The reform of state-owned enterprises (SOEs) was the focus of the Third Plenary Session of the 18th Communist Party of China’s Central Committee. On July 15, China released a list of the first group of centrally-administered SOEs to reform, thereby unveiling a new round of changes in SOE structure.
Six centrally-administered SOEs are involved: the State Development & Investment Corporation, China National Cereals, Oils and Foodstuffs Corporation, China National Pharmaceutical Group, China National Building Materials Group, Xinxing Cathay International Group and China Energy Conservation and Environmental Protection Group.
Each of these six companies has their own focus. The State Development & Investment Corporation and China National Cereals, Oils and Foodstuffs Corporation will pilot reform in restructuring the state-owned asset investment company; the China National Pharmaceutical Group and China National Building Materials Group will pilot mixed-ownership reform; the reform of Xinxing Cathay International Group and China Energy Conservation and Environmental Protection Group will be placed on the executive right of the board of directors in recruiting executives, appraising performance and managing salaries.
The State Development & Investment Corporation and China National Cereals, Oils and Foodstuffs Corporation are reform pioneers, involved in both capital restructuring and mixed ownership.
On the whole, this round of centrally-administered SOE reform reveals the following: first, the enterprises involved in the reform are all from competitive industries, showing the Chinese government’s willingness to further open up competitive areas. Second, this reform is intended to tackle less controversial enterprises first. This is an easy way to gain success, which can provide a bigger impetus for reform. Third, these enterprises have a strong foundation with competent leadership and better business performance. Lastly, they have clearer business objectives, and are experienced in management.
Judging from the focus of the reform, the Chinese government may expect to achieve the following goals:
Firstly, capital restructuring may invigorate China’s internal capital market on the one hand and may introduce strategic partners on the other. Past reform shows that whenever there is an opening up, there will be an invigoration that benefits enterprises.
Second, with mixed ownership, state-owned enterprises can take holding and shares, or establish enterprises through a joint venture with private enterprises. Many private enterprises hope to cooperate with state-owned enterprises. The opening of these areas is good news for private enterprises.
Third, it can invigorate the relevant management systems, making business leaders more responsible for their operations and, of course, making the managerial staff improve their business performance. The enterprises involved in the reform still need to work out detailed ways to arouse the enthusiasm of the managerial staff and to make enterprises more dynamic.
The leaders of China National Cereals, Oils and Foodstuffs Corporation have decided to deepen the strategy of a comprehensive industrial chain and to forge an international business network. By following the market, they will manage their subordinate business sections in the framework of a holding company, play the role of the board of directors and fully arouse the initiative of the business sections. This company will establish an international system in which the professional managers are ready to accept a higher or lower position and income. They have also indicated that they will improve the appraisal and incentive standards, allow the management team to maximize their creativity and passion and enhance the vitality and competitiveness of each business.
The leaders of China National Building Materials Group have also said that they will carry out a pilot reform of the executive right of the board of directors in recruiting executives, appraising performance and managing salary, and will further improve the structure of corporate governance. The company will enhance the independence, authority and effectiveness of the board of directors. As a result, they will probe and form an institutional arrangement and work mechanism that can be replicated elsewhere.
This round of centrally-administered SOEs reform will play a demonstrative and leading role. . . After that, the pilot reform will be rolled out through China. Each provincial State-owned Assets Supervision and Administration Commission will be expected to reform its state-owned enterprises.
In view of the capital reorganization of the state-owned enterprise reform, foreign enterprises are likely to be invited to join, and some leading enterprises in the field may become the strategic partners of Chinese state-owned enterprises. The SOEs have more flexibility in recruiting senior managers and can be very attractive to many foreign professional managers experienced in managing multinationals. At the time when the global economic recovery is still rather weak and people are looking for a better market, Chinese SOEs reform and the opening of Chinese capital can be positive news to many foreign enterprises.
Ding Yifan, Deputy Director, Research Institute of World Development, China Development Research Center (DRC).