Editor's note: Although this paper was written in May 9, 2017, it still has reference significance for the current reform issue in China's state-owned enterprises.
In the past two months, the mixed ownership reform of the Chinese state-owned enterprises (SOEs) in the fields of electric power, oil and gas, railway and military industry has been accelerated in an all-round way. The National Development and Reform Commission (NDRC) has identified 6 pilot schemes for SOE mixed ownership reform, which are expected to be approved soon. As the SOEs in monopolized areas take the lead in mixed ownership reform, they will drive the mixed ownership reform of the SOEs of other key areas. It is understood that among the second batch of the pilot 10 SOEs, 7 has been approved; the screening the third batch of SOEs is in progress, all provinces and cities will carry out a number of pilot projects in the near future. Among the SOEs, the progress of mixed ownership reform in Air China, China Eastern Airlines and other airlines in civil aviation area is particularly eye-catching; China Unicom has suspended trading and is now planning its mixed ownership reform.
The Third Plenary Session of the 18th CPC Central Committee put forward two basic ideas for the reform of SOEs. One is the model of state-owned asset management company model similar to mutual fund; the other is the model of mixed ownership reform. Now, it seems that the model of mixed ownership reform is leading the way. Since the current stage of mixed ownership reform of SOEs is in the pilot stage, that is to say, mixed ownership reform of state-owned enterprises has not yet reached the standard. I did not focus on the issue of mixed ownership reform before, because I personally do not think it is a viable path. As an independent think tank, Anbound has always insisted other paths such as the reform based on mutual funds model as the more suitable path to promote the SOEs reform. However, reform always needs trials, and it is not known which solution will solve the problem in the end. In the following paragraph, I would like to talk about my views on mixed ownership reform of SOEs, which has been promoted on a pilot basis.
In my opinion, from the perspective of China's specific national conditions, mixed ownership reform of SOEs should have a few "cautious" mentalities. Particularly, there are ten "cautions":
The first "caution" is the employee stock ownership plan (ESOP).One of the ways to conduct mixed ownership reform is to implement ESOP. On August 17, 2016, the State-owned Assets Supervision and Administration Commission (SASAC) issued relevant documents to select SOEs in which the main businesses belong to fully competitive industries and fields; 10 state-owned central enterprise, and 5 to 10 local SOEs will be selected to carry out the first batch of pilot projects. The document makes clear that the total amount of employee stock ownership in this round shall not be higher than 30% of the total capital stock of the company in principle, and the single employee stock ownership ratio shall not be higher than 1% of the total capital stock in principle. Employee stock ownership is intended to allow the employees of SOEs to share the profits. The intention is good, but it should be cautious that the mixed ownership reform disperse the equity to employees, and the employee's equity is once again concentrated in the hands of certain people, which will turn the mixed ownership reform as the process of privatization in essence. In the past, there has been a similar situation in the reform of SOEs in Russia. As a result, there was a large-scale of SOEs privatization and that created a special breed of "New Russians". Though the situation in China is different from the past Russia, but China has to be cautious of similar possibilities.
The second "caution" is still about the ESOP. Employee stock ownership is to allow employees to share the benefits, but the premise is that the enterprise should be profitable, to make money and to grow. However, SOEs are not guaranteed to make profits in market operation. If employees pay the cost and hold shares, but the SOEs do not perform well in business, employees should be careful -- if SOEs lose money after the mixed ownership reform, the employees lose money too. In this case, there is no beneficiaries under this mixed ownership reform, which will make the reform of SOEs losing the support.
The third "caution" is about foreign capital and how the foreign investors get involved. In September 2015, the State Council of China issued " Opinions of the State Council on Developing the Mixed Ownership Economy by State-owned Enterprises ", which mentioned the introduction of foreign participation in the restructuring and reorganization of SOEs, joint venture cooperation, overseas mergers and acquisitions, investment and financing, offshore financial cooperation, make full use of international resources and elements such as market, technology, talent, and to develop a mixed ownership economy, participate in international competition and the global industrial division. There is no problem with the overall idea of foreign investment participating in SOEs reform, but there are restrictions in many domestic industries. The degree of foreign participation in the future is still unknown. If there are problems in the mixed ownership reform of SOEs which involving the foreign capital, it will have a negative impact on foreign capital, SOEs and the China's opening up to the outside world.
The fourth "caution" is that today's "state-owned entrepreneurs" have become real bosses. A major problem in the operation of SOEs is the absence of ownership. In addition, the management of SOEs is heavily influenced by the government. As a result, the power of SOEs is highly concentrated in the top management, which this could become the source of many SOEs' corruption and major investment mistakes. Thus, it should beware of the mixed ownership reform could provide such "state-owned entrepreneurs" an opportunity to swallowing up state-assets and creating new inequalities.
The fifth "caution" is to be careful that SOEs become the black hole of debt through so-called reforms. Mixed ownership reform of SOEs not only has the change of property right, the reorganization of assets, it is often accompanied by the debt restructuring. In this case, China should beware of SOEs falsify or erase its debt through the mixed ownership reform; this is due to the erasure of debt is virtually the transfer of debt burden to the society.
The sixth "caution" is to be careful about the future operation and capital of SOEs, especially their capital input. One of the purpose of transfer of equity is to pump new capital into the SOEs, if the SOEs transfer portion of their equity through the mixed ownership reform but did not bring any new capital investment into SOEs, or even abuse the status of SOEs to get bank's credit, subsidies from the government, then there will be major problems with such SOEs reform, and therefore such problems in the design of SOEs reform should be avoided.
The seventh "caution" is to be careful about the future supervision of SOEs. In the past, the supervision of SOEs was mainly dealing with the leaders of SOEs, who were all from the Communist Party and the government, and the supervision worked through the documentation and meetings, especially the "cadres in charge", the supervision was worked through the party's instructions. However, after the mixed ownership reform in the future, the market mechanism and standardized corporate governance will be introduced into the SOEs, and hence, whether the mixed ownership reform of SOEs will face more complex regulatory situation or even out of control is worthy of attention.
The eighth "caution" is the status and role of private enterprises. One of the important goals of the mixed ownership reform of SOEs is to attract private capital. In fact, some private enterprises are willing to participate in the mixed ownership reform of civil aviation and telecommunications SOEs. However, the private enterprises that accustomed to China's policy changes and government turmoil, are wary of mixed ownership reform of SOEs, on the one hand, they hoping to respond to the policy call, but on the other hand, they worried that after joining the SOEs, they have no sense of participation as they are just the minority shareholders, and their investment interests will not be guaranteed. In this case, one should be cautious that the private enterprises are not willing to participate in SOEs' reform; this would eventually cause the private capital not pumping into the SOEs.
The ninth "caution" is about the asset structure traps between the SOEs. Strictly speaking, the innovation of mixed ownership reform is not the latest invention; for many years, there are many examples of mergers and acquisitions between SOEs. There are kind of spirit of brotherhood exists between the SOEs, if this spirit appears in the mixed ownership reform, would turns out the mixed ownership reform as the transaction between the brothers or insiders of SOEs, which is the failure of mixed ownership reform. The purpose of mixed ownership reform of SOEs is to change the mechanism and management of SOEs through exchange of equity, capital and governance, so as to enhance the strength of market competition. If mixed ownership reform turns out as the mixed of SOEs ownership, it will become completely superficial and consume a lot of social capital.
The tenth "caution" is that through mixed ownership reform, some SOEs will become bigger in size and far too cumbersome. If during the mixed ownership reform, both useful and useless SOEs are integrated together would result the giant SOEs, which are "too big to fail", and this is also a failed mixed ownership reform of SOEs.
Final analysis conclusion:
The mixed ownership reform of SOEs has become a fact vigorously promoted by policies. As an independent think tank, Anbound suggests that SOEs should pay attention to the above ten "cautions" in the pilot mixed ownership reform, to avoid relevant the practical reform problems in advance, assist in implementation design, and prevent potential risks caused by inadequate implementation. If the above mentioned problems can be avoided in the mixed ownership reform, it will be a relatively successful pilot SOEs mixed ownership reform. On the other hand, if there are a lot of problems occur and most of them caused by the system and mechanism of the reform, then it is probably necessary to consider changing the course of SOEs reform to the reform model similar to the mutual funds' model.
