Interagency turf war continues as SOE reform staggers ahead on three fronts.
SASAC strikes back
SOE über-agency, State-owned Assets Supervision and Administration Commission (SASAC), sidelined in the 2015 reform plan, has been making a comeback. The plan had reduced SASAC’s functions to Temasek-style management of capital, and corporate conversion pilots. Ministry of Finance’s (MoF) star was on the rise, given charge of ‘state capital investment and operation pilots’, an initiative to shift state capital to more profitable sectors. With MoF cast as a more effective reformer than the conservative SASAC, this was welcomed.
But SASAC has managed to wrest control of the initiative, announcing a series of pilots in 2016 and 2017 and setting up new bureaus to oversee them. A May State Council policy stipulated SASAC, not MoF, will lead the reform, to the dismay of many. Commentators remain critical of the agency’s track record, blaming it for, inter alia, failed overseas ventures and widespread industrial overcapacity. SASAC’s current priority is creating ‘bigger, stronger’ SOEs through M&As across sectors like steel, energy and shipping. Favouring expansion over efficiency and playing to state ideology compromises the agency’s role as reformer. Its growing clout coincides with Lou Jiwei 楼继伟 stepping down from heading MoF, and is seen as a blow to plans to buoy up social security funds with state-owned assets.
The bloated and inefficient state sector needs an overhaul. According to MoF, SOEs’ return on equity (RoE) was 5.18 percent in 2016, compared to private firms’ 8.75 percent. Higher SOE profits in H1 2017 were largely the result of higher commodity prices, not efficiency gains.
three-legged reform
investment and operation
One of SOE reform’s three pillars, this aims to shift state capital from sunset industries, like steel and coal, to more strategic and emerging ones. Policymakers have long questioned how SOEs are concentrated in the most unpromising sectors, with no new-economy success stories to match the likes of Baidu, Alibaba and Tencent. In the pilots, SOEs or state assets are first securitised and listed to get a fair price. Pilot firms then oversee divestment from sectors with overcapacity while increasing state holdings in more promising ones, protecting state assets and creating higher returns. But, despite the May policy, many critical details for these pilots are missing, and as yet the difference between investment and operation remains unclear. Reform plans will be delayed as uncertain firms try to feel their way to viable operation models.
China Reform Holdings Corp 中国国新 an emerging SOE holding conglomerate Nicknamed ‘China Investment Corp Mark II’, CRHC was founded in 2010 as SASAC’s third industrial assets management firm, with the aim of advancing central SOE restructuring. SASAC chose CRHC as a pilot state capital operating firm in early 2016. Since then, it has jointly set up two high-profile funds—a coal asset management fund and a venture capital fund. CRHC is the controlling shareholder in the latter, with a mandate to boost technology, innovation and industrial upgrades. Setting up 93 subsidiaries and one joint venture by September 2016, it has expanded into various financial sectors, owing C¥46.5 bn in debt, mostly as bank loans, against its C¥15.5 bn capital. Its latest goal is to set up a financial services platform for SOEs. Holding firms with industrial backgrounds, say commentators, are in a regulatory vacuum. Along with other systemically important financial institutions, they will see increased supervision from PBoC following the 5th National Financial Work Conference, which stressed financial security.
mixed-ownership
The second pillar of SOE reform, under NDRC, this aims to increase firms’ efficiency by diversifying the corporate ownership base with strategic or financial investors. It focuses on seven SOE-monopolised industries: oil, telecommunications, natural gas, power, railways, civil aviation, and the military. 68 percent of SOE subsidiaries have already undergone some mixed-ownership reform, claimed SASAC in March. With the news that Liu He 刘鹤, Xi’s economics adviser, was in charge of a Party sub-group covering mixed ownership reform, market hopes for faster progress grew in late April. On 19 June 2017, the first central SOE pilot in this round of reform, China Eastern Airline Logistics, completed restructuring, after four years of negotiations. The third batch of pilots is to be announced soon. But the limits are clear: state leadership must be maintained, and asset 'erosion' avoided. The misgiving of private investors, burnt in the past, over whether the Party will respect their property rights, need addressing as well. Special management shares are a possible solution, granting the government a veto in major decision making with a less dominant role at other times.
China National Petroleum Corporation 中国石油天然气集团公司 Under political pressure to restructure, and driven to increase profits, CNPC has split off bad assets and listed other restructured ones to focus on core business. But it must, say commentators, open up lucrative areas like its pipeline and sales businesses to show reform resolve, although the recent oil and gas reform plan indicates this process will be slow. CNPC’s pipeline assets account for 70 percent of the national total. If committed, CNPC should list the integrated pipeline unit, then reduce its holdings, allowing private investors to buy in. Eventually, it should integrate and inject all its unlisted assets into listed firms for group listing, which is required of all petroleum SOEs.a reluctant yet slowly reforming SOE
corporate conversion
Under SASAC, the final pillar of SOE reform aims for SOEs to adopt corporate structures, placing professional managers in charge of operations, and bringing in boards of directors and boards of supervisors to represent shareholders. The first step is for SOEs, currently governed under Enterprise Law, to re-register as companies under Company Law; this should be completed by end 2017. With huge assets in various businesses nationwide, a significant amount of work is needed for asset verification, appraisal and liquidation before re-registration. Further obstacles include lack of board independence and autonomy, whose directors are usually given little say in company operations, and the fuzzy line between boards and managers. The state first has to step back: an unappealing prospect for SOE officials and SASAC. Professional managers will also struggle to escape state interference. 50 central SOEs, almost half, have yet to complete corporate conversion reform, while most of their subsidiaries have.
Baosteel Group Corp Limited 宝钢集团有限公司 Shanghai Baosteel Group Corp was renamed BaoSteel Corp Limited in 2005, having converted from an enterprise to a company. Among 85 SASAC corporate board pilots launched since 2004, Baosteel stands out, given its strong internal culture and support from SASAC, which hand-picked its external directors. Past directors have included Victor Fung Kwok-king 冯国经, chairman of Li & Fung Group, and Stephen Lee 李庆言, chairman of Singapore Airlines Limited. ‘Buck’ Pei Ker-Wei 贝克伟, an American professor of accountancy, serves on the current board. Authorised by SASAC, the boards appointed two vice managers in 2015, among the first three central SOEs to do so. Its board chair and general manager are appointed by the Central Organisation Department. With Baosteel’s external directors surviving its 2016 merger with Wuhan Iron and Steel Corporation, there are high hopes its good corporate practices will also carry over.a rare corporate board pilot success
roundtable
Chen Qingtai 陈清泰 | former State Council Development and Reform Centre party secretary
SOE reform practice lags behind theory. The socialist market economy proposed in 1993 found a middle ground: a more efficient market economy without total privatisation. The key is developing modern corporate institutions that protect independent market participants despite state investment. The state should thus focus on managing capital, not enterprises. To achieve this, assets of SOEs should be equitised to be easily allocated, just as banks did in the 2000s. State capital investment and operation firms, pursuing returns, will take on the job of state capital allocation, barring direct government interference in firms. Yicai
Shao Yu 邵宇 | Orient Securities chief economist
SOE reform simultaneously occurs at SASAC, enterprises, and personnel levels. SASAC should keep its investor role while devolving its operator role. SOEs should adopt modern corporate structures. The way senior managers are selected, and incentivised, also needs to be set straight. Reform should occur in three steps. Firstly, state assets should be equitised and then authorised to the investment and operation firms, who are better at allocating these more liquid forms of capital. The second step is mixed-ownership reform: enterprise–company conversion (with associated corporate structures), asset securitisation, employee shareholding, joint funds and investments. The third step is establishing modern corporate institutions in a bid to improve enterprise efficiency. Finance World
Zhang Wenkui 张文魁 | State Council Development and Reform Centre enterprise department
SASAC should give up its overseer role and focus on investment. This should be enhanced through participation in shareholder meetings. The agency should encourage private investor’s active participation in firms’ decisionmaking. Empirical evidence shows whenever private holdings exceed a third of a firm’s shares or half of government holdings, private investors become active participants. Only then would reforms make real sense. Indeed, private investment should be allowed to exceed government holdings, as private investors would help improve state capital efficiency. Economic Observer
context
mixed-ownership reform
21 Jun 2017: more SOEs are carrying out mixed-ownership reform through share capital increases at national and local equity exchanges, according to media reports
16 Jun 2017: commentators argue SASAC should be held accountable for huge state-owned assets losses from failed overseas expansion and overcapacity in heavy industries
25 May 2017: two SOEs undergo securitisation in May, following one in March and two in February
21 May 2017: State Council and CCP issue the oil and natural gas institutional reform plan, encouraging SOEs in the two sectors to diversify ownership of units along the value chain
17 Apr 2017: Yunnan Baiyao Holding Limited, a local SOE, announces it has undergone successful mixed-ownership reform after introducing a private investor
9 May 2017: the announcement that Liu He 刘鹤 has taken on a new role as Central Economic Institution and Eco-Civilisation Reform Special Force director raises hope for a speed-up of mixed-ownership reform
26 Apr 2017: NDRC reports ten central SOEs pilots were launched in March, following the success of the nine pilots in 2016, and that the third batch of pilots are being chosen; the 19 pilots are in key sectors of electricity dispatch, telecom, and military industries
18 Apr 2017: State Council issues the 2017 SOE related institutional reform agenda outlining the labour division among central agencies: NDRC leading mixed-ownership reform; SASAC corporate structure development; MoF state capital investment and operation firm pilots
27 Feb 2017: SASAC reviews mixed-ownership reform pilots in 2016 and projects into 2017
22 Nov 2016: SASAC issues a policy on central sci-tech enterprise equity and bonus incentives, focused on high-tech SOE talent, particularly management; it later reportedly selects 10 pilots
28 Sep 2016: NDRC director Liu He conducts a conference on SOE mixed-ownership reform, which six central SOEs and Zhejiang DRC attend
18 Aug 2016: SASAC, MoF and CSRC issue a policy on SOE mixed-ownership reform through employee stock holding, with SASAC to lead
1 Jul 2016: MoF and SASAC issue measures on state-owned asset transactions to prevent their erosion during mixed-ownership reform, stipulating all state asset transactions should happen through either the stock market or local/regional equity exchanges
24 Sep 2015: State Council issues an SOE mixed-ownership reform policy, promoting mixed-ownership at both the SOE group and subsidiary levels and stipulating SOEs should open up some sectors; in petroleum and natural gas, transmission businesses should be separated from pipeline businesses, and main business from the supplementary ones
corporate conversion
26 Jun 2017: Xi Jinping 习近平 reviews an implementation plan for SOE corporate reform at the 36th Deepening Reform Leading Group meeting
12 Jun 2017: SASAC reports that, by 2016, 83 out of 102 central SOEs have set up regular/standard boards of directors; 88 percent of local SOE directly supervised by local SASAC have set up boards of directors while 13.1 percent of boards have a majority of external directors
June 2017: SASAC revises ‘Interim measures for central SOE boards and boards evaluation’, cutting evaluation items for both boards and directors
3 May 2017: State Council issued ’Guiding opinions on improving SOE corporate governance structure’, calling for all SOE, central and local, to set up corporate institutions by 2017
April 2017: State Council general office issues, in hardcopy online, ‘Opinions on piloting reforms to central SOE boards of directors’ responsibilities and rights’, granting boards six rights: mid- to long-term development decision-making; manager recruitment; manager performance evaluation; manager compensation; employee compensation; and major financial management
21 Dec 2016: SASAC data shows that, by 2016, among central SOEs and their subsidiaries, 5.1 percent have managers recruited from the market; this figure is 14 percent for local SOEs
20 Dec 2016: Xi Jinping convenes the 31st Deepening Reform Leading Group meeting, reviewing ‘Opinions on piloting reforms to central SOE boards of directors’ responsibilities and rights’
state capital investment and operation pilots
1 Jul 2017: SOEs are planning to transfer into financial holding firms, according to media reports; supporters say this move will help SOEs become bigger and stronger; opponents say SOEs are merely adopting the holding firm framework, but remain weak in management
29 Jun 2017: SASAC celebrates its leading role in state capital investment and operating firm pilots with headline stories in Xinhua-controlled Economic Information Daily
12 Jun 2017: SASAC director, Xiao Yaqing 肖亚庆, explains the three types of SOE funds which will promote state capital allocation
10 May 2017: State Council releases the ’SASAC functional transformation plan’, stripping SASAC of 43 responsibilities; the plan stresses SASAC supervision should focus on capital, promoting state capital efficiency through state capital investment and operation pilots
30 Mar 2017: MoF issues an interim directive outlining central-level state capital operating expenses eligible for budgeting; state capital will also be injected into three types of central SOEs including investment and operation firms and industrial investment funds
1 Jun 2016: Luo Xinyu 罗新宇 Shanghai State-Owned Capital Operation Research Institute secretary explains state capital investment and operation firms
other relevant moves
14-15 Jul 2017: the Fifth National Financial Work Conference convened, stressing financial risk prevention and PBoC role in it. PBoC will enhance supervision over financial institutions of systemic importance including holding firms, especially with industrial backgrounds, predict commentators
10 Jul 2017: Economic Information Daily notes the capital market has become the battlefield for SOE reform via M&As
16 Jun 2017: Xiao Yaqing publishes an article arguing against privatisation and reduction of state ownership, contending SOEs should feel justified to grow stronger
1 Apr 2017: state capital operation pilot Chengtong Holdings Group Ltd and a private firm set up a financial asset management venture
29 Mar 2017: experts highlight challenges for SOE corporate governance and mixed-ownership reforms
29 Jul 2016: Guoyuan coal asset management company founded by four SOEs
21 Jun 2016: Chengtong Group sets up an SOE restructuring fund of C¥350 bn
18 May 2016: premier Li Keqiang 李克强 calls for slimmer, healthier SOEs; SASAC then pledges to shut down 345 zombie firms and reduce SOE layers
4 Nov 2015: State Council issues a directive on state asset management; Lou Jiwei MoF minister who led the policy drafting argues SASAC should transform from managing manpower, operation and assets towards managing capital