Alarmed at a rapidly slowing economy and the prospect of rising unemployment and capital flight, Beijing has launched a long-expected overhaul of its bloated and underperforming state-owned enterprises (SOEs).
In September, the State Council said it was preparing to unveil plans to boost private ownership of the country’s 150,000 state-run groups, which control $17 trillion in assets and employ 35 million people, yet remain chronically poorly managed and underproductive.
In a document sent to government ministries, China’s chief administrative body said it would “forcefully push state-owned enterprises to reform and go public, and create conditions for conglomerates to list all their assets”.
State-run firms would be encouraged to pursue ‘mixed-ownership’ reform, the Party’s catch-all phrase for partial privatization. Beijing aims to divide firms into three categories (‘strategic’, ‘public interest’ and ‘commercial’) before deciding whether an SOE deserves to be broken up, listed, forcibly merged with a peer, or injected with fresh local or foreign private capital.
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A natural gas processing plant in Sulige, |
Restructuring
If successful, it would mark the most aggressive restructuring of China’s corporate apparatus since the late 1990s, when the reformist premier Zhu Rongji smashed the last vestiges of the old ‘iron rice bowl’ system, in which state enterprises took care of workers from cradle to grave. Zhu laid off 30 million workers and forcibly merged tens of thousands of SOEs, creating sprawling corporations in sectors ranging from telecommunications and mining, to auto production and chemicals.
The system created national champions such as Hong Kong listed-Lenovo Group, the world’s largest maker of personal computers. But it also coddled SOEs, protecting unproductive firms from insolvency and competition, and turning many into zombie firms kept alive only thanks to state-sanctioned life support. As China’s economy has slowed this year, putting it on track to grow at the slowest rate in a quarter of a century, the glaring discrepancy between productive private firms and underperforming SOEs has become jarring.
Hong Kong consultancy Gavekal reckons that if revenues at state firms had expanded at the same pace as private firms in the first six months of 2015, the country would have posted economic growth of 8.2% over the period, rather than 7%.
Beijing’s motivation here is complex and multi-layered. Analysts say it has chosen this moment to dust off its old privatization playbook because it is spooked by poor growth data. To others, the bigger fear is capital flight, as entrepreneurs and wealthy state officials look to sequester their fortunes far from the prying eyes of the Party. In the year to end-June 2015, $500 billion fled the mainland in one form or the other, according to data from Citi; by the end of the year, the country’s foreign reserves are set to fall to $3.3 trillion, from $4 trillion at their peak.
In a September 8 report, Anne Stevenson-Yang, co-founder of independent consultancy J Capital Research, said capital may flee the mainland “much faster than anyone expects”, as the economy slows, and individuals fear for the safety of their fortunes.
Others point to the Party’s determination to vouchsafe its future by transforming the State-Owned Assets and Administration Commission, the government arm that oversees all SOEs, into a clone of Singapore’s sovereign wealth fund, Temasek. SASAC is viewed in Beijing as vital to its future (because it will help the Party maintain its control over state firms, while in theory insulating them from excessive political interference), but structurally weak, and easily manipulated by the companies it is charged with regulating.
Yet many wonder how serious Beijing is about allowing ‘non-public investment entities’ to, in the words of the State Council, “participate in SOE restructurings, listings, capital raisings and enterprise management, through equity stake purchases, share subscriptions, convertible bonds, equity swaps and other methods”.
Factions
The Party is riven by two factions: liberals, who espouse greater genuine privatization; and conservatives, who want to tighten their grip over SOEs, and merge state firms into yet larger groups. In May, SASAC floated the notion of forcibly conjoining several of China’s largest oil and gas groups, in an attempt to protect them from tumbling energy prices; company executives pushed back, and the plans were quietly dropped.
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Others warn that the privatization plan has the potential to stall, or entirely fail to launch. Insiders say the Party is concerned that the programme will exacerbate the volatility of stocks listed in Shanghai and Shenzhen, as well as Hong Kong. Beijing is fretful of undermining fragile confidence in onshore-listed securities, after a year marked by a sharp rise, and an equally and spectacularly sharp fall, in mainland share prices.
The final challenge for China’s more liberal-minded officials will be in convincing private investors, local or foreign, that the state is committed to genuine privatising reforms, rather than a socialist redrawing of the concept. So far the omens are not good.
In April, Jiangxi Salt invited investors to buy shares in the regional monopoly producer, cutting the state’s stake in the firm to 45%, from 100%. Even though the government is still the company’s single largest shareholder, the firm now has four new investors, with a combined holding of 47%. Mainland media made a big fuss of the deal; the People’s Daily described it as a ‘landmark’ transaction, and a sign of things to come.
Yet those with sharper eyes spotted that the quartet of new shareholders, including China Merchants Group, asset manager China Cinda, and Zhonxinjian Merchants Investment, were all themselves either state firms, or divisions of groups controlled by Beijing.
This again highlights the challenges and the Kafka-esque logistical and intellectual complexities inherent in convincing a one-Party state obsessed with power to loosen its control over corporations that are, in themselves, merely little cogs in a huge state-run machine.
