SOE reform heads in right direction
(China Daily)
Updated: 2004-09-30 09:26

The State-owned Assets Supervision and Administration Commission, the supervisory body of State assets, published an article in People's Daily yesterday giving its view, for the first time since the debate began. It says that the direction of the SOE reform should be maintained, but that the reform should be advanced in an orderly way. The commission said more standards and rules, especially those on the property rights system, should be established as soon as possible.

The following is an abstract of the SASAC article.

The State-owned enterprises (SOEs) reform is at the core of the entire economic reform in China.

The SOEs have witnessed great changes in management and operation systems after years of reform.

Now market competition is becoming more intense and increased progress is being made.

For example, the government has reduced administrative interference in the enterprises' operation. The economic structure is more reasonable and shareholding restructuring is gathering pace.

The SOEs' quality as a whole has improved. Their contribution to economic development is also obvious.

Therefore the authorities' policy on the SOE reform and the reform trend have been approved as correct. Related measures that have been taken are efficient.

However, the SOE reform is a long process that needs steady improvement and exploration. In recent years, lack of parallel regulations for the reform, and the obscurity of the exact owners of the State assets, have brewed problems that arouse public concerns.

But to realize the target of the overall economic market reform and the well-being of society, the SOE reform should maintain its direction and be promoted with better discipline.

Actively promoting the strategic restructuring of the State economy

Since the opening of the 15th National Congress of the Communist Party of China (CPC) in 1997, China has speeded up the strategic restructuring of State-owned economic forces.

A number of internationally-competitive big corporations have emerged. Small and medium-sized SOEs have also gained vigour.

Meanwhile, a number of loss-makers and exhausted mines have been closed.

The number of State-owned and State-controlled enterprises declined from 238,000 in 1998 to 150,000 in 2003. At the same time, the profits realized by SOEs increased from 21.4 billion yuan (US$2.6 billion) to 495.1 billion yuan (US$59.8 billion).

Fifteen Chinese enterprises entered the Fortune Global 500 list in 2003, among which 14 were SOEs, compared to only three in 1998.

Through mergers and acquisitions, rental, contracting and shareholding restructuring, most small and medium-sized SOEs have also realized a more diversified property rights structure, while their profitability has also improved substantially.

However, during the reforms, problems were also raised.

Some people simply took the restructuring as the entire withdrawal of the State from competitive sectors and the advancement of the private sector.

Some were too aggressive about the State assets sales, while some measures used during the process infringed the lawful interest and rights of the owners, creditors and employees and aroused public complaints.

However, the economic reform in China aims to improve and consolidate the socialist system, upgrade the economic structure and enhance the vitality and competitiveness of the State economy.

Policies and guidelines should be understood correctly. It is wrong to claim a comprehensive withdrawal of the State force from competitive sectors or simply emphasize the selling of the State assets while ignoring the market rules.

The SOE reform should enable State capital to flow in a rational way and put more of the capital into key economic sectors that concern national security and its backbone industries.

The asset restructuring should be conducted in fair market competition and a diversified manner, based on the actual conditions in different industries and regions.

As the reform continues, the proportion of the State capital in the overall national economy is expected to further decline, but the total quantity of the State economy should be increasing and quality improving.

The practice of some regions of building up a few strong SOE groups has exerted a positive impact on the local economy.

Persist in shareholding reform

The shareholding system is one way to let State capital enhance a leading role in the economy.

The Third Plenary Session of the 16th CPC Central Committee clarified that China should develop the mixed ownership system via joint-stock operations of State capital, collective capital and non-State capital.

By the end of 2003, 2,514 of the 4,223 key large and medium-sized SOEs in China had been transformed into shareholding corporations.

Some were listed domestically or overseas after the shareholding restructuring. The mixed ownership system also enhanced the controlling power of State capital and pointed to a right direction for the SOE reform.

In recent years, some enterprises have been trying the practice of management buy-out (MBO), as a stimulus to executives.

While that did to some extent improve the vitality of the enterprises, it was also accompanied by irregularities such as self-interested dealing and insider trading.

Some individuals tried to transfer the risks of the transaction to the buy-out target or financial institutions by using State equities and assets as guarantees for financing. Some practices also harmed the rights of investors and employees and triggered social instability.

The implementation of MBO has to be put in a developed market environment. In China, however, such an environment is not yet available, given the shortage of an efficient price discovering and formation scheme for the State assets and insufficient laws about this aspect.

Limited legal financing access for the buying party and weak monitoring schemes on the enterprises would increase the possibility for insider control.

Therefore, any hasty implementation of MBO is apt to fuel irregularities and the losses of State assets when the market condition is not ripe.

It is particularly inappropriate to execute MBO in the big SOEs, since the quantity of assets involved is large and it would be hard for the buyer to get enough funding.

Moreover, many of these enterprises are controlling the lifeline of the economy. The reform guideline for them is to separate the ownership from management and build up corporate governance. And the most important ones must be controlled by the State.

MBO is against the direction of such reforms in the big SOEs as it would put the ownership and operational rights into the same persons' hands.

For small and medium-sized enterprises, however, which do not concern national security or the economic lifeline, they may try the experiment of MBO, but it has to be done in a fair, open and standard way, with effective protection of the legal rights of relevant parties.

Speed up the construction of an efficient property rights system

Property rights are a key part of the ownership system.

Though China has enacted a series of regulations on property rights management, it is still lagging behind many other countries in the sector. The process of legislation has to be accelerated and the property rights system reform should be deepened.

Presently, poor-quality auditing, unaccountable figures for asset evaluation and lack of transparency and standards in property right transactions have made it possible for some to sell State assets cheaply or even take them over as personal property.

The fragile regulatory scheme is a major reason for such problems.

The temporary regulation on the transfer of State-owned property right in enterprises, adopted last December, framed the legal procedure and location for such transactions.

Three asset and equity exchanges in Beijing, Shanghai and Tianjin were designated as pilot exchanges for relevant transactions in the central SOEs.

Then the question is to implement the regulation, strengthen supervision and enhance information disclosure to curb irregularities and prevent losses of State assets.

Now the SOE reform is at a crucial stage and is expected to make a breakthrough.

We have to liberate our minds and be bold to make experiments and head on with the reforms in the designated direction.

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