China embarks on three-year reform of SOEs

(ATF) The highest echelons of the Chinese Communist Party are discussing ways to reform China’s sprawling state-owned enterprises (SOEs). 

The Fifth Plenary Session of the Nineteenth Central Committee of the Communist Party of China proposed to deepen reforms and strengthen and optimise SOEs and state-owned capital. 

As China enters a new stage of development, the question of how and to do that is proving tricky for party bosses.  

According to top brass, the overarching strategy is “the great rejuvenation of the Chinese nation” after the unpredicted and unprecedented chaos of 2020.

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Consequently, the “Three-year Action Plan for SOE Reform (2020-2022)” was issued. This is a plan for deepening reform of SOEs based on meeting the new requirements of the new development stage. 

According to CCP rhetoric, China is moving up a stage to a more advanced stage of capitalism. It is of great significance to promote SOE reform and to further improve the basic socialist economic system.

During the 14th Five-Year Plan period, China will embark on a new journey of building a modern socialist country, with the economy turning to “high-quality development”.

‘Profound changes’

Huang Qunhui, Director of the Institute of Economics of the Chinese Academy of Social Sciences, which formulates most CCP policy, wrote in the Economic Daily that “the world has entered a period of profound changes that have not been seen in a century. The coronavirus epidemic will have a profound impact after the short-term impact on the global economy and society. 

“At present, in deepening the reform of SOEs, we must clearly recognise this historical position, the background of the times, the domestic and international situations and the new situation of economic development.”

Under the reforms, SOEs must serve the strategic overall aims of China and as the country is :rejuvenating”, the more dinosaur-like SOEs will feel some pain. The three-year reforms focus on a number of key tasks: 

1. Perfecting the modern enterprise system with Chinese characteristics
2. Advancing the optimisation and structural adjustment of state-owned capital
3. Actively and steadily advancing the reform of mixed ownership
4. Improving the market-oriented operating mechanism
5. Forming state-owned assets that focus on capital management.

The regulatory system will promote the fair participation of SOEs in market competition, promote the implementation of a series of reform special actions, and strengthen the party’s leadership of SOEs. 

Chinese characteristics

The plan has long-term and far-reaching institutional construction and economic development of strategic significance. It will promote a more mature and more formalised modern enterprise system “with Chinese characteristics” and a state-owned asset regulatory system that focuses on capital management. 

“The formation of this will be conducive to upholding and improving the basic socialist economic system, and will give better play to the strategic role of the state-owned economy in optimising the economic structure and unblocking economic cycles, and promote high-quality economic development,” Huang wrote.

The key is to achieve institutional innovation breakthroughs, he added.

Reforms started with the “decentralisation of powers and profits” in 1978. In 1993, the central government proposed that the establishment of a modern enterprise system is the direction of SOE reform. In 2003, further institutional innovations were carried out at the macro level to promote the reform of state-owned assets supervision system. After entering this new era, the reform of SOEs will further institutional innovation.

Modern enterprise

In terms of micro-enterprise systems, the party will gradually explore the formation of a modern enterprise system. This requires consistent adherence to the important political principle and establishment of the party’s leadership over SOEs will be the main strategy for these enterprises.

Reform of SOE corporate governance will see an emphasis on the separation of government from enterprise and the separation of government from capital. 

Greater attention will be given to the supervision of SOEs based on the investment relationship, involving changes in supervision concepts, supervision methods, and supervision objectives. State-owned assets supervision institutions will ensure the autonomous operation of SOEs as independent market entities on the premise of preventing the loss of state-owned assets and improving the efficiency of supervision. 

SOE reform was a central pillar in China’s transition from a planned economy to a socialist market system. 

the issue of whether SOEs can truly become the main players in a fair competitive market must be resolved from three levels, Huang said:

1. Reform of enterprise property rights. From solely state-owned to equity diversification and mixed ownership, becoming a modern corporate enterprise must explore multiple forms of public ownership, and developing a mixed ownership economy. 
2. Transformation of the operating mechanism, promoting the SOE operating mechanism from an administrative management mechanism to a market-oriented operating mechanism is the main task.
3. Improving the fair competition mechanism. Realising the fair participation of SOEs and non-public enterprises in market competition requires deepening reform of the separation of government and enterprises, separation of government and capital, and break natural monopoly industries.

Whether the three-year reforms can really play a decisive role in transforming SOEs as China enters an economic “new era” depends on whether it can be effectively implemented. “It is hard to know, but hard to do,” one analysts said.