Is China Serious About Its New State-Owned Enterprise Reforms?


In the latest top-down measure to restore confidence in an economy that appears to be faltering, Chinese leaders unveiled the details of a new set of guidelines to reform state-owned enterprises (SOEs). According to China’s state-owned Xinhua news agency, China “will modernize SOEs, enhance state assets management, promote mixed ownership and prevent the erosion of state assets.” Along with a set of short-term, stopgap policy measures to restore investor confidence in the wake of equity market volatility in July and August, the new SOE guidelines appear to be aimed at much-needed longer term structural change.

SOE reform has been something foreign investors have been wanting to see for some time. Two years ago, in the lead-up to China’s economic policy-focused Third Plenum, there was considerable hope that SOE reform would feature at the top of Xi Jinping’s economic policy agenda. Unfortunately, the Party fell short of comprehensive SOE reform at the time. The issue has never been an easy one for the Party leadership to pursue, given powerful vested interests in the existing SOE structure. With Xi’s power now consolidated and the stock market’s volatility still reverberating across the country, it makes sense that the State Council (the country’s cabinet, responsible for policy) would announce SOE reform measures now.

To be sure, nothing about the newly announced reforms suggests that we’re about to witness a revolution in SOE structure or a move toward radical privatization. Instead, what we have is a five-year road map for modest reform. “The guidelines suggest that by 2020, the goals in all the main reform areas should be accomplished, constituting a system that is more suitable to the nation’s socialist-market economy,” Xinhua notes. Echoing some of the language used by the country’s Central Bank when it allowed the yuan to devalue, Xinhua notes that the “SOE system should be more modernized and market-oriented.”

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In the Chinese economy, SOEs are far from a fringe sector. The Financial Times notes that China has more than 155,000 SOEs which, in cumulative, employ tens of millions of Chinese. The reason SOEs have come to be the target of so much foreign investor frustration is because, by their very nature, SOEs are plagued by inefficient management, aversion toward innovation, and moral hazard. The new reforms will hopefully address these shortcomings.

The new guidelines, Xinhua reports, state that the government will encourage SOEs to eventually “go public” though “no specific timetable will be set.” Additionally, “SOEs will also be allowed to experiment with selling shares to their employees.” These provisions hearken positively for longer-term structural SOE reform and appear to address recommendations that foreign investors have proffered for a few years now.

Skeptics may read the announcement of the new guidelines, particularly given their timing, as an attempt to signal reform without necessarily pursuing it. After this summer’s volatility, confidence in China’s continuing growth and short-term economic health has been shaken worldwide. By issuing these guidelines, the State Council could be sending investors another signal that it is taking structural reform seriously. For the skeptics, they’ll believe the sort of SOE reforms these guidelines promise when they see it. One hopes that China will move toward implementation sooner rather than later.

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