How to Produce Substantial SOE Reforms

The General Offi ce of the State Council, China’s cabinet, recently issued an action plan on the reform of central state- owned enterprises (SOEs). The plan requires that all central SOEs under the State-owned Assets Supervision and Administration Commission must complete the corporate sys- tem reform by the end of 2017. Moreover, they must also accelerate the establishment of an effective corporate governance structure as well as a flexible and efficient market-based operational scheme. This indicates that, for the fi rst time, all central SOEs will be required to adopt the corporate system since China’s SOEs started such reforms in the 1990s.

Among the 101 central SOEs in China, 69—including 3,200 subsidiaries —must transform into modern corporate system structures within half a year. The reform is not merely a change of their organiza- tional layout, but a transformation of their operating methods and mechanisms.

Most of China’s central SOEs were set up by ministries and commissions under the Central Government during the coun- try’s planned economy era and are wholly owned by the state. As China’s market economy develops, the disadvantages of such a system are becoming increasingly noticeable.

In November 1993, the Third Plenary Session of the 14th Communist Party of China Central Committee decided to restructure SOEs into modern corporate systems. After years of reform, a large number of SOEs in China have succeeded in establishing market-oriented operational systems. However, some SOEs have not yet become real market players and their reforms have not yet been completed. Practice proves that reforms are easier in small and some medium-sized SOEs than of large ones. Now the remaining 69 SOEs have to prepare their reform propos- als within three months, which will be a real challenge for them.

However, reforms of those enterprises must be carried out in accordance with dif- ferent circumstances. Industries involving the national economy and state security, in- frastructure and important natural resources can be restructured as wholly state-owned limited companies. But in competitive sec- tors such as coal, iron and steel, trade, textile, mechanics, transportation and building materials—in which most of the 69 remain- ing SOEs are focused—wholly state-owned enterprises must be reformed to adopt a corporate governance system and diversify their shareholding structure.

The biggest change of such reforms should be the implementation of corporate governance and market-oriented operations. This is no simple task, and requires numer- ous changes.

First, the responsibilities that SOEs as- sume will be changed In the corporate system, state capital assumes limited responsibilities in accordance with share- holding proportions, instead of unlimited responsibilities.

Second, the market status has changed In the corporate system, SOEs are complete market players with a sound corporate gov- ernance structure. Such changes will pave the way for furthering SOE reforms, intensify- ing mixed-ownership reform and diversifying shareholding structure in SOEs.

Corporate system reform of wholly state- owned enterprises among central SOEs is both a general trend and a necessary step for them to participate in international com- petition, so it must be well implemented, regardless of the diffi culty.