China trials new SOEs reform

According to recent media reports, in order to look over state-owned assets, the new round of state-owned enterprise reform schemes suggests to establish three kinds of asset management firms （AMCs）, including industrial investment, investment holding, and capital operation. The number of AMCs could vary from a few to more than ten, which emphasize on industrial development, capital investment, and equity operation respectively. And one or two pilot AMC may be launched next year.

Why should China establish the three kinds of state-owned AMCs? One important reason is that state-owned enterprises (SOEs) involve all kinds of industries. For instance, among the 113 SOEs, which directly managed by the State-owned Assets Supervision and Administration Commission, some are in monopoly industries, such as energy and transportation industries; some are in competitive industries, such as real estate, finance and pharmacy; and some others, such as China Grain Reserves Corporation, still enjoy government subsidies, etc. It’s improper to evaluate different types of SOEs by using same criteria. Thus, setting up three types of AMCs can improve the efficiency of performance assessments and supervision.

It seems that such a classification is quite reasonable, but actually that is not the case. With the development of technology, the operating status of an industry will change as well. For instance, the telecommunications industry was monopoly

industry, but with the development of internet, many functions of traditional telecommunications were replaced by internet companies, which caused the major conflict among WeChat and other telecom operators. Express delivery industry is another example, logistics were exclusively controlled by SOEs before, and needed large amount of government subsidies; however, more and more private express delivery companies have turned this industry into a profitability industry.

The above classification of industries takes past as bases, but profits of companies rely on their future operations. Therefore, the classification management standard, based on the past, will distort both supervision and performance assessments. Industrial investment companies may get fiscal subsidies from governments, but investment holdings don’t have such privileges. As a result, problems that should have been solved by the format of investment holdings would turn to industrial investments for more subsidies.

Furthermore, the market won’t treat enterprises differently just because they are in different industries. For listed companies, investors pay more attention on their current and future profitability. Although the classified regulation on SOEs is new, it does not touch the old problems of SOEs—the soft budget constraint.

Under soft budget constraints, SOEs can get privileges, in the aspect of credit and loan, taxation, and government subsidies, so that SOEs can avoid bankruptcy even they did not operate well. This is the reason that SOEs become more and more advance, while private sectors are retreating recent years. Soft budget constraint does not solve the essential difficulties of SOEs, but instead, it weakens SOEs’ competitiveness. At the same time, soft budget constraints worsens the competitive environment, and distorts SOEs’ behavior patterns that if SOEs can get subsidies when they have deficit, then there is no reason for SOEs to put efforts in gaining market recognition .

Bankruptcy is a good method to harden SOEs’ restraints. The disposition of non-performing assets can not only reduce government subsidies, but also push other enterprises harden the restraints. Although the State-owned Assets Supervision and Administration Commission has all kinds of performance assessments with advanced indexes, but none of the assessments really change the situation of soft budget constraints. Up till now, there is no single central government controlled SOE got bankruptcy due to loss, and there are few local SOE got bankrupt either. Local governments usually solve the problem by asset restructuring—let a profitable company undertake a loss-making company’s debt.  

Overall, from current situation which reported by media, I am not optimistic for the new round of SOE reform schemes.

Published on Southern Metropolis Daily | December 24, 2013