However, at the same time as ceding more power to directors and senior executives, officials want to strengthen party control, which means a party committee in every enterprise will continue to play an important role.

For state enterprises to modernise, the government must not relent in its resolve to eradicate micromanagement.

In successful examples of government-controlled enterprises, such as Singapore's Temasek, the government only controls the board through appointments, effectively using its investment as the instrument of control.

Sasac can be limited to this role, if not abolished. Without that the overall reform is not going to happen.