China unveiled details yesterday of how it would restructure its State-owned enterprises (SOEs), including partial privatisation, as data pointed to a cooling in the world’s second-largest economy.
The guidelines, jointly issued by the Communist Party’s Central Committee and the State Council, China’s cabinet, included plans to clean up and integrate some state firms, the official Xinhua news agency said. It did not elaborate.
Reform of underperforming state-owned enterprises is one of China’s most pressing needs. But if not handled well, the restructuring could lead to hundreds of thousands of people being laid off and social instability.
Xinhua said the plans included introducing “mixed ownership” by bringing in private investment, and “decisive results” were expected by 2020.
The government will not force “mixed ownership”, nor will it set a timetable, giving each firm the go-ahead only when conditions are mature, it said.
Overall, the economy is very weak and the central bank may have to continue cutting interest rates and banks’ reserve requirement
“This reform will be positive for improving the impetus of the economy and making growth more sustainable,” said Xu Hongcai, director of the economic research department at the China Centre for International Economic Exchanges (CCIEE), a Beijing-based think-think.
Partial privatisation, he added, would help establish “check-and-balance and incentive systems” at state firms.
China’s government manages 111 companies centrally under the State-owned Assets Supervision and Administration Commission, or SASAC.
Local governments own and manage around 25,000 state-owned companies and the sector employs nearly 7.5 million people.
State firms will be allowed to bring in “various investors” to help diversify share ownership, and more state firms will be encouraged to restructure to pave the way for stock listings, Xinhua said.
Private investors will be encouraged to buy stakes in state firms, buy convertible bonds issued by state firms, or swap shares with state firms, it said, adding steps will be taken to curb corruption during reforms.
SOEs will be divided into commercial and public welfare-related businesses during the reform process. Oil and gas, electricity, railways and telecommunications were identified as sectors that could be suitable for limited non-state investment.
However, Beijing will have to persuade entrenched interests at local, provincial and national governments to relinquish some control over state enterprises and attract investors to buy shares after one of the worst stock market crashes in China’s history.
And Xinhua indicated full-scale privatisation was not on the cards, saying the government was aiming to “cultivate a large number of state-owned backbone enterprises with innovation capability and international competitiveness”.
The guidelines called for a flexible and market-based compensation system at state firms by linking pay with company performance.
The details were issued after the government said growth in China’s investment and factory output missed forecasts in August. The data followed weak trade and inflation readings, raising the chances that economic growth may dip below 7 percent in the third quarter for the first time since the global financial crisis.
“Overall, the economy is very weak and the central bank may have to continue cutting interest rates and banks’ reserve requirement,” said Zhou Hao, senior economist at Commerzbank AG in Singapore.
Zhou says growth would probably dip below 7 per cent in the July-September quarter. Some economists believe growth is already much weaker than official data suggests.