China’s top state-run firms told to become joint stock corporations by year’s end

Cabinet sets deadline for some 100 enterprises to convert to limited liability or joint stock companies

PUBLISHED : Thursday, 27 July, 2017, 8:33am
UPDATED : Thursday, 27 July, 2017, 11:53am

Beijing has ordered all firms controlled by the central government to complete restructuring to become limited liability and joint stock companies by the end of 2017.

The request from China’s cabinet, the State Council – directed at some 100 enterprises controlled by Beijing – came on Wednesday, after leaders agreed earlier this month to reduce state sector debts and shut down “zombie companies”.

Such deadlines for the ongoing reform of state-run enterprises have rarely been set since former premier Zhu Rongji vowed in 1998 to revitalise the sector “within three years”.

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Analysts said that converting the firms into modern corporations with relatively clear ownership structures could pave the way for future equity transfer deals.

Some 90 per cent of the country’s state-owned enterprises have already been restructured, according to the State Council.

Lu Zhengwei, chief economist with Industrial Bank, said the restructuring would help the process of attracting private investors under the mixed ownership model.

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“It also means poorly managed state firms will be able to file for bankruptcy more easily,” Lu said.

After more than three decades of trials and experimenting, Beijing is still looking for the best way to turn state-run firms into modern, profitable and efficient businesses that will at the same time stay loyal to the ruling Communist Party.

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Committees will lead the restructuring process and prevent the loss of state assets, the cabinet said, meaning that stakes cannot be sold at a discount. State enterprises were also told to adopt a market-oriented mindset.

President Xi Jinping has made clear that overhauling the state sector is crucial to cut the hefty debt load and reshape the economy, but the reform process continued to fall behind expectations.

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State firms are estimated to account for around 70 per cent of the country’s total non-financial debt, and many zombie companies are state-funded.

But there are still question marks over Beijing’s plan to partially privatise state-run firms.

“The key to reforming the state-owned enterprises is to break down market monopolies, to give up preferential policies and strictly supervise income,” said Sheng Hong, director of Unirule Institute of Economics and one of the most vocal critics of China’s state sector.

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“Otherwise, the so-called mixed ownership reform is just a slogan and it won’t have any real effect.”

In the latest case, China Unicom is reportedly in talks to sell stakes to internet giants Alibaba Group and Tencent Technology.