A media release from state news agency Xinhua explained the goals of the latest round of guidelines. ‘China will modernise SOEs, enhance state assets management, promote mixed ownership and prevent the erosion of state assets… The government will improve the competence of SOEs and turn them into fully independent market entities,’ said the release.

Why are they doing this? Efficiency.

China says that state owned enterprises are a pillar of the economy. These government companies enjoy a range of benefits. For example, they have easier access to loans. And they have what’s euphemistically described by the state as ‘more favourable policies’. Basically, they have monopolies over certain products.

But SOEs are inefficient. At least, compared to private firms they are. Which is what really matters here. This inefficiency means they’re less resilient when the economy is going south. Like it is now. The State Council said that reforming SOEs is a top priority for Chinese lawmakers at the moment.

What the SOE reform guideline says

Promoting mixed ownership is a top goal for China. The guideline says that SOEs should bring in diverse types of investors. There will be multiple ways they can do this. A few examples are: bonds, share rights swaps, and outright buying stakes in the enterprise. For the first time, the SEOs will be allowed to test the waters of selling shares to employees. Eventually, the government wants these firms to go public. 

guideline holes

In the official report, China claims that executives will be more tightly supervised. They say that a ‘mechanism for accountability’ will be put in place. Apparently, this will help stop corruption and embezzlement. But so far, there are no details on what this mechanism will look like. Or how violations will be investigated and prosecuted.

Also briefly mentioned was the fact that government agencies will no longer be able to intervene in SOE decisions. The thing is, the SOEs will still be ‘administered’ and overseen by the State-owned Assets Supervision and Administration Commission (SASAC). There isn’t an effective separation of state and corporation here — yet.

New foreign stakeholders may or may not have much chance to influence this. Under Chinese law, it is illegal to threaten to withdraw ‘registered capital’. That’s the amount the investor has put in, according to official records. Registered capital can only be withdrawn to pay company expenses. 

Then, there’s the problem of timing. An institutional investor with a significant proportion of shares cannot profit from a purchase or sale within six months. It’s meant to be a defence against insider trading. But it also applies to investment companies.

Overall

The main takeaway is: from an investor’s point of view, SOE reform would have to be thorough and transparent to be worthwhile.

And the Chinese administration is not famous for being transparent.

See this article in full from Money Morning Australia here. And more on the topic form the FT here.

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