Analysing Guangdong SOE reform

Glory R. Rong
[email protected]

Simply speaking, mixed ownership reform of state-owned enterprises (SOEs) can be understood as a variety of owners participating in the business operations of SOEs. In other words, non-publicly-owned economic institutions, such as self-employed businesses, private enterprises and foreign investment, can take part in the business operations and management of SOEs, with the property right structure of SOEs being reformed from the relatively unitary structure of before to a diversified property right framework.

Compared with previous rounds of SOE reform, this round aims to diversify the property right structure, but the process will also involve aspects including the establishment of a modern corporate system for SOEs, optimal allocation of state-owned assets, capital management, operation of state-owned capital and supervision of state-owned assets. The State Council and other local governments have released different provisions and plans for this reform, but the characteristics and direction of mixed ownership reform in Guangdong province are particularly worthy of note.

According to the Opinion on Comprehensively Deepening the Reform of State-owned Enterprises, or Yuefa [2014] No 15 (Circular 15), promulgated by the Guangdong Provincial Committee of the Chinese Communist Party and the People's Government of Guangdong province on August 16 2014, the basic objectives of mixed ownership reform for Guangdong primarily include: (i) competitive SOEs and infrastructure projects essentially becoming mixed ownership enterprises by 2020; (ii) optimising structural capital placement, with state-owned capital focused in key sectors and competitive industries as well as forming enterprises whose annual revenues exceed Rmb100 billion; (iii) establishing a professional manager system; and (iv) strengthening the supervision of state-owned assets through capital management.

Based on the goals of Circular 15 and its related ancillary documents, the blueprint for SOE reform in Guangdong Province has begun to take shape.

Diversifying ownership relationships

The introduction of non-state-owned capital will have a profound significance during this round of reform.

Key sectors and competitive industries

The People's Government of Guangdong Province is establishing platform companies and releasing batches of mixed ownership reform lists for key sectors and competitive industries. An example is the construction of functional platforms and services for economic entities by “enlarging two existing platforms: one is the Guangdong Assets and Equity Exchange Group, which is constructing a platform for integrating key elements of finance, equity exchange and pharmaceutical transactions, etc.; the other is Guangdong Hengjian Investment Holding Co, which is prominently optimising the structural layout of provincially owned enterprises and adjusting functional structures; building relevant practical foundations; and strengthening financial functions.”

Various forms of owners

This round of reform has the following characteristics for introducing different types of owners: (i) “no minimum shareholding ratio of state-owned capital unless the law provides otherwise” for the equity of reformed enterprises; (ii) diversification of equity investment forms; (iii) permitted manager and employee shareholding; and (iv) the introduction of sovereign funds and non-state-owned capital into public projects.

Enhancing capital through asset-backed securities

Although there are numerous SOEs in Guangdong Province, the proportion of asset-backed securities (ABS) is still quite low. Therefore, the State-owned Assets Supervision and Administration Commission of Guangdong Province has stated in its 12th Five-year Plan that efforts will be made to have the proportion of ABS of state assets break 60% by the end of 2015. However, the proportion of ABS of Guangdong provincial state assets is currently still under 20%. It is clear that there is still huge room for the Guangdong provincial SOEs to push forward ABS and mixed ownership reform.

Exiting from non-key sectors and non-competitive industries

Mixed ownership reform of SOEs will transfer properties through public listings on asset markets, internet bidding, public auction and tendering for a systematic exit from non-key sectors.

Improving corporate management

The key to achieving mixed ownership reform of SOEs will be stimulating participation by non-publicly owned economic institutions through the corporate management of SOEs.

Corporate management primarily includes following dimensions: (i) honing the management structure of corporate legal persons; (ii) deepening reform of the mechanisms for selecting and hiring personnel; (iii) improving incentive and restraint mechanisms; (iv) reasonably confirming and standardising the remuneration levels of the enterprise managers; (v) strengthening risk prevention mechanisms; and (vi) enhancing the transparency of corporate management.

Increasing state-owned assets supervision

A major feature of this reform will be the structural enhancement and innovation of supervision mechanisms for state-owned assets, mainly: (i) improving the management of authorised operators of state-owned assets; (ii) developing a “gold stocks” mechanism for state-owned shareholders and exercising veto power on specially designated matters in accordance with agreements; (iii) optimising the supervisory model for state-owned assets and implementing a system for listing the managerial affairs of capital contributors; (iv) exploring the establishment of mechanisms for arranged discussions on key issues, comprehensive consultations and annual conferences; and (v) improving the major “three-in-one” supervision system.

By introducing a variety of ownership mechanisms and adjusting property right structures, this reform will strengthen control over SOEs in key areas in order to confront increasingly fierce competition in both domestic and international markets. This round of reform will be a long and arduous task, and present both a challenge and an opportunity for the various types of owners.