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Like a phoenix from the ashes: reforms are to bolster China's state-owned enterprises

Mirjam Meissner, Lea Shih, Luisa Kinzius, Sandra Heep

Some might think that Chinese state-owned enterprises have long since become part of the socialist past. In actual fact the first major privatisation phase took place in the 1990s. But until this day public enterprises still have a key role in China’s economic affairs. However, there is an urgent need for reform as many state-owned enterprises are not only heavily in debt but despite generous subsidies are less profitable compared with private Chinese companies. 

The Chinese leadership has recognised this and Party and State Leader Xi Jinping laid out in March 2014 the direction: “State-owned enterprises should be supported and not abandoned. The strengthening of these companies will come in course of the reforms from within, they are to rise like a phoenix from the ashes [...].” For the foreseeable future there are no plans to abolish China’s public enterprises or to undertake a large-scale privatisation. 

There is also no intention to reduce state influence. Instead, the government wants to press ahead with mega mergers and bring together state owned-enterprises under the roof of holding companies. This way one wants in future to enable public companies to operate more efficiently and act internationally as successful “national champions”. In contrast, there is no longer any talk of breaking up state monopolies.

Reform of state-owned enterprises is back on the political agenda

Since the reform resolutions of the 3rd CC plenum of the CPC in November 2013 the state-owned enterprise reform is once again right at the top of China’s political agenda. The "Deepening economic reform in 2015“ was published by the State Council in May 2015 and it holds out the prospect that the “Directive for deepening the reform of SOEs” – the key state document for implementation of the reform – will be adopted this year. 

For long time now observers have been expecting an imminent adoption of this document. Due to conflicts of interest between ministries and authorities who are involved in the specific drafting of the reform there have been continuous delays. Particularly between the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) and the Ministry of Finance (MOF) there are deep divisions. In addition to this the interests of influential public enterprises and their managers are standing in the way of the planned reforms. Not least for this reason they have been the focus of Xi Jinping’s anti-corruption campaign which amongst other things is looking to break through the opposition from the companies’ side and pave the way for the reforms.

The Chinese government has not yet passed the state directive for reforms (as of June 2015). So far only a reform of salaries of managers in state-owned enterprises has been decided. The reform includes a drastic pay cut and the introduction of performance-related earnings which is to create incentives for efficiency. But ongoing pilot projects, current government documents as well as statements made by those politicians participating in the decision-making process already at this point give clear indications which way these reforms are going to go. Particularly for central-government-owned SOEs the following measures are key: 

Consequences of the reform for foreign companies

No larger scope for foreign companies within the Chinese market

The state will not systematically retreat from the market. Although the partial privatisation of state-owned enterprises and its subsidiaries offers new investment opportunities for private investors there is however no fundamental opening of the Chinese market for private and foreign capital on the horizon. 

Global presence of Chinese SOEs increases

One of the objectives of the reforms is to prepare state-owned enterprises and state holding companies for greater international expansion. The government will vehemently support the activities of holdings and enterprises. The involvement of holdings as foreign investors is a new dimension in the internationalisation of Chinese corporations. 

Chinese SOEs become fiercer competitors

Mega mergers will allow SOEs and holding companies to become even greater players who will expand their market power even further. Foreign companies will thus have to prepare for increased competition from Chinese SOEs both within and outside of China. 

 

Contact person for this Web Special: Sandra Heep, Head of Programme Economic Policy and Financial System

The Authors

  • Stiftung Mercator
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