Page 46 - 2017 White Paper
P. 46
7 White Paper on the Business Environment in China
documents, came amid centralizing controls over civil take these steps in order to make a full and successful
society, the military and the media, the FT observed. transition.
The new SOE direction called for greater power to the
party cells within every SOE, which the FT interpreted as Background
undermining efforts to establish boards of directors to
push SOEs to make decisions based on market conditions In September 2015, China issued guidance on
and profitability (Hornby et al. 2016). reforming state-owned enterprises (SOEs), including
the introduction of “mixed ownership” of state firms and
On a more positive note, in September 2016, the efforts to improve their corporate governance. According
State Council issued a new guideline urging SOEs to to Xinhua, China “will modernize SOEs, enhance state
“accept mixed ownership and modernize”. SOEs must assets management, promote mixed ownership and
improve their management through “market-oriented prevent the erosion of state assets” (Armstrong and
reform while adhering to government guidance”, said the Flaherty 2012).
State Council guideline as reported by Xinhua. Foreign
capital is “welcome in restructuring” via various methods, The new SOE guidelines appear to be aimed at much-
including overseas mergers and acquisitions, cooperation needed long term structural change. The new plan
in investment and financing and offshore financing. The calls for the creation of new state asset-management
guideline emphasized the importance of using global companies. The Ministry of Finance, keen to raise the
resources such as the market, technology and talent to dividends paid to the treasury by SOEs, is pushing for this
promote mixed ownership (Huaxia 2016b). market-minded approach.
Business Insider, however, points out that China has Unfortunately, as The Economist observes, resistance
been encouraging mixed ownership in SOEs since late is coming from the State-owned Assets Supervision and
2015 but that, to date, there still aren’t any concrete Administration Commission (SASAC), which currently
plans on how the state would let go of its control. While micromanages the biggest Chinese SOEs (and probably
the authorities seem to understand and recognize the operates out of its own vested interests). Rather than
need for urgent SOE reform, the losses that stem from remain hands-off, it wants the new asset-management
loosening their grip on resources, capital and power has firms to get their hands dirty by forcing consolidation of
made genuine reform politically difficult. Consequently, the biggest SOEs into gargantuan national champions.
much-needed reform on China’s SOEs still hasn't really And it seeks to continue supervising many of the mega-
materialized. The publication exhorts that what China SOEs created by such mergers (Xinhua 2015).
needs to do is relatively clear – transition to more
consumption-driven, higher value-added growth, a While China’s leaders have ruled out wholesale
direction to which its authorities seem focused. However, privatization, the new plan also calls for“mixed ownership”,
Business Insider opines that to make a successful with sales of minority stakes and the listing of shares
transition, the state will have to decrease its role as a seeming to be on the horizon. Such moves could inject
direct participant in the economy, something which the a dose of market discipline, according to The Economist,
present administration may have no intention of doing as an influx of fresh outside investors will push for greater
(Butt 2016). transparency and better corporate governance at SOEs
(Xinhua 2015).
In conclusion, by restructuring and fully reforming
SOEs, China may have to face resulting higher However, there is a caveat: while the reform plan
unemployment and may need to boost household advocates “mixed ownership”, it also vows to “prevent
welfare spending. By reforming its financial sector, China the loss of state assets”. This suggests that a chunk of the
may have deal with less direct control over credit growth, minority stakes in SOEs will be sold to other state firms,
resource allocation and the exchange rate. Its authorities rather than just to private investors. The plan also says
would have to accept a painful period of lower growth “leadership by the party” will be strengthened at state
rates today in order to promote sustainable growth down enterprises, ensuring that the Communist Party will still
the road. To be sure, these are difficult tradeoffs. But we be largely influential in running these enterprises and,
are of the opinion that the Chinese government has to The Economist notes, putting question to the idea that
outside investors will even have a voice (Xinhua 2015).
46
documents, came amid centralizing controls over civil take these steps in order to make a full and successful
society, the military and the media, the FT observed. transition.
The new SOE direction called for greater power to the
party cells within every SOE, which the FT interpreted as Background
undermining efforts to establish boards of directors to
push SOEs to make decisions based on market conditions In September 2015, China issued guidance on
and profitability (Hornby et al. 2016). reforming state-owned enterprises (SOEs), including
the introduction of “mixed ownership” of state firms and
On a more positive note, in September 2016, the efforts to improve their corporate governance. According
State Council issued a new guideline urging SOEs to to Xinhua, China “will modernize SOEs, enhance state
“accept mixed ownership and modernize”. SOEs must assets management, promote mixed ownership and
improve their management through “market-oriented prevent the erosion of state assets” (Armstrong and
reform while adhering to government guidance”, said the Flaherty 2012).
State Council guideline as reported by Xinhua. Foreign
capital is “welcome in restructuring” via various methods, The new SOE guidelines appear to be aimed at much-
including overseas mergers and acquisitions, cooperation needed long term structural change. The new plan
in investment and financing and offshore financing. The calls for the creation of new state asset-management
guideline emphasized the importance of using global companies. The Ministry of Finance, keen to raise the
resources such as the market, technology and talent to dividends paid to the treasury by SOEs, is pushing for this
promote mixed ownership (Huaxia 2016b). market-minded approach.
Business Insider, however, points out that China has Unfortunately, as The Economist observes, resistance
been encouraging mixed ownership in SOEs since late is coming from the State-owned Assets Supervision and
2015 but that, to date, there still aren’t any concrete Administration Commission (SASAC), which currently
plans on how the state would let go of its control. While micromanages the biggest Chinese SOEs (and probably
the authorities seem to understand and recognize the operates out of its own vested interests). Rather than
need for urgent SOE reform, the losses that stem from remain hands-off, it wants the new asset-management
loosening their grip on resources, capital and power has firms to get their hands dirty by forcing consolidation of
made genuine reform politically difficult. Consequently, the biggest SOEs into gargantuan national champions.
much-needed reform on China’s SOEs still hasn't really And it seeks to continue supervising many of the mega-
materialized. The publication exhorts that what China SOEs created by such mergers (Xinhua 2015).
needs to do is relatively clear – transition to more
consumption-driven, higher value-added growth, a While China’s leaders have ruled out wholesale
direction to which its authorities seem focused. However, privatization, the new plan also calls for“mixed ownership”,
Business Insider opines that to make a successful with sales of minority stakes and the listing of shares
transition, the state will have to decrease its role as a seeming to be on the horizon. Such moves could inject
direct participant in the economy, something which the a dose of market discipline, according to The Economist,
present administration may have no intention of doing as an influx of fresh outside investors will push for greater
(Butt 2016). transparency and better corporate governance at SOEs
(Xinhua 2015).
In conclusion, by restructuring and fully reforming
SOEs, China may have to face resulting higher However, there is a caveat: while the reform plan
unemployment and may need to boost household advocates “mixed ownership”, it also vows to “prevent
welfare spending. By reforming its financial sector, China the loss of state assets”. This suggests that a chunk of the
may have deal with less direct control over credit growth, minority stakes in SOEs will be sold to other state firms,
resource allocation and the exchange rate. Its authorities rather than just to private investors. The plan also says
would have to accept a painful period of lower growth “leadership by the party” will be strengthened at state
rates today in order to promote sustainable growth down enterprises, ensuring that the Communist Party will still
the road. To be sure, these are difficult tradeoffs. But we be largely influential in running these enterprises and,
are of the opinion that the Chinese government has to The Economist notes, putting question to the idea that
outside investors will even have a voice (Xinhua 2015).
46
