China´s leaders have announced that reform (and even merger) of state-owned enterprises are high on the political agenda. But at the same time, the central government does not want to lose control. Can both ambitions go together, wonders financial analyst Sara Hsu in the Diplomat. Mixed ownership does not mean an orientation on the market.
The State-owned Assets Supervision and Administration Commission (SASAC), the Ministry of Finance, and the National Development and Reform Commission determined that SOEs must become more market oriented, laying out guidelines at the end of last year on how to increase the market orientation of SOEs and promote mixed ownership. Indeed, SOE reform has been centered on bringing about higher levels of mixed, or partially private, ownership.
However, as Curtis Milhaupt and Wentong Zheng write in a Paulson Institute Memorandum, China’s focus on increasing mixed ownership will not bring about major change. The state does not exercise extensive control over the daily management of SOEs, while it can also be said that the private sector functions in close connection to the state, blurring the implications of expanding private ownership in SOEs. Therefore, rather than focusing on pushing forward with mixed ownership in SOEs, regulators should focus directly on improving the market orientation of SOEs.
Given the regulations surrounding asset sales, mixed ownership is not necessarily the answer to poor performance in the SOE sector. As Chen Long pointed out last year in a blog for the Financial Times, the regulations that guide pricing of state assets render investment in poorly performing SOEs unattractive. Shares in SOEs must be sold, at a minimum, at book value. Long also pointed out that in practice, mixed ownership may mean that new ownership comes from other state-owned enterprises, rendering the intention to improve market competitiveness and profitability moot.
So what will SOE restructuring imply for China’s future economic growth? SOEs are to be characterized into those that exist for commercial purposes and those that serve the public interest, and will also be classed by industry, in terms of the reforms they are likely to undergo. In some cases, the focus on mixed ownership or mergers and acquisitions (which only increase the market power of some firms) may be less effective for growth. In other cases, whittling down the size of firms that have reached overcapacity in recent years may improve the competitiveness of these firms. In other words, in the usual econspeak, the answer is “it depends.” It’s somewhat anxiety-producing, since results could move growth in either direction. Effects will certainly be mixed.
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