AI view: kicking SOE reform down the road

AsianInvestor has answered 10 key questions for investors in the Year of the Monkey. Here we consider whether China will introduce meaningful reform of its state-owned enterprises.
AI view: kicking SOE reform down the road

AsianInvestor’s editorial team set out this month to answer 10 key questions for the Year of the Monkey, having consulted a range of industry experts.

Here we present our response to question number six: whether China will introduce meaningful reform of its state-owned enterprises. Our first five predictions are available by clicking on the picture below. The feature appears in full in the February issue of AsianInvestor magazine.

Question 6: Will China introduce a meaningful SOE reform in 2016?
Answer: No

Reform of China’s many state-owned enterprises (SOEs) has been high on the agenda since Xi Jinping became president in November 2012. But progression has been glacial, and many argue it has stalled. 

The latest government missive is that the State-owned Assets Supervision and Administration Commission (Sasac) aims to complete the closure of 'zombie companies' before 2020. 

Click above for more stories

Authorities have also stressed that priority will be given to public-private participation in SOE projects, and talked up the so-called “supply-side structural reforms” to reduce excess capacity and boost productivity. 

The “mixed ownership” reform of SinoPac (selling inefficient assets) and Citic Group (bringing in private institutional financing) once ignited investor hopes. But it still remains to be seen whether they have broken up monopolies or improved management practices. 

The big question is whether Xi is willing to bear the short-term pain necessary to reform SOEs.

China’s GDP grew 6.9% last year, its lowest rate since 1990, and more headwinds are expected. Implementing major SOE reform as the nation’s economic growth slows would be difficult. It seems more likely that the Party will fall back into old habits: debt and procrastination.

Ultimately, SOE reform is about politics. Xi’s anti-corruption drive has become a hurdle for SOE reform as restructurings would raise conflicts of interest among SOE leaders. Meanwhile, five of the seven-strong Politburo Standing Committee, the Communist Party’s core power group, will retire by the end of this year. 

Stability will more important to Xi’s leadership than SOE reform, so he is likely to kick this can down the road. 

¬ Haymarket Media Limited. All rights reserved.