SOEs Urged to Speed up Restructuring

A central government report issued on Wednesday urged state-owned enterprises to accelerate their corporatization and concentration process to increase competitiveness.

Corporatization refers to the process of transforming a state-owned company into an entity with a corporate structure usually found in publicly traded companies, in order to adopt corporate management models.

The report, submitted to a bimonthly session of the top legislature, identified the underdevelopment of the companies' corporate governance models as the main problem faced by SOEs.

"The shareholding reform of the SOEs' parent companies is still lagging behind," the report said. "The uncertainty on how to achieve the complete listing of the SOEs without leaving behind nonperforming assets has to be tackled," it added.

In the late 1990s and early 2000s, many SOEs were corporatized and radically restructured.

About 100 major SOEs directly controlled by the State-owned Assets Supervision and Administration Commission of the State Council went through a capitalization process, during which the best assets went public.

But the challenge of achieving the complete listing of parent companies, which include a large amount of nonperforming assets, still vexes policymakers.

Oliver Rui, a professor of finance and accounting at China Europe International Business School in Shanghai, said the objective of the public ownership reform is to improve the SOEs' corporate governance models and to expose the corporations' management techniques to public supervision.

"At present, the parent companies of the 117 central SOEs are largely nonpublic companies. Their business decisions are still mandated by the State-owned Assets Supervision and Administration Commission, not the public," he said.

The government report also called for further concentration of the SOEs toward key industries and sectors. Research showed that State-owned companies are now present in almost all the competitive sectors.

For example, a study showed that 20,296 SOEs, 17.8 percent of the total, are still involved in the wholesale trade, retailing and restaurant businesses.

Rui said that from 1998 to 2003, the SOEs' presence in competitive sectors was downsized under the "grasping the big, letting go of the small" principle.

But the process has been frozen or even downgraded as the 2008 financial crisis boosted the argument for a strong State presence in the economy.

"However, several recent signs suggested that a more market-oriented approach is being recognized," Rui said.

Despite its problems, the past reform made remarkable progress.

The total assets of the 144,700 SOEs and state-controlled companies are worth 85.37 trillion yuan (US$13.66 trillion), 3.3 times more than in 2003, according to Wang Yong, head of the State-owned Assets Supervision and Administration Commission.

The net profits of SOEs saw an average annual growth of 25.2 percent from 2003 to 2011, increasing from 320 billion yuan to 1.9 trillion yuan, Wang said.

But Xu Dingbo, a professor of macroeconomics at China Europe International Business School, noted that the average profitability of SOEs remains well below that of non-State firms.

According to a report by the World Bank and China's Development Research Center of the State Council, the average return on equity of non-State firms is 9.9 percent above that of SOEs.

"To sustain rapid GDP growth, China will need to extract more productivity from its currently protected services and utilities sectors," the World Bank's report said.

The report presented to the national legislature also encouraged SOEs to implement the "go global" strategy through mergers and acquisitions, equity participation, initial public offerings, and restructuring, in a bid to build corporations able to compete on a global scale.