On February 20, China Petroleum and Chemical Corporation, known as Sinopec, said it would open its distribution chain to 30% outside investment, a landmark change to the state’s monopoly on the oil sector. On the same day, Gree Group, an appliance maker owned by the city government of Zhuhai, followed suit, saying it would establish a new company and sell 49% of that to strategic investors.
This isn’t just talk. The moves by these two powerful state-owned firms – particularly Sinopec – are significant steps in the long and tired process of state enterprise reform.
Chinese media have pointed to the announcements as signs that new, concrete reforms to central and local state assets will be announced at the second annual session of the 12th National People’s Congress, which convenes on Wednesday and will likely run through mid-March.
More often than not, NPC sessions are extravagant and meticulously organized events where government plans are rubber-stamped by officials. Leaders issue long-winded work reports, stress stability and unity and, most importantly, praise the Communist Party. That was true of last year’s congress too, except that session completed a once-in-a-decade leadership change that officially crowned Xi Jinping president of China and head of the People’s Liberation Army. The transition started a few months before that when Xi was ushered in as party chief at the Communist Party’s congress.
‘Quality assets’
What’s drawing attention to this year’s NPC is all that has happened since Xi took over. Even before he became president, Xi launched a campaign to tackle inner-party corruption. The major purges that followed have cleared the way for reform at state firms such as Sinopec, where a pantheon of senior officials have been disposed on graft charges. The new leader’s consolidation of power was evident at the party’s Third Plenum summit in November, which issued a 60-point to-do list of social and financial reforms. Experts called the document the most substantial push for change in China in nearly 20 years, one that only a leader with a staunch power base could make.
The State-owned Assets Supervision & Administration Commission (SASAC), which oversees China’s SOEs, has been hard at work since November drafting a set of guidelines for reform. Midway through last year, SASAC head and Sinopec don Jiang Jiemin was removed from his post and saddled with corruption charges. That was likely a necessary move to press ahead with real reform for some of the assets that SASAC oversees either directly at a central level or indirectly at the local level.
The deputy director of SASAC recently told state media that the new guidelines are a two-pronged strategy that will give private players a chance to take equity ownership in SOEs and promote modern corporate governance in the mammoth firms.
That Sinopec is a guinea pig for the overhaul shows that leaders won’t just toss worthless assets into the fray. “The current wave of SOE reform is being started with both quality companies and quality assets,” Barclays Research said in a report.
Like it’s 1997
In 2014, it might be hard to remember that state-asset reform isn’t new. One can’t be blamed for forgetting this following a decade under former president Hu Jintao when struggling government-backed companies saw their share of the economy surge after years of decline.
Millions of Chinese were laid off in the late 1990s as Beijing pushed the failing state companies they worked out of the market. Big SOEs that survived the cull grew stronger as sectors become less crowded. Avoiding dismantlement became an incentive for the firms to boost efficiency. But in 2003, under the direction of the new leader Hu, SASAC effectively ended the reform. The government closed the door for exiting the market. Since then SOEs have grown bloated with no real threat of failure.
The state-asset reforms at hand today are a continuation of the works that were put in place in 1997. SASACs leadership since the sacking of Jiang Jiemin has stressed its commitment to shuttering bad state assets. The Third Plenum’s to-do list mentioned mixed ownership for SOEs, as well as establishing a “market exit mechanism,” Andrew Batson, researcher at GavKal Dragonomics, noted in a recent report. But it stopped short of specifically mentioning the exit of SOEs, a step that will be crucial for re-starting the reform – and for it to have a meaningful result.
“For this kind of threat to have credibility and bite, there need to be consequences for firms that fail to deliver,” Batson said in the report. “So the government should also restore a credible threat of closure and market exit for the worst performing SOEs.”
Analysts are conflicted on whether the NPC will yield a robust plan for clearing inefficient players from the market. London-based Capital Economics said in a note this week that detailed plans could be elusive but the NPC may shed some light on the dividend payments SOEs are supposed to make to government coffers. State firms have been reluctant to split their profits with the state itself but the Third Plenum list asked SOEs to contribute 30%. The NPC could solidify the decision.
While Chinese media are hopeful on a strong follow-up to the Third Plenum starting on Wednesday, weekly newspaper The Economic Observer warned against confusing marketization with privatization of SOEs. The high-level meeting in November showed real commitment to reform in the state sector but it also defined the future role of SOEs, calling the firms a “foundation” of China’s unique system.
“The debate within China is not about whether there should be state-owned enterprises,” Batson wrote, “but rather what kinds of companies these should be and how they should be managed.”
With that in mind, it’s clear that SOEs will remain important market players in China for years to come, even if outside investment begins to trickle in.