Article

State-Owned Enterprises Slowly Letting Go

From Shanghai to Guangdong, private investors will be welcomed under a new phase of SOE reform. This is in essence a management transformation. Remains to be seen how capital will be managed, defined and changed. Research in these areas is still being conducted. . It's still a far-reaching topic under discussion.

“By Gateway to China Staff”

Sources say that Shanghai is home to three platforms involved with state-owned capital – Shanghai Guosheng (Group) Co. Ltd., Shanghai International Group Co. Ltd. and Shanghai State-owned Capital Management Co.

Guosheng is geared toward manufacturing companies, and Shanghai International focuses on financing. Shanghai State-owned Capital Management was founded in 2010 with 100 million yuan from the city's State-owned Assets Supervision and Administration Commission of the State Council (SASAC)   to manage state-owned shares and market operations.

Shanghai SASAC now manages 55 SOEs, down from 79 in 2008. Some 93 percent are doing business in 20 leading industries.

Shanghai has three classes for its State Owned Emterprises (SOE) : competitive, functional and public service-oriented. Each has a different administrative structure and management mechanism. They also vary in human resource and executive compensation areas.

The Shanghai government wants strategic emerging industries to account for 80 percent or more of all SASAC-controlled assets within five years. Key areas would include advanced manufacturing, services and infrastructure.

Shanghai

The vice director of the Shanghai SASAC, Lin Yibin, said 62 percent of SASAC assets already focus on these strategic areas. And about 40 percent are tied to infrastructure concerns and public services.

Guangdong's government has likewise proposed steering state-owned holdings into companies engaged in infrastructure, public services and resource-related industries. Officials also want to leave a door open to future investments in new industries that emerge as economically important.

A recent Huatai Securities report found that most SOEs in Guangdong are either competitive enterprises or tied to social services. Few are large, assets are generally dispersed, and the government wants to introduce private investors to competitive companies, and perhaps public services firms, at a relatively rapid rate.

Following in Shanghai's footsteps, the Guangdong government has proposed better financial opportunities for (SOEs). Its plan is to delegate financial responsibilities to SOEs with track records that prove they can properly handle money matters. These would then become state-owned capital investment firms in charge of companies helping other SOEs manage risk and capital.

Premier Li Keqiang recently proposed letting private investors participate in central government-controlled SOE investment projects in areas including financial services, petroleum, electric power, railroads, telecoms and resource development.

In step with the premier's call, the Chongqing government proposed at a January work conference rolling out nearly 100 state-owned capital projects with combined initial investments totaling nearly 200 billion yuan by the end of the year. These projects would be open to private investors.

Chongqing also plans to form up to five, state-owned capital investment companies with the ability to compete nationwide. Another goal for 2014: the government of the southwestern city wants to see at least three of its SOEs launch initial public offerings.

Mixed Ownership

But exactly what the central government means by "mixed ownership" has yet to be clarified in the context of SOE reform.

Mixed ownership has in one sense already begun, since a large number of SOEs own minority stakes in companies with no government ties.

According to SASAC, various private partners have already invested in 52 percent of all central government-controlled SOEs or their subsidiaries. And as of late 2012, these central SOEs and their subsidiaries held controlling stakes in 378 listed companies. And more than 53 percent of all shares in these listed companies were not in state hands.

The nation's local-government-controlled SOEs, according to records, had stakes in 681 listed companies. And more than 60 percent of the shares in these companies were held by the state.

A study by the All-China Federation of Industry and Commerce found that private enterprises already participate in a mixed ownership economy in three ways. Some private enterprises have gotten strong enough to participate in SOE projects or become an SOE shareholder. Mixed ownership can also occur when private enterprises hope to introduce advanced management systems and improve competitiveness. In the third scenario, private enterprises eye to break into monopolized sectors through a partnership with SOEs.

As of January 1, state investments created a mixed ownership environment that covered 31 percent of all enterprises in Guangdong, excluding Shenzhen. The state invested in these enterprises by including non-public investments. Proportions of provincial government-owned and municipal government-owned enterprises in the same region were 45 and 27 percent, respectively.

Under a provincial government timetable, all Guangdong SOEs must complete administration system reforms by 2015. Moreover, more than 60 percent of SOEs must be mixed ownership enterprises by 2017, and that ratio must rise to more than 80 percent by 2020.

Thus in Guangdong, investment capital for the mixed ownership scheme flows both ways: SOEs can accept private investors, and state-run companies can invest in private enterprises. But in other parts of the country, local governments have proposed one-directional schemes whereby private money would be welcomed by SOEs.

Some governments have proposed mixed ownership via securitization. Shanghai, for example, is looking at increasing state-owned asset securitization to at least 40 percent. It was 35 percent as of 2012.

Guangdong's plan would include no low limit for state-owned company shareholding. It would exclude a few SOEs in special areas such as state policy functions. But mixed-ownership enterprises in which the state has a minority stake would not be subject to government or SOE oversight.

Only a few SOEs today have mixed-ownership structures, according to Shi Jun, deputy director of the Chinese People's Political Consultative Conference's Economic Commission. Most of these are weak structures, he said, which means any private investors involved usually have to passively accept whatever SOE managers decide.

"To develop mixed ownership," Shi said, "we must find a way to resolve market entry restrictions and used legal means to protect private enterprise assets."

Supporters of SOE reform also see a connection between mixed ownership and adjusting executive compensation systems in ways that better reflect market conditions, according to Zhou of the enterprise reform institute.

SOE leaders should open their positions to market forces, Zhou said, as a first step to a market-oriented salary system.

Reform plans for Guangdong and Shanghai have embraced this point. The Guangdong plan, for example, calls for establishing a system of hiring professional managers through which the market would determine how talent is recruited for high-level management positions at SOEs.

Han Zheng, Shanghai's party boss, said that "the process of recruiting presidents for some enterprises will be marketized" and "the government cannot interfere in the daily operations of enterprises."

A director at a Shanghai SOE who asked to remain anonymous said he sees advantages to working for a salary based on the market rather than party standards.

"If my salary is set too high, then other government cadres at the same level might object," he said. "As an entrepreneur, especially in an enterprise in a highly competitive industry, competitive salaries are several times higher than at SOEs."