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Successful SOE reform requires splitting government and enterprise

Even if an SOE is an economic failure, its leaders face no real consequences, as many of them are given posts at non-SOE government agencies. Equally, there’s no benefit for them if a SOE runs very well.

By NewsChina Updated May.1

In the run-up to the annual National People’s Congress session to be held in March, a keynote event during which the government will release the budget for the year and announce its major policy priorities, reform of China’s State-owned enterprises (SOEs) has emerged top of the government’s policy agenda. In the first two months of the year, SOE reform was listed as a major task of reform by governments in more than 20 provinces and regions. 

It was against this background that Wang Yixin, vicegovernor of Shanxi Province, lambasted the low efficiency of SOEs in a recent government meeting on February 9. According to Wang, SOEs managed by his government now owe 5.46 billion yuan (US$791m) in back pay to employees and 11.8 billion yuan (US$1.71bn) in social security contributions. The major cause of the mismanagement of these SOEs is bureaucracy, Wang said. “In one SOE alone, there are over 2,000 mid-level government officials working as managers,” said Wang, without specifying to which SOE he was referring. 

It’s true that the bureaucratic management structure of China’s SOEs has long been considered the principal reason for the relatively low efficiency of the sector and a major impediment to effective reform of SOEs. 

Established in the era of the planned economy, the management hierarchy of China’s SOEs was designed to run parallel with the institutional structure of the government, which has a total of 9 grades. Under this system, SOE managers and executives are simultaneously government officials, enjoying compatible rank, political status and benefits to officials serving in government agencies. 

A direct result is that the management of many SOEs lacks the ability and incentive to be innovative, creative and efficient. Even if an SOE is an economic failure, its leaders face no real consequences, as many of them are given posts at non-SOE government agencies. Equally, there’s no benefit for them if a SOE runs well. 

Moreover, thanks to a complex system that has been constantly changed in the past decades, the specific ownership of many SOEs, whether by provincial government, the local government or other stakeholders, has become murky, which has often resulted in an erosion of state assets. The bosses’ dual identity both as government officials and entrepreneurs has also created a hotbed for corruption, as many senior SOE executives have been caught up in the ongoing anti-graft drive in the past couple of years. 

There are currently 110 state-owned conglomerates administered by the State-owned Assets Supervision and Administration Commission (SASAC). Other than that, there are about 150,000 SOEs across the country. 

With the focus of the “market-oriented” reform shifting to SOEs, the Chinese government should realize that the key of the SOE reforms is to separate government and enterprise. The first step should be to clarify the status of SOE executives, who should be clearly differentiated from government officials. 

In 2016, the SASAC launched a pilot program to establish “professional management” within SOEs, which is a step on the right track. In order to clearly separate government from enterprise, the Chinese government needs a systematic approach to overhauling its existing organizational structure in SOEs. 

A good model China can learn from is Temasek, an investment company owned by the government of Singapore. With its sole stakeholder Singapore’s Finance Ministry, Temasek has its own board of directors and a professional management team. While the appointment and removal of board members and CEO is subject to the approval of the Singaporean President, the government is not involved in its regular business operations. 

With past reforms, China’s SASAC has gradually retreated from most of the 110 major SOEs under its administration. With the establishment of boards of directors and management teams in these SOEs, the SASAC has started to assume a role as a shareholder only. It is not a coincidence that the 110 SOEs under the administration of the SASAC are considered more efficient than other SOEs. 

With the successful experiences of recent years, now is the time to officially separate government and enterprise by legalizing and institutionalizing the SASAC’s approach and extending its reach to all SOEs across China.