Feeling the elephant of state-owned enterprise reform

The major financial news agencies (Bloomberg, Reuters, The Wall Street Journal) all have stories today about a new round of state-owned enterprise reforms that Beijing is expected to roll out shortly. (Full disclosure: both a colleague and myself are quoted in these articles). But anyone who bothered to read and compare all three stories might come away a bit confused. The Bloomberg story focuses on a proposal to transfer the government’s ownership stakes in SOEs to asset-management companies, and generally casts a positive light on the move. The Reuters and WSJ stories spin the changes as “industrial consolidation,” and generally take a more skeptical tone. So what is going on, and is it good or bad?

Unfortunately the reform plans have not actually been announced–the stories are based on conversations with officials and scholars–so we can’t evaluate them yet. The agency that manages the central government’s SOEs, known as Sasac, is widely expected to publish its plans later this month. But reading between the lines, the reporters appear to be hearing pretty much the same thing. And in fact most of this speculation has been widely reported in Chinese domestic media in recent weeks and months (reporting that the foreign media, adhering to an unwritten rule, do not acknowledge).

The idea of putting the top 100 or so big SOEs under asset-management companies, that would interfere less in day-to-day operations and focus on financial returns, does indeed seem broadly positive. This direction was in fact flagged more than a year ago in some early statements about SOE reform, which referred to a shift from “managing state enterprises” to “managing state capital,” implying a move to a more financially-driven model. The ambiguity is that these asset-management firms will reportedly be grouped by industry, and may in fact be formed on the basis of existing SOEs. In which case the resulting entities may look less like a financial portfolio and more like a forced industrial consolidation. This is I think why the WSJ and Reuters talk about this as a move away from market forces rather than towards them–and with good reason, given the enthusiasm the government has shown for forced consolidation of SOEs in the past.

The WSJ story asserts that the reform plan “takes large-scale privatization off the table,” but doesn’t explain why that would be the case. In fact I think part of the logic of handing ownership stakes to financial investors is to make partial privatization of SOEs easier. And the key slogan of SOE reform to date has been “mixed ownership,” which is hard to understand as anything other than an endorsement of additional privatization, however limited. Though I do expect much more partial privatization to happen at the local government level than at the large, strategic firms in Beijing that are the focus of this discussion. (Indeed, Shandong governor Guo Shuqing alluded a bit indirectly to this possibility recently.)

In the end, whether this upcoming reform plan means a new round of centrally-planned consolidation, or a move to impose more financial-market discipline (or, perhaps more likely, some odd combination of both) depends on a lot of things we don’t know yet. So I am going to make an unhelpful analysis: it depends, and I want to wait to see what the government actually proposes. In any case, we need to keep an eye on what the government is doing in other arenas. And as I’ve suggested previously, the really important reforms are not just to improve the management and ownership of state enterprises, but also to deregulate state-dominated industries and allow more private-sector activity.

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