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Boao Forum for Asia Members’ Club Event Mixed Ownership: Rekindling the Reform of State-Owned Enterprise

Time:2015-04-16 14:56:54    Views:885176    Origin:Boao Forum for Asia

 This is by no means a new topic, but it is one which requires new impetus.

The reform of China’s State-Owned Enterprises (SOE) extends over three extraordinary decades, and has consistently been seen as “the toughest nut to crack”. The “Decision of the CCCPC on Certain Major Issues Concerning the Comprehensive Deepening of Reform” of the Third Plenary Session of the 18th Central Committee of the CPC (hereinafter referred as the “Decision”) once again raised the topic of SOE reform, and in the space of 1000 words outlined a roadmap for SOE reform, highlighting the need for further improvements to the state-owned asset management system, the use of capital management as a primary tool for strengthening the oversight of state-owned assets, reforming of the state-owned authorized capital management system, the establishment of a number of state-owned capital operating companies, and support for the restructuring of certain state-owned enterprises into state-owned capital investment firms.

In the view of Liu Shijin, Deputy Director of the State Council’s Development Research Center, the Decision of the 18th Central Committee of the CPC laying out the way forward for SOE reform is clearly on the right track, and provides the basic principles for ongoing SOE reform as well as mixed ownership reform. However, there remains a lack of consensus between the various parties involved.

So what are the main differences between the various parties in this round of SOE reform? What is needed to overcome these obstacles? What is the next step forward to deepen the SOE reform?

On the evening of 26 March 2015, as part of the Annual Conference of the Boao Forum for Asia, State Council Development Research Center Deputy Director Liu Shijin, former State Commission for Structuring Deputy Director Shao Bingren, former Deputy Prime Minister of Russia Anatoly Chubais (known as the “Father of Russian capitalism”), Roland Berger Global CEO Charles-Edouard Bouée, Temasek Holdings Senior Managing Director Wu Yibing, and Yale University School of Finance Professor Chen Zhiwu came together for a Boao Forum for Asia Members’ club event, titled “Mixed Ownership: Rekindling the Reform of State-Owned Enterprises”, to probe the weak points of reform as well as get a sense of its direction. The moderator of the event was Financial Times’ Associated Editor and FTChinese.com’s Editor in Chief Zhang Lifen.

 “This is an excellent concept, and both reiterates the results of the last round of SOE reform in our new, changing circumstances, and also builds on these results”, commented former State Commission for Structuring Deputy Director Shao Bingren on the idea of mixed ownership put forward by the 18th Central Committee, particularly during the Third Plenary Session.

Looking back over the progress in SOE reform from the 1990s to date, Shao noted pointedly that the consensus formed at the time has today been blurred: “There has not only been no progress in terms of SOE reform over the last decade or so, but in certain areas, this has even fallen back. Monopolies not only remain unbroken, but have even grown stronger. Empowered by the “bigger is stronger” slogan, state-owned enterprises have in fact invested state capital on blind expansion with very low rates of return, the long-term result being a drain on the country’s coffers.”

For this reason, Shao emphasizes that any further progress in SOE reform will require the breakup of these monopolies. “Making progress in mixed ownership reform must start with the battle against corruption, and continue with the elimination of vested interests. I believe that when it comes to discussing the issue of mixed ownership, this is not an issue of looking at the implementation of mixed ownership, but rather whether or not we dare deal with the problems of vested interests.”

Former Russian Deputy Prime Minister Anatoly Chubais was asked to talk about the bravery required for such reforms. Known in his home country as the “Father of Capitalism”, he was self-deprecating during his speech, calling himself the country’s most hated politician in opinion polls taken over the last 15 years. In 1992, Chubais launched the world’s largest and fastest privatization of state assets, a privatization which placed 80% of the Russian economy in private ownership. He believes that confusion over ownership rights are the basic root problem for the low efficiency of state-owned enterprises, and, as a result, “the fewer the state-owned enterprises, the lower the asset holdings by the state, the greater the competitiveness, and the higher the efficiency.” Chubais’ experience in Russia is that governments must have a powerful political will and expend great effort to deliberately generate any increase in the private share of capital.

With regard to whether governments should or should not deliberately generate increases in the private or state shares of capital, State Council Development Research Center Deputy Director Liu Shijin held a different view, declaring that controlling these shares will not lead to the development of a market economy – a market economy is a competitive process. As part of this competitive process, the more competitive an economic structure, the greater its share will be, while other shares will shrink. “Creating a fair competitive environment is something that we must make every effort to achieve.”

Furthermore, Liu’s views also differed from Chubais’ in terms of the deliberate control of state capital, as he believes that state capital must be expanded. “What are the benefits of a moderate expansion in state capital? This must be used in services which support strategic State objectives, and not in any other area.”

Liu called a process whereby this is neither deliberately suppressed or increased a fair competitive environment: “I believe that mixed ownership cannot be arbitrarily applied, there must be a reason behind it.” He continued, querying the reasons why certain areas of private capital are not overly keen to dabble in mixed ownership. The reason is the continued status quo in governance structures: “You need money and I give you some, but when all is said and done, I cannot figure out how these funds have been used, and I cannot even attend a meeting if you hold one.” Only if everyone has their appropriate positions and powers can mixed ownership become a win-win proposition.

Market-oriented operation was a topic which Temasek Holdings Senior Managing Director Wu Yibing emphasized at several points during the event. Wu explained that Temasek is an investment company with entirely market-oriented operations, with a market-oriented governance structure: “None of Temasek’s board of directors or senior managers is government appointed; they are all market-oriented talent, and this is the basic reason why the board has been able to create a market-oriented operation.”

So, can the Temasek model be replicated in China? Yale University School of Finance Professor Chen Zhiwu iterated that the possibilities for replicability under China’s current system are very low. In his words, “Really allowing any state-owned operation to operate according to a market-oriented approach is very difficult. The management of central enterprises are appointed by central government, which makes the game very dull indeed – market orientation becomes impossible.”

Chen went on to say that with regard to the current reform of mixed ownership, merely focusing on increasing quantity simply means that ever greater amounts of social capital are used to perpetuate the investment projects of penniless state-owned enterprises or local governments; mixed ownership of this kind is undesirable. “State-owned enterprise reform should focus on cutting the fat, rather than continuing to encourage obesity.” According to Chen, local state-owned assets in stock, particularly those with low levels of efficiency, should all be sold off.

“Actually, they are a bit overweight,” according to Roland Berger Global CEO Charles-Edouard Bouée. “This is because, over the last 30 years, China’s economy has grown extremely rapidly, and state-owned enterprises have played a central bread-winning role in this process, providing the nation with public services and products, and investing in the development of infrastructure.” However, is not one of the objectives of mixed ownership reform to make state-owned enterprises ever weaker? Bouée does not see it this way. On this point, he agreed with Liu Shijin in the belief that the objectives of the reform are to make state-owned enterprises stronger, more efficient, and to enable them to continue to play a major role in the public services area. With regard to the route to be taken by these reforms, Bouée emphasized that “contact points” are very important, and he proposed introducing mixed ownership from the most commercially-oriented areas of the market, and gradually extending this to less commercially-focused parts of the market.