56 Finance and economics The EconomistJuly 22nd 2017
12 supplementary documents and launched
reform trials at 21 different firms. Provinces
and cities have followed up with dozens of
plans, guidelines and trials of their own.
Some promising ideas are afoot. After
years of discussion, China has started to let
state firms award shares to employees as
part of their pay packages. SOEs had tried
such schemes in the 1980s and 1990s, but
the governmentstopped them, fearing that
senior executives were siphoning off state
assets, much like Russia’s oligarchs.
Shanghai International Port Group
(SIPG), a city-owned firm, is one of the
companies pioneering employee owner-
ship of shares. It also demonstrates how lo-
cal SOEs, though smaller than their nation-
al peers, are often huge themselves:SIPGis
the principal operator of Shanghai’s cargo
port, the world’sbusiest. In June 2015, as a
first step, it allocated 1.8% of company
shares to employees; some 16,000 of its
22,000 employees now hold a stake. Ding
Xiangming, vice-president of the port
group, believes he is already seeing results.
“Workers are more focused on our com-
pany’s growth,” he says.Public and private
Shanghai is also an example of how parts
of the country can outpace others in SOE
reform. Last August the People’s Daily, the
Communist Party’s main newspaper,
hailed the city as a model for other local
governments. Shanghai moved quickly to
classify itsSOEs as either commercial (eg,
SAIC Motor) or in public service (eg, Shang-
hai Metro). This is a distinction that the cen-
tral government wants to see applied na-
tionwide, so that companies classified as
commercial can be treated more like priv-
ate firms. Shanghai’s commercial SOEs
have more leeway to hire managers from
the private sector and to pay market rates.
Another potentially promising idea is
“mixed-ownership reform”, a fancy term
for allowingSOEs to sell stakes to private
investors, as in the case of Yunnan Baiyao.
The thinking is that private shareholders
will demand more from SOEs, especially if
their investment is combined with a seat
on the board. As a concept it is not new:
many bigSOEs have been listed on the
stockmarket since the early 2000s, attract-
ing outside investors. But Cao Zhilong of
Shanghai United, a law firm, thinks this
round of mixed-ownership reform could
lead to bigger deals: “The word privatisa-
tion is not used. It is too sensitive. But the
state can sell a majority.”
At national level, the mixed-ownership
trials have been disappointing. The state is
mainly selling minority stakes in the sub-
sidiaries of large groups, such as a 45%
share in the logistics arm of China Eastern
Airlines, a deal completed in June. But for
local SOEs, outright sales are easier. Tuopai,
a small town in Sichuan, sold a majority
stake in its struggling liquor company to aChinese private-equity firm last year. The
change in culture is already apparent. The
company has rolled out slick new adverts
and uses designer bottles instead ofthe old
ones with ill-fitting labels. It has also cut
about a third of production staff to make
way for more automation, the kind of un-
popular decision that a government-
owned company is loth to make.
In general, though, such deals are rare.
This cannotjust be blamed on the govern-
ment; a basic dynamic is also at work.
“ProfitableSOEs don’t want to sell to out-
siders and no one wants to buy a struggling
SOE,” says Hong Liang of Everbright Law.
What can be blamed on the govern-
ment are conflicting messages. Less noted
at the time of Mr Xi’s 2013 pronouncement
about market forces, but more glaring now,
was his declaration thatSOEs should con-
tinue to play a dominant role in the econ-
omy. The implication is that he wants state
firms to be better run—hence the emphasis
on the market—but only so that they better
serve the party by helping it to manage the
economy at home and carry China’s flag
into foreign territory. Mr Xi has made this
point in increasingly strident terms. At a
meeting onSOEs last October he devoted
his comments not to reform but to the ne-
cessity of strengthening the party’s grip.
“The party’s leadership ofSOEs is a major
political principle, and that principle must
be insisted on,” he said.
People who work in and with SOEsre-
port a palpable change in atmosphere in
recent years. “Party officials are not the
same as the technocrats who used to run
theSOEs,” says a top banker. “They don’t
take risks. Doing nothing is what’s safe.”
Some of the most capable employees are
leavingSOEs altogether. Political educa-
tion, always a part of life in state firms, has
been stepped up. One manager who re-
cently quit a big state bank said that a cam-
paign exhorting workers to study the party
constitution had been unusually intense.
At the same time the government has
capped pay for senior executives, con-
cerned that they were getting more than
government employees of equivalent
ranks, stoking resentment. Yet on an inter-national basis, SOEbosses are dramatical-
ly underpaid. The president of PetroChina,
the country’sbiggest oil company, earned
774,000 yuan ($112,000) in 2016; the CEOof
Chevron, a firm of roughly the same mar-
ket value, pulled in a handsome $24.7m.
Signs suggest thatafter seeing morale
suffer without any improvement in perfor-
mance, the party is rethinking at least some
of its policies. A senior official in charge of
supervisingSOEs said in June that it would
be wise to delegate power to company
boards, giving them more say over long-
term planning and hiring decisions. Li Ke-
qiang, China’sprime minister, told a meet-
ing of 100 leading executives in April that
the government might try to implement a
system of performance-linked pay at big
state firms. At a conference on July 15th, Mr
Xi said it was vital thatSOEs reduce their
excessive debts (see chart 3 on nextpage).
But Mr Xi’semphasison party leader-
ship has also created cover for those seek-
ing to defend and even expand state pow-
er. The most important role in this is played
bySASAC, the arm of the government that
oversees mostSOEs. It has pushed for the
creation ofbigger “national champions”
under its control. It has combined China’s
two biggest railway-equipment makers
and its two biggest shipping groups, and is
reportedly working to knot together its two
biggest chemical producers. Medium-sized
companies, too, have seen plenty of such
activity, affecting property, ports, cement
and more.
Some mergers make sense: for instance,
the steel sector is highly fragmented, a re-
sult of local protectionism. But most com-
binations look more dubious, because
state firms are already oversized. The aver-
age SOEhas about 13 times more assets
than the average private-sector firm, ac-
cording to World Bank estimates. What is
more, in many industries, the only compe-
tition faced by state firms is from other
state firms. Indeed, part of the rationale for
the mergers is to preventSOEs from butting
up against each other as they go abroad toOn the rebound^1Source: CEIC *13-month centred moving averageChina, state-controlled firms’ share of fixed-
asset investment*, %2004 06 08 10 12 14 160102030405060Things of state^2Sources: S&P Capital IQ; The EconomistChina, 200 biggest state-controlled firms’ share
of global market, by revenue, %05101520
Integrated
oil and gas
Diversified banks
Coal
Electric utilities
Steel
Carmakers
Gold
Aerospace
and defence
Metals and mining2008 2015