Turning around China’s megalithic state-owned enterprises
China, like Thailand, is attempting to transform its economy under a new economic model appropriate to the 21st century.
Key to its success is State Owned Enterprises, or SOEs, which dominate the business landscape and control about 40 per cent of industrial assets. However, SOEs are concentrated in “sunset industries” such as steel, concrete and cement, heavily indebted, and their productivity is very poor.
Although attempts have been made to reform the SOEs for many years, success up to now has been limited. However, there now seems to be signs of progress with a report from the state regulator that assets have soared thanks to improved efficiency and production, with a 27 per cent increase in overall profitability.
Last year, all SOEs were ordered to restructure into corporations following modern company practices and the government also pushed for divestment of assets, mergers and acquisitions. Meanwhile more than 90 billion yuan of private capital was injected into SOEs in sectors such as power, oil, gas, shipping and telecommunications, while over 1,000 “zombie” enterprises were targeted for shutdown. At the same time, SOEs in heavy industries such as coal-fired power stations, shipbuilding and construction have been ordered to reduce capacity. However, reforming these SOEs is unlikely to lessen their importance in the economy as they have both a policy and commercial role, supporting China’s strategies such as the Belt and Road initiative. For example, the giant train-maker CRRC is an SOE, as is Cosco, the massive shipping company, and these companies are developing infrastructure while supporting Chinese access to global markets. Other companies such as Sinopec and China National Petroleum play a critical role in protecting China’s energy interests.
Some commentators describe China’s SOE strategy as “state capitalism with Chinese characteristics” – pointing out that the goal is not to privatise these Chinese SOEs but to create a more concentrated, efficient and powerful state sector of global champions. Since Chinese SOEs occupied three of the top five positions in Fortune 500 companies in 2017, the government seems well on the way to achieving these objectives.
If China does succeed in reforming its biggest SOEs – and this is looking promising – it will then need to deal with the more than 100,000 heavily indebted SOEs managed by municipalities. This is an even thornier problem – we will have to wait to see how it tackles this.
