Revolutionary SOE reform taking places

Despite China-US trade tensions and some new skepticism about the direction of China’s reforms, state-owned enterprises (SOEs) are set to change radically. A new large-scale reorganization is about to begin, and it could revolutionize the efficiency of the sector and boost overall national growth. The quantity of administrative- guideline documents concerning the deepening of SOE reform, with the new theme of mixed-ownership restructuring (MOR), has been overwhelming. The high number of documents might indicate this is one of the most important initiatives in the history of Chinese SOE reform. The recent economic slowdown has led to debates on whether China can continue its economic growth or if the country is heading toward stagflation. One thing which seems obvious is that China is currently facing more domestic and global challenges than it has at any other time in the past 40 years. Deepening the reform of SOEs is a clear signal that the Chinese government is dedicated to the improvement of its market economy. The MOR initiative aims to have shareholders from all backgrounds, including state, private and foreign shareholders, invest in SOEs to reach a balanced share-holding structure and board representation. Such a magnitude will facilitate major socioeconomic transformation and drive change in the industrial competitive landscape. Productivity adjustments at many large companies over a short period of time will have a very positive impact on economic growth and the improvement of the economic environment. China’s economic reform has been cautiously advancing in a gradual, long-term trial-and-error process. MOR will refocus government responsibility from the management of people, businesses and assets to the management of capital. This will empower boards to make quicker decisions based on commercial principles and, as a result, will improve productivity and create better returns for state capital. China-US trade tensions and the slowdown of domestic economic growth may have contributed to an acceleration of the MOR initiative, and the wave of MOR transactions seems to be at its tipping point. We welcome the MOR initiative, and believe it is one of the most important reforms to safeguard the balance and dynamic of the market economy, the efficient allocation of resources and fair opportunities for private and foreign investors. But it does not automatically guarantee the success of any business following a MOR transaction. We believe certain conditions are equally important in order to succeed with MOR. First, the existence of an active non-state shareholder with a significant stake in the company; second, balanced board representation and consummate corporate governance; third, entrepreneur-minded corporate leaders with reasonable investment in the company and a proper incentives plan for key employees; fourth, a clear core business focus, strategic plan and road map for management improvements. Over the past three years, the practice of MOR has been gradually shifting from diversifying the shareholder mix to implementing employee stock-option plans (ESOPs). One of the earliest MOR attempts was the reform of Sinopec’s gas retail business, which invited 25 diversified investors to invest 120 billion yuan in return for a 30 percent stake. A recent announcement of board approval for an ESOP in Naura, a domestic listed company headquartered in Beijing, caused its stock price to immediately jump 10 percent, reaching the daily limit for stock price fluctuation set by security regulator China Securities Regulatory Commission. The stock market reaction reflects the general belief that MOR could unleash the enormous potential of SOEs. We can anticipate more fundamental changes to come, particularly in competitive industries where the government will be more willing to give up control: consumer goods, food and beverages, pharmaceuticals and medical devices, TMT (telecom, media and technology), transportation and logistics, clean energy, retail and distribution, and business services. We expect that more management teams and key employees will become SOE shareholders. -The Daily Mail-Global Times News Exchange Item