China pushes SOE restructuring

Updated 2017-08-23 09:00:17 Global Times

Mixed ownership more important than mergers: experts

The Chinese government has been pushing for robust efforts in restructuring State-owned enterprises (SOEs) in recent years, having cut the number of centrally administered SOEs by half since 2003. And new plans are in the works to continue the reforms.

The government aims to reorganize SOEs in sectors like coal, electricity, heavy equipment manufacturing and steel, according to a report published by the People's Daily newspaper on Tuesday.

Currently there are 99 central government-administered enterprises, compared with 196 when the State-owned Assets Supervision and Administration Commission (SASAC), which regulates the centrally administered SOEs, was founded in 2003, the report said.

In the latest development, SASAC said Monday that the State Council, China's cabinet, had approved a plan to merge Sinolight Corporation and China National Arts & Crafts (Group) Corp with China Poly Group Corp.

"The aim of SOE reform is not to cut SOE numbers. What's more important is the effectiveness of the SOE reorganization," according to the People's Daily report.

"As the 19th National Congress of the Communist Party of China approaches, future reforms are again likely to come under the spotlight. Railways, defense and civil aviation are among the areas where we may see mixed-ownership reform soon," UBS strategist Gao Ting told the Global Times on Tuesday via e-mail.

Heavy industry reform

Feng Liguo, an expert at the Beijing-based China Enterprises Confederation, told the Global Times Tuesday that many firms in the heavy industry sector are facing severe problems related to overcapacity, and the government wants to solve this problem through reforms, mostly by mergers.

There have been several heavy industry SOE mergers in recent years, such as the merger of domestic steel giants Shanghai Baosteel Group Corp and Wuhan Iron and Steel (Group) Corp to create Baowu Steel Group, as well as the merger between CSR Corp and China CNR Corp, China's two largest train producers, into CRRC Corp.

In the first quarter of 2017, Baowu Steel achieved profits of 5.05 billion yuan (9 million), up 118 percent year-on-year.

However, data revealed by CRRC showed that the company's profits slumped by 4.42 percent year-on-year to 11.3 billion yuan in 2016.

According to Feng, it's not fair to blame CRRC's profit slump on the merger or jump to the conclusion that the merger has been unsuccessful.

"The government intended to create a train maker with a larger scale in order to compete with overseas industrial giants like Siemens. But a company's increasing competitiveness in the global market won't be immediately reflected in its financial data - it will take about three to five years," Feng said.

But Feng cautioned that mergers cannot necessarily enhance the companies' competitiveness, and the core of SOE reform is still mixed-ownership reform, the blending of State and private capital.

The pace of mixed-ownership reform has been increasing recently. Domestic telecom giant China Unicom on Sunday published its plan to sell a large shareholding to nine strategic investors, including private firms like Tencent Holdings and JD.com Inc.

China Unicom's reform is a good sign, Feng noted, but he added that it will be hard to duplicate in the heavy industry sector.

"The active participation of private companies in the reform of China Unicom is because the company's business is highly related to the Internet industry. With heavy industry, which is burdened with overcapacity, I don't think private investors are so eager to participate," Feng noted.

Risk averse

Feng also said that SOEs' participation in the reform scheme is often slow and reluctant.

"There are too many people in domestic SOEs who have little to do with the companies' business or profits," a mid-level executive at a Shanghai-based SOE in the equipment manufacturing industry, who only gave his surname, told the Global Times on Tuesday.

"It's worth studying how to tie SOE employees' income to their company's revenue. Some SOE leaders only stay in their positions for three years and then get promoted, so they don't pay attention to improving the company's business performance as they want to avoid risks," Chen noted.

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