The top-level plan for fixing China’s bloated and inefficient state sector, 22 months in the making, disappoints. The November 2013 Third Plenum Resolution represented a progressive blueprint for breaking policy gridlock, but the Party’s determination to retain control of economic management shows no sign of abating. The new document restates key Third Plenum principles

  • partial privatisation and reducing administrative privilege to achieve efficiency gains
  • personnel incentives tied to company performance
  • separating capital management from on-the-ground operations

At the same time, it asserts the Party as the backbone of corporate governance and calls for strict vigilance against windfall gains in privatisation.

This plan is supposed to be just a start. A move to challenge the State Grid’s monopoly has already been released and 14 sector or task-specific plans are in the works.

But as Xi approaches his third year in power, no single champion to carry forward state-owned enterprise reform has emerged.


SOEs are late in the reform sequence

In the broader reform agenda, a mixed-ownership economy is the end game, not the linchpin. While foreign observers hailed the Third Plenum’s embrace of ‘the market’s decisive role in allocating resources’, domestic observers cheered its reconfiguration of public finance. Bringing runaway local budgets under control, ensuring that public service and social security expenditure was sustainable, and creating broader capital markets to disperse risk and better serve the needs of the real economy were viewed as preliminary steps to reinvigorating the state sector. These tasks have made demonstrable progress, if being driven by central command rather than market principles. They are still leaders’ top priority.

Nonetheless, these tasks have moved forward because they have the political space to do so. Finance Minister Lou Jiwei 楼继伟 and PBoC Governor Zhou Xiaochuan 周小川 have been given unparalleled autonomy to reconstruct the fiscal system and liberalise the financial system, respectively. The losers in these processes—local governments, banks and beneficiaries of investment driven-growth like property developers and the construction materials industry—scarcely have the political capital to oppose them. By contrast, no anointed acolyte or unitary vision exists for SOE reform, and the ramifications are far-reaching.

Capital market reforms could create a more robust institutional foundation for listing SOEs and privatising assets. Without stronger market-oriented institutions, implementation can only be centrally-administered and on a one-off basis.

more plans, more pilots…

The viability of this central-level SOE plan depends on follow-up plans and the rigour of pilots. The Budget Law revision, passed in 2014, disappointed in its vagueness on municipal bond use and fiscal transfer system clean up, yet in supplementary documents the State Council quickly took hard stances on both; fiscal reform is well on its way to meeting interim deadlines.

NDRC, which oversees mixed-ownership reform, has identified 15 areas for follow-up documents to guide implementation. Most are simply supplementary plans for one article of the plan, ranging in breadth from ‘developing a mixed-ownership economy’ to several overlapping initiatives to strengthen the property rights regime. More than a third deal directly with increasing supervision, either in normal business operation or in execution of reforms, such as transferring state-owned assets. Like the electricity sector reform blueprint, NDRC will release a plan on reforming the petroleum and natural gas sector.

At a State Council press conference, officials said pilot programs would be launched in

  • central state-owned capital investor-operators
  • government and private capital cooperation
  • mixed-ownership reform through employee shareholding
  • centralising supervision by installing SASAC general accountants in mid-sized and major SOEs, rather than SOEs reviewing their own books

looming tensions

Party versus market

  • a deep ideological debate on the Party’s role in SOEs remains unresolved, complains Hu Shuli 胡舒立 Caixin editor-in-chief. Boards are to be granted authority and autonomy comparable to those of enterprises in a developed market economy, but the Party remains paramount. Some passages in the plan suggest the Party should oversee boards and control important appointments. CEOs paid by market standards would report to civil servants and be evaluated according to Party allegiance
  • it is not that Xi has failed to galvanise support behind one or other side of the debate. Part of his mission is to renew the Party’s mandate by institutionalising its role in societal and economic management. Just as the Fourth Plenum saw no contradiction between enshrining rule of law as the basis of governance and placing the Party at the top of the judicial hierarchy, so the SOE reform plan assumes that Party decision-making is perfectly compatible with sound economic management and efficient distribution of capital. In practice, unacknowledged contradictions give Party organs immense interpretive licence


  • it is unclear whether investor-operators’ primary responsibility is to increase returns on state assets or channel capital toward industrial policy objectives. Zhao Changwen 赵昌文 Development Research Centre DRC prefers to leave industry policy objectives to SASAC and charge investor-operators with maximising returns
  • may duplicate SASAC’s current controls that inhibit SOE business autonomy


  • Zhang Wenkui 张文魁 DRC fears a ‘classification trap’. Most SOE corporate groups, particularly encouraged to list, have business operations far too diverse to fall neatly into prescribed categories
  • it will vary widely in practice. Of 52,000 central SOEs and their subsidiaries, roughly 38,000 are controlled by SASAC, 3,614 by MoF and another 9,988 by other central departments. Each agency is likely to use classification for its own ends, argues Li Shuguang 李曙光 China University of Political Science and Law. At sub-national levels, suggests Zhang Chunxiao 张春晓 SASAC Research Centre, classification will depend on local or regional conditions

public budget

  • Finance minister Lou Jiwei 楼继伟 insists that 30 percent of SOE earnings be turned over to the public budget rather than for SASAC to reinvest, largely back into SOEs. To achieve this, MoF will agree that SASAC should take responsibility for a larger number of SOEs as long as they submit to rigorous accounting and budgeting measures

legal definitions

  • without a clear definition of ‘erosion of state-owned assets’, potential private investors may be deterred for fear of overstepping retroactively applied legal interpretations. The widely publicised case of air conditioning tycoon, Gu Chujun 顾雏军, who faced a number of charges five years after acquiring several SOEs, remains in public consciousness

domestic reaction

China’s SOE reform: backtracking, highlights and breakthroughs

Liu Shengjun 刘胜军 | FT Chinese

The plan has made noticeable progress on SOE categorisation, personnel management and the Temasek model, but stayed ambiguous on mixed ownership, Party command of SOEs and busting monopolies. Its less-than-bold rhetoric will not advance necessary reforms, but perhaps it is the best plan possible. A more fundamental issue in need of rethinking is: why keep SOEs in the first place? What is their value? The state must recognise that SOE strength is antithetical to reform and opening up.

why I oppose this round of ‘SOE reform’

Sheng Hong 盛洪 | Caijing blog

The latest SOE reform plan is wrong in that it fails to grasp real problems, and only tries to improve on the margins. By aiming to ‘strengthen and enlarge’ SOEs, the plan will further reinforce their illegitimate monopolies, squeezing out what remains of private businesses. Shakedown and consolidation will not make them more efficient, but rather too big to regulate. Ensuring ‘SOE dominance’ is philosophically wrong.

breakthrough is in managing capital

Chen Qingtai 陈清泰 | interview with Caijing

Accepting Singapore’s Temasek as a model is a great breakthrough for SOE reform. Freeing up state-owned capital through securitisation and granting SOEs greater business autonomy will release economic vitality. However, there is still a need to clarify roles and demarcate boundaries. SASAC and investor-operators need to become financial, rather than industrial, entities. Policy goals cannot be confused with investment goals. Equity diversification experiments must seek balanced ownership ratios, so that the board can govern effectively but is held in check by shareholders.

key proposals


  • SOEs divided into those that seek profit and those that serve the public, e.g. utilities and public transport. Categories determine nature of ownership structure and personnel reforms.
  • commercial SOEs subdivided into
    • ‘competitive’ firms: to operate on equal administrative footing with private counterparts; inefficient firms are allowed an ‘orderly exit’. This undefined term suggests minimising social impact, by filing for bankruptcy through legal channels and transplanting state employees through retraining and placement programs, both processes that will take time to develop
    • ‘special’ SOEs: in national security, natural monopolies, pillar industries, strategic emerging industries and those executing important national projects. The distinction from public welfare SOEs is still hazy.
      • natural monopolies vertically disintegrated, with segments reclassified as special or competitive according to function
  • public service SOEs may farm out or spin off segments of their business, e.g. service provision through franchise operations

reforming ownership structure

  • conglomerates to list on the stock market, where before subsidiaries listed. Could make restructuring easier as asset ownership is sometimes unclear between parent companies and subsidiaries
  • private investors may hold equity in SOEs and state-controlled, listed companies
    • equal rights for all shareholders
    • portion of available state-owned shares determined by classification and function. Competitive commercial SOEs may become fully privatised. The state will retain ‘a certain position’ in special commercial SOEs and public welfare SOEs
    • ‘no timetable for mixed-ownership’. Proceeding by pilots, this qualification indicates more prevarication rather than a decisive reform step
  • foreign investment permitted, under the Guiding Catalogue of Foreign Investment Industries and relevant provisions of Security Review

reforming personnel management

  • four-part corporate governance structure
    • board of directors
      • make key business decisions, independent of state
      • include external members, one member one vote
      • open to dismissal for poor decisions
    • board of supervisors
      • role not entirely clear, but would seem to review board of directors
    • managers
      • run day-to-day operations
    • Party organisations
      • role not entirely clear, but would seem to control key appointments and oversee board of directors
  • commercial SOEs: market-based compensation; shareholding incentives for staff and managers
  • public service SOEs: contract-based employment, with more fluid advancement and demotion; managers appointed or elected depending on classification and function of enterprise

separating capital and enterprise management

  • three-tiered system
    • SASAC on top, managing capital but not meddling in enterprises’ day-to-day affairs as it currently does (the Temasek Model)
    • a layer of holding companies that act as state-owned capital investor-operators in the middle
    • enterprises at the bottom
  • state-owned capital
    • concentrated in national security, pillar industries and job-creating industries, key infrastructure projects and strategic industries
    • used to build up flagship multinationals
    • can be invested in private enterprises
  • centralised supervision
    • enterprises under other government organs, like service agencies, transferred to investor-operators under SASAC; rumours suggest SOEs under state ministries will not be transferred
  • 30 percent of capital gains turned over to the public budget by 2020
    • some state capital transferred to replenish pension funds

tightening supervision

  • internal monitoring, third-party auditing and public supervision through better information disclosure. Reduces likelihood that former managers or opportunistic investors can snatch up newly-privatised assets at bargain prices
  • continued anti-corruption campaigns through Party organs
  • all SOEs under state-owned capital budget management system; supervised by Ministry of Finance


12 nov 2013 Third Plenum ‘Resolution’ promotes mixed-ownership reform, corporate governance reform and SOE classification

18 dec 2013 Shanghai approves its own SOE reform plan, dividing SOEs into functional (strategic industries and asset management), public service, and competitive, and setting ambitious goals for consolidation of state-owned capital. Shanghai’s plan becomes the template for more than 20 plans released by the end of 2014

19 dec 2013 SASAC convenes press conference explaining its own plan for SOE reform. Mixed-ownership is the core, but the state must retain sole ownership of firms related to national security and hold an absolute majority in pillars and economic lifeline industries, as well as strategic and high-tech industries

1 feb 2014 Huang Shuhe 黄淑和 SASAC publishes article in leading Party journal Seeking Truth claiming reform must guard against ‘erosion of state-owned assets’

28 mar 2014 Economic Information claims an initial SOE reform plan draft has been submitted to the State Council for review, and will be released shortly

mid 2014 Rumours suggest plan draft process mired in gridlock. The anti-corruption drive discouraged reform-minded SOE managers, wary of drawing complaints from disgruntled subordinates. Initial mixed-ownership reform plans suggested little more than spinning off under-performing sales departments

15 july 2014 NDRC announces four pilot programs: shipping giant COFCO and investment firm SDIC reorganised as state-owned investment companies; Sinopharm and China National Building Materials to shift to mixed ownership; a handful of central SOEs to trial corporate governance reforms; undisclosed SOEs subject to Central Discipline Inspection Committee monitoring

18 aug 2014 SOE managers’ salaries slashed as part of anti-corruption and austerity campaigns

14 sep 2014 China’s largest oil refiner, Sinopec, announced winners of a bid to sell a 30 percent stake in its distribution arm, labelling the sale a ‘mixed-ownership reform’. Critics say Sinopec is merely divesting non-core assets to raise cash

6 nov 2014 Xinhua cites an unnamed source claiming a leading group headed by Vice Premier Ma Kai 马凯, and composed of members from SASAC, MoF, NDRC and Ministry of Human Resources and Social Security MoHRSS, is coordinating development of a plan

18 may 2015 NDRC’s Opinions on deepening economic system reform in 2015 introduces the ‘1 + N’ framework, with ‘1’ as the top-level plan on SOE reform, and N as supplementary documents

5 june 2015 Deepening Reform Leadership Group approves plans on ‘promoting the central role of Party organs in SOE governance’ and preventing erosion of state-owned assets, winding back hope for more independent decision-making by new corporate boards

13 sep 2015 State Council releases ‘Guiding opinions on deepening SOE reform’

whom to watch

State-owned Assets Supervision and Administration Commission 国有资产监督管理委员会

Created in 2003 to unify supervision of central-level SOEs and prevent loss of state assets during privatisation, SASAC has become the poster child of state-sector inefficiency, dragging its feet in reform and accusing provinces of privatising too quickly. It comes out a net loser in the SOE reform plan, scaled back from managing ‘personnel, operations and assets’ to solely managing capital, plus perhaps a few central SOEs. The strongest words in the plan’s watered-down language exhort SASAC to mind its boundaries and draw up its own list of where they end. Clauses on centralising supervision and unifying standards allow it to further consolidate some of China’s 152,000 SOEs under its supervision—currently it oversees about 38,000 central SOEs. This appears to be a trade-off for letting MoF impose strict budgeting processes on SOEs, and collect a greater share of their earnings. Its next move may be to orchestrate mergers of China’s largest SOEs, an initiative it claims will increase efficiency; liberals fear it will create behemoths too big to regulate.

Ministry of Finance 财政部

It comes as no surprise that MoF has prevailed in the SOE reform plan. Finance minister Lou Jiwei 楼继伟 has been given free rein to overhaul the nation’s public finances, moving toward fiscal federalism that would distance local government debt risk from the centre. In the Deepening SOE Reform Leading Group, MoF was adamant SASAC shed all responsibilities but capital management. According to the plan, SASAC will review the books of central SOEs’ subsidiaries that formerly kept their own accounts. MoF will then tally all state capital on the budget, earmarking 30 percent of returns for public revenue by 2020—as of 2014, 88.7 percent of state-owned assets were on the state’s budget, but only a handful of SOEs pay up more than 15 percent. This answers Lou Jiwei’s call, issued with great drama this May, to set aside state capital for pensions or face the middle income trap.

National Development and Reform Commission 发展和改革委员会

The massive economic planner appeared in decline at the beginning of Xi’s administration. Many senior officials were ousted on graft charges, its extensive price-setting and project approval mechanisms came under fire, and Li Keqiang 李克强 rejected its sensible urbanisation plan in favour of an unworkable scheme proposed by the ascendant Ministry of Land and Resources. In its remade image as more of a think tank, it will still have decision-making power over the ways the SOE reform plan is executed. Mixed-ownership reform, likely focused on securitisation and listing, will be directed by NDRC. NDRC will also write plans for reforming the powerful oil and gas sector.

Central Discipline Inspection Commission 中央纪律检查委员会

CDIC is responsible for representing the Party as the backbone of SOE governance. This upholds a sentiment among princelings that counterbalances reformers: any hiccups in SOE restructuring stem from a lack of Party discipline. CDIC will exercise its power by patrolling personnel decisions, managed by the Central Organisation Department and SASAC. The plan does not clarify where SASAC or investor-operator appointment power ends, but reserves top appointments and oversight to the Party. Ministry of Human Resources and Social Security MoHRSS is included in the SOE reform leading group to weigh in on personnel reform and is charged with salary reform, but all signs suggest it is a third wheel. Through CDIC, Xi preemptively slashed SOE heads’ salaries in August 2014, while the reform plan was still in gridlock.