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Special> NPC & CPPCC Sessions 2015> Exclusive
UPDATED: March 8, 2015 NO. 11 MARCH 12, 2015
A Shift in Role
The government should step back from its control of state-owned enterprises
By Wang Hairong & Cui Xiaoqin

The year 2015 is one in which China will accelerate the comprehensive deepening of the reform, and reform of the state-owned enterprises (SOEs) is a priority.

The SOE reform in 2015 will focus on classification of SOEs and mixed ownership reform, said Zhang Yi, Chairman of the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council at a recent meeting with centrally administered companies.

SOEs play a major part in the Chinese economy. As of 2014, two thirds of the top 500 Chinese companies on Fortune China's list are SOEs, and three centrally administered SOEs have made it into the top 10 of the 2014 Fortune Global 500 list. However, for being government-backed, they are inadequately powered to make progress in technological research and development, cost control and industrial upgrading.

At the Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC) convened in November 2013, the central leadership decided to promote SOEs to improve their modern corporate governance system and deepen SOE reform.

To make SOEs real market entities and boost their vitality and competitiveness, the government, being the owner, manager and supervisor of SOEs, should change its role.

"Separating government administration and corporate management is a precondition for improving SOE performance. Only if the government refrains from what it should not do can SOEs become real independent market entities responsible for their own profits and losses," said Peng Huagang, Director General of the SASAC's Research Bureau.

This round of SOE reform will determine the future operation model of SOEs and state-owned capital, and it must be based on the classification of SOEs by their functions, Gao Fuping, a professor of East China University of Political Science and Law told Oriental Daily News. "Classifying SOEs by functions will demarcate the boundary between the government and market, letting government do what it should do, and leaving the others to the market."

Companies in competitive industries should be evaluated according to market rules, whereas those in non-competitive industries should be evaluated through cost and benefit analysis, following the principle to maximize social benefit, he said.

SOEs have been a major channel for the government to allocate sources. Such a mechanism weakens the market's role and companies' competitiveness. By categorizing SOEs, the government can reasonably define its positions and roles in various affairs and become service-oriented; meanwhile, the market can play a major role in allocating resources, Gao said.

In 2014, the SASAC launched pilot reforms to develop new state-owned asset management models, promote mixed ownership, improve corporate governance structure and step up disciplinary inspection of corporate executives. It selected several centrally administered SOEs to pilot the reforms.

Prior to that, Sinopec Corp. in February 2014 announced that it would reshuffle itself and introduce private investment, taking the lead in SOE's mixed ownership reform. Last September, 25 private investors offered a total of 107.1 billion yuan ($17.3 billion) to purchase 29.99 percent of the company's stocks.

Nonetheless, some private investors have concerns. Zong Qinghou, founder, Chairman and CEO of Hangzhou Wahaha Group and one of the richest men in China, said private investors worry that after they put capital into SOEs, they will neither gain any decision-making power nor be able to change the SOE's management system.

The key to attracting private investors into SOEs is to ensure their returns. Xie Lujiang, a professor with the Party School of the CPC Central Committee, believed that to dispel the concerns of private investors, it is important to treat companies equally and let them follow established rules rather than allowing them to revise rules to their respective advantage. To him, the mixed ownership reform is not simply to re-split the cake but rather to set new rules and operation models for companies and investors.

The government should shift from "managing enterprises" to "managing capital," Wu Jinglian, a renowned economist, was quoted in a Xinhua News Agency report.

"Under mixed ownership, if the government continues to 'manage' SOEs, private investors will worry that it will not have any say on company policies. Yet, if SOEs are governed according to the Corporate Law, private investors should be relieved of their concerns," Wu said.

Wu said that now, the SASACs at various levels are still "micro-managing" SOEs, including managing their human resources, assets and other affairs. In the future, a representative agency of the government should manage state-owned capital as a shareholder according to the Corporate Law. He said that corporate governance structure should be established and improved sooner so that there will be checks and balances between owners and managers.

Wu suggested establishing a state-owned capital management company at the national level as soon as possible, and transferring a large amount of state-owned capital into the social insurance fund, which will directly invest or entrust asset management companies to invest the capital. The social insurance fund will take part in corporate management as a representative of shareholders.

Email us at: wanghairong@bjreview.com

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