China’s SOE Reform: Domestic and International Perspectives
Conference held in Beijing on 7 May 2015
CONCLUSIONS AND RECOMMENDATIONS
China is expected to embark before the end-2015 on another wave of reform of state-owned enterprises (SOEs). Drawing on the OECD’s extensive expertise on SOE reform and management and the NSD’s wide-range involvement in China’s policy dialogues, this workshop gathered experts from OECD headquarters and member countries as well as from research institutes in China to discuss the major issues and solutions for China’s next wave of SOE reform. This document summarizes the conclusions and recommendations the workshop participants agreed for China’s SOE reform.
State-owned enterprises in an international context:
SOEs are nationally or locally owned, but their activities are felt abroad through their involvement in trade, investment and cross-border competition. Moreover, the reform challenges facing the owners of SOEs tend to be similar across countries at comparable levels of economic development. For these reasons, a strong international dialogue about SOE reform is warranted and beneficial for all.
There can clearly be no one-size-fits-all in SOE reform. Yet policy makers tend to agree on some good practices and outcomes toward which all should aspire, including transparency; a professional ownership function operating separately from regulatory agencies; a healthy competitive environment; and a high level of professionalism among SOE managers and supervisory boards. These values have been codified in international codes such as the OECD Guidelines on Corporate Governance of State-Owned Enterprises (henceforth the OECD Guidelines).
The challenge in China:
After the first wave of reform in the 1990s, the number of non-financial SOEs in China was reduced to about 159,000 by the end of 2013. Around forty percent of SOE assets belong to central government owned SOEs, of which more than two-thirds belong to the 112 large corporate groups managed by the national SASAC (State Assets Supervision and Administration Commission). Although their size of employment is relatively small, SOEs contribute significantly to the national economy, accounting for about one fourth of the country’s industrial value-added. In the financial sector, state-owned banks and other financial institutes maintain a dominant role.
While making a significant contribution to the national economy, Chinese SOEs compete with the private sector for resources – particularly finance – and dominate upstream industries where monopoly profits can come at the expense of downstream industries. Inefficiency or monopolistic behaviour in SOEs potentially holds back growth of the Chinese economy and impedes the ability of the market to allocate resources efficiently. State ownership has helped China move up to a middle-income country. However, China has reached a challenge that is in many ways classical for countries having developed their economy to reach middle-income status: how to find the most efficient balance between the private and state-owned sectors.
1. Ownership reform
- SOE reform needs to be tailored with a view to both maximising economy-wide efficiency and avoiding adverse distributional or social consequences of redressing the sectoral balance. Judging by the practices of OECD countries, wholesale privatisation may not be the only solution for SOE reform, and in any case would be undesirable for those industries that are currently monopolised by the state.
- Yet a broadening of the ownership is likely to improve the efficiency by which SOEs reach their objectives. The government should clearly define the objectives of individual SOEs to officially categorize SOEs according to whether their function is purely commercial (maximising financial return on public assets), to provide economic infrastructure (maximising total economic return on public assets rather than profit) or to pursue explicitly defined non-commercial objectives (including the provision of social services and public goods). Purely commercial SOEs should be considered candidates for privatization. Mixed ownership can in most cases be introduced to the other two kinds of SOEs.
- Public listing can be an effective way to enhance corporate governance in SOEs because it requires SOEs to adopt internationally recognized rules for information disclosure, accounting, and board structure.
- When it is desirable, mixed ownership reform should consider social capital --- capital provided by equity funds, social security funds or other forms of social funds --- as a priority to absorb external capital. The participation of social capital can reduce the risk of wealth concentration and the dominance of large businesses in the national economy.
- International experiences show that private-public partnership (PPP) can be an effective instrument to provide public services. When PPP is appropriate, existing SOEs can either be privatized or take a smaller role.
2. Management of state assets
§ The government should not consider just one approach to restructure the management of assets that remain in the hand of the state.
§ Large SOEs that carry out government strategic objectives can still be directly owned and managed by the government.
§ For other companies, a professional ownership agency, holding company or similar centrally coordinated ownership model may be applied. Any such body (or bodies) should report to the executive powers and be overseen on a whole-of-government basis.
3. Management of SOEs
§ No matter what ownership form an SOE takes, the government should stay arms-length away from its daily management. In this regard, the OECD Guidelines provide a template for the best practice. In particular,
o The board of directors should act as the highest authority in an SOE;
o A professional ownership function is protected so it operates separately from regulatory agencies;
o Transparency and accountability are guaranteed;
o Market principles are applied to foster a healthy competitive environment ;
o A high level of professionalism and autonomy is promoted among SOE managers and supervisory board members.
§ An incentive structure should be introduced into an SOE to attract highly competent talents and foster a high level of professionalism.