State-owned shares must be lowered for the mixed ownership
Before the convening of the Third Plenary Session of the 18th Central Committee of the Communist, the public had quite focused their attention upon state-owned enterprise (SOE) reforms. And after the announcement of the Decision on Major Issues Concerning Comprehensively Deepening Reforms (the Decision for short), the public express their appreciations: not only in form there is the length of two small sections that are used for discussing the state-owned enterprise reforms, but also the content of the mixed ownership, establishing state-owned capital operating companies and breaking all forms of administrative monopoly etc. have been written in the Decision. Among these measures, the mixed ownership is the focus of most attention.
What is mixed ownership? According to the statement in the Decision, it refers to “the cross-shareholding and integration of state capital, collective capital and private capital.” Before the Third Plenary Session, the mixed ownership model is considered an important measure to improve SOE’s efficiency and competitiveness. In fact, the former SOE shareholding reforms were successful practices of the mixed ownership, especially those listed SOE. The reason that the public have great expectation for the mixed ownership is because the Decision has put it to an unprecedented height, considering the mixed ownership “is the prime method for materializing the basic economic system.”
Though SOE’s governance mechanism will be improved after mix ownership reform, I thought the biggest advantage of this reform lies in absorbing more funds for SOEs; just like that launching the stock market in China in the past was for raising more funds for SOEs. Though shareholding reforms have been carried out for all these companies later, due to the leading role of state-owned shareholders, restrained by factors of various aspects such as ideologies, the fundamental improvements have not yet been achieved for the governance structure of most SOEs.
In my opinion, for the current promotion for the mixed ownership, the biggest advantage is to lower the holding costs of SOEs through introducing more social capitals. We may take the Industrial and Commercial Bank of China (ICBC) as an example, currently the shareholders of ICBC include Central Huijin Investment Ltd. and the Ministry of Finance of PRC, ranking the first place and the second place of shareholders with share percentages of 35.40% and 35.20% respectively, the state-owned share percentage is over 70%, ensuring the state-owned percentage of the company. But simply calculating from the holding costs, this is not a very cost-efficient deal.
Because there is a requirement on capital adequacy ratio for banks, according to the regulations of the Law on Commercial Banks, “the capital adequacy ratio of a bank shall not be lower than 8%, and the proportion of loan balance and deposit balance shall not be over 75%, and the proportion of liquid asset balance and liquid liability balance shall not be lower than 25%,” and this means that supposing state-owned shareholders intend to guarantee the holding of 51%, then they must guarantee the capital injection at least 1.2 times the bank assets annually. This is a very huge number, especially for the five major state-owned banks. If the scale of a bank is larger and larger, then the burden for major shareholders can be unbearable, just like what Xie Ping, deputy manager of China Investment Corporation, once said, “the cost will be so high that even all dividends in the future may not even be enough for capital injection.”
Of course, a bank is a very special industry. For state-owned corporations of other industries, because there is no capital adequacy ratio requirement, then there will be no leverage effect for holding costs, and the costs will be slightly cheaper. But even so, the situation of the monopoly of state-owned shares is not good for improving the governance mechanism of enterprises. Taking PetroChina Company Limited, a holding company, as an example, China National Petroleum Corporation, a state-owned enterprise, has guaranteed the absolute state control power with the share percentage of 86.3473%. But because the shares of the major shareholder is really too huge, it causes that other minority shareholders have no chance at all to raise objections for the governance of the company. Why the transport of benefits existed in the past period for senior management personnel in PetroChina? The monopoly of state-owned shares is also an important reason. This is not simply harmful for state-owned shareholders, because of the insider control, it leads to various conveyances of interests, thus the corporate benefits are harmed; and the voting mechanism that ignores benefits of minority shareholders also affects its popularity in stock market: the share price of PetroChina has dropped from the opening price of 48.60 yuan on November 30, 2007 to 8.10 yuan today. That is: since you are a monopolist, why should I play a game with you?
In other words, if the amount of holding shares by state-owned shareholders is too concentrated, it is not only harmful for improving the governance mechanism, but also has no way of protecting the equity interests of minority shareholders. More importantly, the huge amount of holding costs will bring extremely heavy burdens for the government, and the final costs have to be borne by taxpayers. Therefore, it’s necessary for us to put forward a question, for controlling the leading role of state-owned shares, is it necessary to have such a high equity ratio? Simply viewing from experiences, the share decentralization is a necessary condition for a good governance structure of a company, because only then, there will be the check and balance among all shareholders so that the abuse of rights of shareholders can be avoided.
It is unquestionable that the mixed ownership in the Decision will be beneficial for reducing the holding costs of state-owned enterprises, but in order to really let the mixed ownership play a role, the state-owned holding proportion must be greatly reduced. Otherwise, the mixed ownership will be like the same situation of the shareholding reforms that began 20 years ago, and will be for transporting funds for SOEs, but will not be helpful for improving the governance mechanism and raising efficiency.
Originally published on http://www.chengdu.cn | 2013-11-25
