Reform plan for China’s state firms boosts investors' confidence, but questions remain
Some analysts question whether mergers will boost productivity at the notoriously inefficient SOEs
China’s planned reforms, which are likely to involve mergers between major state-owned enterprises (SOEs) in sectors including power, energy, and shipping, have helped the stock market to soar in the past few weeks as investors anticipate stronger – and hopefully more profitable – state giants.
However, some analysts and industry players remain unconvinced that these reforms will boost productivity at SOEs, which are known for their poor levels of efficiency.
They also questioned whether the reforms might lower the threshold for small- and medium-sized enterprises (SMEs) to enter the lucrative industries that have long been dominated by state giants, or rather put their expansion and survival at greater risk.
“There’s no direct link between mergers of SOEs and the pledged reforms of the state system: the signals sent out so far are troubling,” said Gary Liu, executive deputy director of the Shanghai-based CEIBS Lujiazui Institute of International Finance.
”Mergers among central SOEs might harm the economy in the long run despite some short-term benefits. It might mean more [state] monopolies, lower efficiency, and setbacks for the planned market-oriented reforms,” he warned.
The Politburo, China’s core decision-making body, issued a statement following a meeting last Thursday, saying that the direction of reforms of SOEs remained unchanged, while the interests of private enterprises would be legally protected. But it did not provide any details.
The planned mergers of SOEs could lead to 40 new groups being formed from the more than 100 central government-controlled entities that existed now, the Economic Daily, a unit of the official Xinhua news agency, reported last week. The article also said that this round of reforms might affect sectors including oil, power, and railways.
The State-owned Assets Supervision and Administration Commission responded with a statement saying that the report had not been verified or authorised by the regulator. But it did not issue an outright denial.
Government researchers told the South China Morning Post that the proposals were still being discussed.
Beijing has claimed it would eventually create state capital investment companies to focus on improving returns on state assets while cutting the government’s control over the daily operations of SOEs.
The latest move towards reform saw the merger of the China Northern Railway (CNR) and China Southern Railway (CSR) – the world’s two largest train makers – gain regulatory approval in January.
The two companies had been separated from a single state-owned firm in the early 2000s as Beijing attempted to introduce greater competition within the train-making sector. But the companies became involved in vicious competition – so bitter that it harmed their ability to secure major global contracts.
So far mainland media reports of the reform plans have focused largely on efforts to increase the scale of the SOEs. They have not really touched on the introduction of private capital to help improve operating efficiency.
“The reform of SOEs should have focused on two main issues – breaking up the dominance of the state sector and reducing government intervention in businesses,” Liu said.
The latest reform plans will be the third major changes involving SOEs launched by Beijing since the 1990s, when former Premier Zhu Rongji led a campaign to boost SOE efficiency by forcing about 60,000 failing industrial companies to close with the loss of about 20 million jobs.
However, Zhu’s reforms, as well as government policies rolled out in more recent years, are thought to have enabled some SOEs to gain monopolies in many sectors. In 2006, the government identified the so-called strategically important seven sectors where the state would retain absolute control.
The progress of reform has been slow. Chinese state businesses still enjoy cheap loans, easy access to land, and the power to set prices. Private enterprises, which offer a vast majority of the country’s new jobs, have often had to face financing costs that are several times higher than those of SOEs.
State dominance in the oil sector had caused “huge efficiency losses to the whole Chinese society”, said Sheng Hong, head of the Unirule Institute of Economics, a prominent private research institute.
He estimated that a system involving a state monopoly and a distorted allocation of resources ensured that PetroChina paid 395.8 billion yuan less for land that it leased between 2001 and 2010.
Jack Yu, a commercial manager at the privately-owned Gingko Energy Investment, said he hoped state firms would improve operational efficiency through mergers, but he doubted that the reforms would fundamentally reduce the dominance of SOEs in the energy sector.
”If the big oil giants were to merge and restructure their operations, they might spin off certain oil blocks, from which they might find it was harder to reap high returns,” Yu told Post.
“That might be attractive to private firms like us. Sometimes the low return on assets has not been the result of the poor quality of assets, but because the operating models of SOEs are less efficient,” he said.
Despite the fresh opportunities that mergers might provide, “the industry’s openness to private players remains very low”, Yu said.
”Without strong enough government links, domestic private firms are able to access only projects that are small or located in remote, poor regions.”
The profitability of SOEs had deteriorated in recent years due to excessive capacity and insufficient attention placed on returns.
During this year’s first quarter, the profits of state-controlled industrial companies fell 29.3 per cent compared with the same period last year, data from the National Bureau of Statistics showed.
This decline in profits compared with a national average fall in profits of 2.7 per cent, but a 6.8 per cent rise in the profits of private enterprises, the same data revealed.
