The changing state-owned enterprises – Sara Hsu

China´s central government is trying – yet again – to reform state-owned enterprises, who are de facto loss-making and very corrupt. But changing their ownership structure has not been easy, and financial analyst Sara Hsu points at two major caveats in the Diplomat.

Sara Hsu:

Although increasing profitability and mixed ownership can be positive outcomes of SOE reform, two caveats remain. Despite the fact that the central government has cracked down on corruption, precedent warns us to be wary of SOE asset sales. SOE managers have embezzled state assets through management buy-outs of enterprise shares (in particular) in a variety of ways, often through the purchase of non-circulating shares. A lack of transparency in these negotiations allowed the transactions to be carried out undetected. Monitoring of the ownership change process is therefore essential.

The second caveat is that once mixed ownership types are allowed and ownership by central or local governments is reduced, directly held state assets will decline. Currently, assets of both central and local SOEs amount to about 94 trillion RMB. If some assets are to be partly privatized, the state had better ensure that its debt is kept low; until this point, analysts have pointed out that government debt issues can be resolved by selling off state assets. However, once they are sold, the ability to repeat the exercise in the future diminishes. Hence, sales of ownership shares in SOEs had better be carried out conscientiously, and with an eye to perpetuating profits in the future.

Analysts have recently written extensively about the prospects of SOE reform. We wait to find out whether this time will be deeper, better, and more meaningful than past reforms. With China’s declining GDP growth, it will be hoping that SOE profitability can be improved. If so, then the country’s economic restructuring targets are more likely to be met.