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At present, China has 101 State-owned enterprises (SOEs) under the Central Government, managing the bulk of the country’s State assets. However, their monopoly in many sectors has shut out smaller and private entities for decades, thus leading to low efficiency, poor service and wide criticism from society.
The Central Government is taking two important measures to reduce the number of central SOEs and enhance their service quality.
One of the measures is mergers, which means that enterprises from the same or similar industries will be combined to streamline their operations. With the latest combination as an example, on Aug. 28 this year, the State-owned Assets Supervision and Administration Commission approved the merger of China’s largest coal miner Shenhua Group and top-five State power producer Guodian Corp., aiming to form the world’s largest utility provider by capacity. The merger will likely create an energy behemoth with combined assets of about 1.8 trillion yuan (US$274 billion).
The other measure is mixed-ownership reform, which means bringing in multiple types of investors to central SOEs, spurring more initial public offerings, establishing modern corporate management, exploring flexible and market-based salary systems and selling part of the shares to SOE employees as incentives.
In my point of view, compared with mergers, mixed-ownership is a much better way and an ice breaker for China’s overall SOE reform. In August, China Unicom, the country’s second-largest mobile carrier by subscribers, announced a plan to raise a total of 78 billion yuan (US$11.7 billion) by selling 35.2 percent stakes of its Shanghai-listed arm to various strategic investors.
By doing so, China Unicom will become the first central SOE on the group level to undertake a mixed-ownership reform scheme. Its strategic investors include Chinese tech heavyweights Tencent Holdings, Alibaba Group Holding Ltd., Baidu Inc., JD.com Inc., Didi Chuxing and Suning Commerce Group. It is said that China Unicom’s Shanghai-listed arm will also allot four board members to those private investors.
Frankly speaking, China Unicom is the biggest beneficiary in this mixed-ownership reform so far, as it could take advantage of the cutting-edge technologies from various Internet giants, and access more channels and potential customers. At present, Alipay, a subsidiary of Alibaba, has about 500 million real-name users. Tencent’s social networking tool WeChat even boasts 963 million users worldwide. On the other hand, China Unicom’s core network and rich infrastructure resources, such as servers and bandwidth, will also help its private investors speed up business expansion and penetration in different fields such as cloud computing, artificial intelligence (AI) and the Internet of things (IOT).
Breaking the monopoly of SOEs is surely an important reason for China to introduce private investors. Nevertheless, from the macro-economic perspective, China’s mixed-ownership reform is pushed by the country’s supply-side structural reform, the Belt and Road Initiative, and many Chinese companies’ going-global strategies, as well as the “Made in China 2025” plan.
With these aims in mind, a number of central SOEs are expected to follow the example of China Unicom in the second half of this year. Against the backdrop of tackling overcapacity, it is imperative for those coal, steel and power sectors to undergo such reforms first.
China Unicom’s mixed-ownership shakeup is regarded as a milestone for the Chinese Government to further rejuvenate SOEs using private capital. It will also lay a good foundation for subsequent reforms. As we all know, the first step is always taken cautiously. After selling 35.2 percent of its shares to various strategic investors, the unlisted, State-run parent of China Unicom will remain the biggest owner with 36.7 percent of the total shares.
While bringing many opportunities for SOEs, it is obvious that mixed-ownership reform will also pose many challenges.
Firstly, dealing with diversified shareholders is a new and complicated problem for the administrators. It has raised concerns that State-owned assets may face losses in the future.
Secondly, during the process of mixed-ownership reform, SOEs will meet many tough issues such as spending more of their earnings to serve the public needs, losing their preferential policies and protective measures, as well as dealing with the placement of redundant employees.
Last but not least, according to a document released by the State Council in August, China is encouraging foreign companies to take part in the ongoing mixed-ownership reform in the country. Nevertheless, we have seen no participation of any foreign company in the program so far. Foreign investors’ hesitation clearly shows their concern that they may lack equal rights while cooperating with powerful and monopolistic Chinese partners.
(The author is the editor-in-chief of the Shenzhen Daily with a Ph.D. from the Journalism and Communication School of Wuhan University.)