Foreign Capital in SOE Reform a Step Forward

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Last updated at: (Beijing Time) Tuesday, November 12, 2002

Foreign Capital in SOE Reform a Step Forward

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By translating opening-up into a driving force for reforming the State sector, China has not only fulfilled its commitment to the World Trade Organization (WTO), but also made best use of its new membership.

A provisional regulation was jointly released by several key economic departments on Saturday regarding the use of foreign capital for restructuring State-owned enterprises (SOEs).

While leaving foreign investors speculating what proportion of shares they can hold in such SOEs, the regulation clearly drives home the authorities' determination to expedite SOEs' reform.

Undoubtedly, the regulation is a continuation of a circular issued early last week, which gives foreign investors wider access to China's stock market, by allowing them to buy State-owned or institutional shares in home-grown listed companies through open competition.

The government has listed many State-run enterprises on the stock market over the past decade and is considering ways to reduce State shares further in coming years.

The country's transition from a planned economy to a market economy has led to a prevailing understanding that without fundamental shake-ups, low efficiency State firms will not be able to keep their footing in the market.

Therefore, measures must be and have been taken to prevent SOEs from becoming a major impediment to the development of the fledgling market economy.

In fact, the country has achieved remarkable progress in the reform of SOEs over the past years.

State firms have withdrawn from many competitive sectors. With many small SOEs being transformed into non-State-run companies through mergers and reorganization, the share of the State sector in the national economy has shrunk substantially .

For instance, the proportion of the total value of output of State-owned or State holding industrial enterprises to the country's total, has plummeted from 80 per cent in 1980 to about 44.4 per cent in 2001.

Meanwhile, most large and medium-sized SOEs have carried out efficiency-orientated corporate reform, and the monopoly of State firms in most sectors has been broken.

As a result of better efficiency and competitiveness, while the number of SOEs in China fell from 102,300 in 1989 to 46,800 last year, the overall profits they made leapt to 238.9 billion yuan (US$28.7 billion) in 2001 from a mere 74 billion yuan (US$8.9 billion) in 1989.

However, the reform of SOEs remains the most difficult and most challenging central link to the country's overall economic restructuring.

Settlement of many other problems like banks' bad loans and lay-offs has been bottlenecked by sluggish SOEs' reform.

SOEs currently occupy an inordinately large part of the financial resources of both the banking sector and the stock market. The downsizing of SOEs has led to the lay-off of up to 24 million workers in recent years.

To give a fuller picture of the basic role of the market in the allocation of resources and create an equal environment for all market players, breakthroughs in SOEs' reform are urgently needed.

Adjusting the distribution and structure of the State sector and reforming the State property management system must be deemed a major task for the country's deeper economic restructuring.

The introduction of foreign investors in the reforming of SOEs is surely a step forward and one more significant than merely observing the country's promises made upon its WTO entry.

It is a widely-held belief that foreign investors will bring not only capital, but also advanced technology, management and much-needed corporate governance to China.

Admittedly, sophisticated corporate governance reform cannot be achieved overnight, given the immensity and complexity of reforms needed in the SOEs.

Addressing these problems calls for a coherent policy framework.

So the government's role is to ensure transparency and sustainability of its policies, in line with the core principles of fair competition.

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