THE WAY TO PROFITS: The China National Coal Group Corp. is one of several state-owned mining facilities. Weak points in the state-owned enterprises are restricting the sectors' development, but the number of SOEs that will be closed may be relatively small (YAN YAN)

In an article published in the Study Times on November 30, 2009, Li Wei, Vice Minister of the SASAC, wrote that at present, 68 central SOEs are engaged in financial derivatives business, mainly in products involving commodity futures, foreign exchange rate and interest rate swaps, options and structured deposits. By the end of October 2008, the contract value of financial derivatives from central SOEs had reached 125 billion yuan ($18.3 billion), causing a floating net loss of 11.4 billion yuan ($1.63 billion). The contract value on the domestic market had hit 35.74 billion yuan ($5.32 billion), creating a floating net loss of 130 million yuan ($19.03 million). The contract value on overseas markets had been 89.46 billion yuan ($13.1 billion), with a floating net loss of 11.27 billion yuan ($1.65 billion).

In the article, Li Wei pointed out that the lack of a corporate risk-control mechanism has contributed heavily to the substantial losses.

"An analysis shows that one of the common reasons for the failed investments in financial derivatives was a serious defect in risk management by the enterprises. The management teams are not aware of the risk controls, and their idea of gambling and leaving things to chance only accelerated the process of investment failure," Li Wei said in the article.

Among the central SOEs with business interests in financial derivatives, most have no special risk-control institutions. Some go so far as to integrate the functions of trading, clearance and transaction management that should be separated, which has only guaranteed a failure in the supervision and check-and-balance system.

For this reason, Li Rongrong points out that in promoting a transformation of the development pattern of SOEs in 2010, the SASAC will focus on guiding enterprises to strengthen risk controls, including strictly controlling external guarantees, the lending volume and asset-liability ratios, with the aim of effectively reducing debt risks. The SASAC will strictly manage SOE cash flows while strengthening the management of SOE investments to reduce overall risks. The end result will be a reduction and eventual elimination of losses by SOEs.

Other measures to prompt a change in the SOEs' development pattern include: guiding the enterprises to improve independent innovation and brand establishment; to save energy, reduce emissions, develop new technologies for the green and low-carbon economies; and to improve the quality of employees through various forms of skill training.

Whether these measures can curb the losses caused by the lack of a risk-control mechanism has yet to be seen, but some measures are better than no measures, Li Rongrong said.

"We can easily see that by issuing some supportive or punitive measures, the SASAC is trying to avoid or reduce long-term losses possibly incurred by the SOEs," Li Rongrong said.

Supervising And Administering

Established in May 2003, the main principle of the State-Owned Assets Supervision and Administration Commission (SASAC) of the State Council is to separate government administration from enterprise management, and also ownership from management power.

Authorized by the State Council in accordance with the Corporate Law of the People's Republic of China and other administrative regulations, the SASAC's main functions include:

Performing investor's responsibilities, supervising and managing the state-owned assets of enterprises under the supervision of the Central Government (excluding financial enterprises), and enhancing the management of state-owned assets.

Assuming supervisory responsibility while establishing and improving the index system for value preservation and increment of state-owned assets through statistics and auditing. The SASAC is also responsible for the management of wages and remuneration and for formulating policies regulating the income distribution for top executives at supervised enterprises.

Guiding the reform and restructuring of state-owned enterprises (SOEs), advancing the establishment of a modern enterprise system, improving corporate governance, and propelling the strategic adjustment of the layout and structure of the state economy.

Appointing and removing top executives at supervised enterprises and evaluating their performances through legal procedures followed by appropriate rewards or punishments. The SASAC also establishes a corporate executive selection system according to the socialist market economy system and modern enterprise system, while improving the incentives and restraints process for corporate management.

Dispatching and taking charge of supervisory panels on behalf of the State Council.

Organizing the supervised enterprises to turn the state-owned capital gains over to the state, formulating management systems and methods for the state-owned capital operational budget, and working out the operational budget and final account.

Urging the supervised enterprises to carry out the principles, policies, related laws and regulations and standards for safe production, and inspecting the results in accordance with the responsibilities as an investor.

Fundamentally managing enterprise assets, working out draft laws and regulations on the management of state-owned assets, establishing related rules and regulations and directing and supervising the management work of local state-owned assets according to the law.

Assuming other tasks assigned by the State Council.

(Source: www.sasac.gov.cn)