China’s state-owned enterprise reform debate rumbles on as sale of Gree Electric controlling share nears
- Zhuhai government earlier this month said that it will sell a 15 per cent stake in Gree Group, the controlling shareholder of the Shanghai-listed Gree Electric
- The reform of SOEs has been regarded as a core element for China’s economic development, but private participation has been limited
Reform and the potential partial privatisation of China’s state-owned enterprises has been slow since the idea was first introduced in 2013, but debate is now raging about the outlook for broader changes, with the possibility that the world’s largest manufacturer of residential air conditioners could come under the control of the private sector.
The sale is regarded as a test case of Beijing’s attitude toward the roles of state and private corporate ownership after the announcement by the Zhuhai government earlier this month that it will sell a 15 per cent stake in Gree Group, the controlling shareholder of the Shanghai-listed Gree Electric.
Beijing has been trying to further reform state-owned enterprises (SOEs) since 2013 through its “mixed ownership reform” programme that seeks to have private investors buy stakes in state-run firms to improve their operating efficiency.
In general, the progress of the programme has been slow, and was all but stagnant until China Unicom sold a 35.2 per cent stake worth 78 billion yuan (US$11.6 billion) to 14 investors including Tencent, Baidu, and Alibaba in 2017. Alibaba is the owner of the South China Morning Post.
Over the past 40 years, the reform of SOEs has been regarded as a core element for China’s economic development, but there has not been extensive participation by the private sector in SOEs as the government has been cautious about the potential for social and political instability caused by aggressive reforms.
Zhou Fangsheng, a vice-chairman of the China Enterprise Reform and Development Society think tank, warmly welcomed the move by Gree Group as it is consistent with the country’s direction of “mixed ownership reform”.
“In China, large enterprises must have major shareholders, which means the actual controllers. We have not yet entered the stage of highly dispersed equity as in Western countries, which is to say, the best management system for China is that the actual controller and the management level are the same team,” said Zhou.
In China, large enterprises must have major shareholders, which means the actual controllers. We have not yet entered the stage of highly dispersed equity as in Western countries.
Therefore by that logic, Dong Mingzhu, the chairwoman and public face of Gree Electric, is the best candidate to leads its privatisation.
However, Deng Feng, an associate professor at Peking University in Beijing, believes there are still risks for Dong if she takes over the state-owned company.
“Failure will not be tolerated once she becomes the real controller. If she makes a mistake, she will be labelled as the villain that ruined an otherwise good state-owned business,” Deng said.
Lang Xianping, a Hong Kong-based economist, disagrees with the notion of privatising state-owned companies, having previously used performance data from Hong Kong listed state-owned monopolies to prove that their performances were consistent with private enterprises.
Hong Kong-based Lang is well-known for his outspoken public complaints over the privatisation of SOE home appliance manufacturers Haire, TCL, and Greencool, arguing that the private sector is eroding the value of state-owned assets in the name of reform.
Lin Jiang, a professor of economics at Sun Yat-sen University in Guangzhou, argued that there is no risk of a loss in the value of state-owned assets. He explains that the relationship between Gree Electric and Gree Group has been subtle, as they share intellectual property, therefore it is unclear who owns the intellectual property.
“A good performance by Gree Electric is also an achievement for the Zhuhai government,” Lin added.
Dong, 65, joined Gree Electric as a sales manager 29 years ago and has helped develop it from a little known factory owned by a local Chinese government into a US$300 billion white goods giant.
“Premier Li Keqiang mentioned the sharing economy at the Boao Forum [for Asia] this year. Based on that, Dong and her management team should be the preferred transferee for the 15 per cent stake and a considerable discount should be granted to them. This is not a loss in the value of state assets, but an acknowledgement of Dong and her team’s long-term contribution,” said Zhou from the China Enterprise Reform and Development Society.
Lin from Sun Yat-sen University does not see this as starting a trend of more privatisation of SOEs in the future, as they “still play an important role in the socialist system with Chinese characteristics”. However, along with most economists, he does think more reforms is needed of SOE management, especially a market environment in which they and private enterprises “can compete fairly”.
Deng from Peking University, though, is cautious about SOE privatisation as he argues that there are no successful precedents of SOE privatisation except the British Telecommunication (BT) reform in the United Kingdom, which China can follow in the future.
The BT model is not perfect, but it is moderate and causes minimal side effects, which won’t trigger economic turmoil such as a stock market crash, or even social instability like massive lay offs.
“The BT model is not perfect, but it is moderate and causes minimal side effects, which won’t trigger economic turmoil such as a stock market crash, or even social instability like massive lay offs,” Deng said.
Zhou insists the future of SOE reform is the mixed ownership route, but the key question is “how to mix the ownership?”
“In highly competitive industries, corporate management and the private sector can own the controlling stake, while the state-owned companies still take some share. Thus, companies become really market-driven in this way after the reform,” he said.
Zhou’s remarks were echoed in March by Lian Weiliang, a deputy director at the National Development and Reform Commission, who said that the private sector could own majority stakes in some of the SOEs and invest in certain unnamed key industries.
“The biggest difficulty is how to devise a mechanism for the government to exercise power over state assets. The key is that the government should well understand its equity stake, in which areas they should intervene and in which they should not,” Deng said.
