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UPDATED: June 15, 2015 NO.25, JUNE18, 2015
Market Watch NO.25, 2015


SOE Reform Should Be Market-Oriented

The 13th meeting of the Central Leading Group for Deepening Overall Reform held on June 5 approved guidelines for deepening reform of state-owned enterprises (SOEs), making clear the orientations for the reform of SOEs.

During the process of rapid economic growth in the past decade, Chinese SOEs have become more powerful, and their influence on the market has strengthened, particularly in the allocation of market resources.

It is certainly necessary to make SOEs stronger and to enhance the vitality of the state-owned sector and its ability to withstand risks. However, many previous reforms could only be adopted in a piecemeal manner.

A new round of SOE reform represented by reorganization of central SOEs has started. The Central Government supports the massive SOE reorganization for two reasons: reducing the number of central SOEs and strengthening their overseas development. Meanwhile, more than 20 local governments have formulated schemes for SOE reform, half of which have fixed the timetable and targets of their respective reforms.

It must be noted that the essence of SOE reform should be to clarify the position of state-owned sector in the Chinese market and establish a market system best suited to improving China's market economy and economic efficiency. The reform should first break the monopoly of SOEs and then open up the market.

At present, several fundamental questions in SOE reform deserve attention.

First, what are the purposes of SOE reforms? Are they intended to boost the competitiveness of SOEs, or are they market-oriented?

Current circumstances indicate that decision-makers have to solve the problems of the inadequate competitiveness of SOEs and destructive competition between them in overseas markets. Therefore, this round of SOE reform is more functional than it is oriented at establishing a market-oriented scheme.

Second, what are the targets of SOE reform? Currently there are four opinions on the development of state-owned economy and SOE reform that the state-owned sector is the lifeblood of our national economy; that it is an important foundation for the national economy; that can only be strengthened but not weakened; and that no loss of state assets should be incurred during the reform.

Some believe the fundamental goal of SOE reform is to strengthen the mainstay position of the state-owned sector, and that SOE reform should reach two ultimate goals: to continuously increase the value of state assets and strengthen financial power of the government, and to promote China's market-oriented reform.

Making SOEs more powerful does not mean just to expand their size. In fact, downsizing, improving the quality of assets and changing the forms of state assets are also important ways of making SOEs more powerful. A crucial task for SOE reform is to coordinate with market-oriented reform. If SOE reform is not capable of furthering market-oriented progress, its very orientation will be open to question.

Third, how will SOE reform be conducted? Some scholars think SOEs now represent interests of a few people, and this has been verified by the disciplinary inspection of the Communist Party of China. Being state-owned, SOEs are like sweet pies from which everyone desires to take a bite, thus they become a breeding ground for corruption. Will the current reform plan solve this problem?

Fourth, what are the principles of SOE reform? In the medium and long term, SOE reform should firmly stick to advancing the market-oriented process, and the government must gradually withdraw. At present, however, the state capital operational reform is making slow progress. The underlying reason is the competition for investment powers and management of state assets.

Therefore progress in the following aspects must be made during the next round of SOE reform. Financial support to SOE reform must be strengthened, and privately owned companies should be granted easy access to low-cost financing. Corporate governance structure must be improved, so that private investors can participate in the decision-making process of SOEs through boards of directors. SOE reform should also abide by market mechanism to avoid corruption and the loss of state assets.

Moreover, in projects involving public interests, the government must guarantee that after reform, SOEs will continue to provide adequate public products at reasonable prices, and public interests must not be damaged by the reform.

Above all, SOE reform should be a market-oriented reform. As Zhong Wei, an economics professor with Beijing Normal University, said, there are too many showy but useless theories on SOE reform. Without selling stakes, breaking market monopolies or improving corporate governance, SOE reform will become a false reform in which the market cannot have the say it should.

This is an edited excerpt of an article by Zhou Zixun, an economic commentator, published in National Business Daily



The number of companies that got the green light to be listed on the stock market this year

409,700 yuan

The annual salary paid by Shanghai Pudong Development Bank, the highest among banks listed in the top 50 companies in China in 2014


The Bankcard Consumer Confidence Index in May, edging up 0.32 from April1.44 tln yuan

330.95 bln yuan

Paid-in foreign investment in China from January to May, a year-on-year increase of 10.5 percent

1.44 tln yuan

Public budget revenue in May, a year-on-year increase of 5 percent

3.23 tln yuan

Real estate development investment from January to May, a nominal year-on-year increase of 5.1 percent

2.42 tln yuan

Retail sales of consumer goods in May, a year-on-year increase of 10.2 percent after adjusting for inflation

283.84 mln tons

The volume of railway freight in May, a month-on-month increase of 2.73 percent


Copyedited by Kylee McIntyre

Comments to yushujun@bjreview.com

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