China’s state-owned firms under pressure from foreign investors to boost transparency
- Recent moves by some Chinese state-owned enterprises to boost transparency in supply chain management caused their stock prices to jump
- Chinese consumers are dissatisfied with services of finance and retail sector SOEs, research shows, putting them under pressure to reform
The increased participation of foreign investors in China’s domestic stock and bond markets is putting pressure on state-owned enterprises to increase their transparency and efficiency, but bringing them into line with global standards will take time, analysts said.
Chinese state-owned enterprises (SOEs) often serve political policy ends – such as ensuring financial stability and supporting the real economy – as much as commercial objectives. The government also maintains SOEs as a safeguard against unemployment or as a means of creating national champions that can compete with foreign multinationals abroad.
Ira Kalish, chief global economist at consultancy Deloitte, said China needs to accelerate market reforms to attract higher foreign investment, especially in financial services, to improve the allocation of funds in the economy and the competitiveness of SOEs.
Despite high corporate debt levels, defaults were just 0.4 per cent of outstanding bonds at the end of July last year because SOEs and other public entities enjoy implicit guarantees from local governments and other forms of preferential treatment.
“The problem with SOEs is that they never go under, because their budget constraints are never binding. But in a more competitive environment with foreign competition, I think political interference would be mitigated,” Kalish said.
This year, China passed a new foreign investment law aimed at addressing criticisms over market access and legal protections for foreign investors, though the law’s implementation will determine its success in creating a level playing field, analyst said.
Indeed, the share prices of a number of SOEs jumped between 25 per cent and 135 per cent this month because of expectations that these firms will employ technological means to increase the transparency of their supply chains to help control logistics costs.
These so-called tou ming gong chang, which translates as “transparent factories”, in sectors from electrical instruments to software, apparel and minerals are being implemented by firms including appliance maker Gree Electric, chemical firm Xinjiang Tianye, coke, coal and natural gas producer Shanxi Meijun Energy and health product provider Huaren Pharmaceutical.
There are some instances in which SOEs have managed to remain competitive, outside China. Analysts point to Singapore as an example of SOEs competing on a level playing field with private domestic and foreign companies.
Manu Bhaskaran, CEO of Centennial Asia Advisers noted that Singaporean government-linked company Temasek Holdings is able to operate its Singapore Airlines subsidiary worldwide on these terms.
“[Singaporean SOEs] are run not with a political strategy in mind but purely to make profits,” Bhaskaran noted. “The US is prepared to accept the role of large SOEs as an economic partner, so long as there is a level playing field and the companies are run on commercial terms.”
It remains to be seen whether President Xi Jinping intends for SOE reform to be deep enough for the companies to become truly competitive, but sophisticated Chinese consumers are increasingly demanding better products and services from domestic SOEs.
In a consumer survey conducted by market intelligence firm CMR China, 86 per cent of respondents reported a moderate or severe dislike of the services provided by the Bank of China, one of China’s four large state-owned banks. This mirrors other recent evidence that SOEs in the financial services and retail sectors are failing to meet consumers’ demands.
