BNP PARIBAS中國國企改革報告：老話題新挑戰期待19大

新聞 07-18

BNP PARIBAS中國國企改革報告：老話題新挑戰期待19大

總結：

?SOE reform remains a hot topic, particularly with investors around the world who see it as an increasingly important issue for themselves. There are a number of reasons: 1) the RMB has become a constituent of the IMF』s Special Drawing Right (SDR) basket; 2) the MSCI EM index now includes China A-share stocks; and 3) the Shanghai-HK and Shenzhen-HK stock connect and CIBM-HK bond connect schemes have commenced trading.

? Many critics believe SOE reform has made little progress when measured by privatization, liberalization or marketization. They claim SOE reform policy guidelines have been changed and that under the political circumstances of the anti-corruption campaign, the SOE reform process that began in 1995 has ground to a halt.

? Indeed, SOE still face major challenges given low efficiency, misallocation of resources, high debt ratios and financial risks. China needs to develop new growth engines to move to the next stage of growth and avoid a middle-income trap, and we think SOE reform is key.

? We, however, think SOE reform has progressed since 2014. This might be less apparent in fundamentals, but the idea of managing state-owned capital (rather than just managing SOEs) is now accepted and has been put into practice. More importantly, mixed-ownership reform has been applied to the six central SOE groups and other local SOEs.

? We expect SOE reform to regain momentum after the 19th party congress, and for the new government in 2018 to shift its political agenda toward economic growth. We expect SOE reform or liberalization to bring more business opportunities for private investment. Also, in the meantime, we expect SOEs themselves to become more efficient.

Overview

SOE (state-owned enterprise) reform is a serious but hard question. Many critics believe SOE reform in China has hardly made any progress, even after China published its aggressive reform document in November 2013. Some suggest that SOE reform is not a priority given the current political economic circumstances. However, we are frequently asked by investors globally how China is progressing in SOE reform. As China becomes increasingly important in the new version of globalization, any policy change relating to its growth has increasing spill-over effects on the world. SOE reform matters globally much more than ever before.

SOE reform is an old topic. To a large extent, China』s reform history for more than three decades is the history of SOE reform (when reform focus shifted from rural to urban reform in the mid-1980s). Although the Chinese government does not accept the term 『privatization』 given ideological considerations

By 1995, China seemed to have decided on SOE reform to address three key issues: 1) what SOEs to have – it privatized SOEs which did not serve matters of state security, market failure or long-term development; 2) how to manage them – SOEs should be managed like normal corporates in line with market forces; and 3) how to distribute their profit – most SOE profit should be handed over to public finance.

However, those ideas do not seem to have translated into the new policy guidelines. Instead, the guidelines prioritize the role of the Communist Party Committee in SOE top management appointments and major business decisions given the new leadership sees SOEs as the political ruling base. Thus, for example, SOEs are not free to undertake privatizations; and their incentive systems limit the compensation packages of top management.

However, the SOE problems remain or even worsen. Their political roles conflict with their business objectives, causing misallocation of productive resources, lower efficiencies, higher debt ratios and worse financial risks. Reforming SOEs at the same time as China transform its economy for its next stage of modernization is a big challenge. China must create and develop new growth engines when the old ones – industrialization, exports and property development – are powering down.

Despite all this, we think it is unfair to say there has been little progress on SOE reform. In fact, quite a few SOE reform policies have been adopted and implemented. These measures, if not fundamental, help set the ground for further changes and improvement.

What has SOE reform done since 2013?

SOEs in China are complicated. They can be split into financial and non-financial SOEs. Apart from these, there are a large number of state-owned assets held by the so-called government-affiliated institutions, such as kindergartens, schools, colleges, universities, hospitals, laboratories, testing centres, etc. Financial SOEs are under the administration of the CBRC (China Bank Regulatory Commission), CSRC (China Securities Regulatory Commission) and CIRC (China Insurance Regulatory Commission). Non-financial SOEs are regulated by central or local SASACs (State-owned Assets Supervision and Administration Commission). In most cases, when we talk about SOE reform, we refer to SOEs under SASAC.

According to the central SASAC, total state-owned assets amounted to Rmb139.2tr in May 2017 including central and local SOEs. Total liabilities were Rmb91.5tr, implying an average debt-to-asset ratio of 65.8%, and a total-debt-to-GDP ratio of 120%.

The number of SOEs under the central SASAC has reduced to 102 from 196 in 2003 and 114 in 2013 through mergers. But there are many layers of SOEs – some central SOEs have more than 10 layers. Many lower layers of SOEs have become mixed ownership, but, while they are called SOEs, the state ownership is usually more than 50%. For instance, by June 2017, there were 999 SOEs listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange (excluding those solely listed on the Hong Kong Stock Exchange and others), accounting for 30.4% of the number of total listed companies on the two bourses. Among the 999, 350 are SOEs belong to the 102 central SOE groups. The total market cap of listed SOEs is Rmb26.5tr, 44.7% of the total market cap of the China A-share market as a whole.

Based on our searches and studies, China has conducted four major SOE reform measures since 2014, but mainly on a trial basis:

1.Corporate governance enforcement, including empowering boards of directors: to hire managerial personal through market competition; to establish professional managerial systems; to differentiate compensation packages; and to increase SOE transparency.

2. All SOE groups must set up state capital investment companies responsible for state capital safety and profitability. The state capital operation platforms use state capital for business operations. We think this is the most important development in SOE reform.

? M&A and restructuring.

? Finally, but by no means the least, mixed ownership reform (more detailed discussion below).

Since 2014, 416 SOEs of different sizes have carried out one or more of the above reform measures: 185 undertook asset restructuring (44%); 49 become state capital operation platforms (12%); 37 adopted share-bonus schemes (9%); 36 introduced key worker shares (9%); 27 carried out debt-equity swaps (6%); and six central SOEs and many local SOEs conducted mixed-ownership reform.

Mixed-ownership reform

We think mixed ownership is the most significant SOE reform implemented since 2014. Once listed, an SOE is no longer purely state owned but the state usually remains the dominant

shareholder, with other, minority shareholders having little say in the listed SOE』s management.

and take director positions on the boards of directors. As major shareholders, they can influence managerial employment, incentive and compensation policies, and business decision making.

Moreover, mixed-ownership reform encourages SOEs to offer key workers with company shares as part of incentive schemes. Furthermore, SOEs remove social functions such as

affiliated kindergartens, schools, shops, hospitals and theatres from their balance sheets.

The SASAC selected six central SOE groups as the first batch to undertake mixed-ownership reform. They are China Eastern Airlines, China Unicom, South Power Grid, Harbin Power

Group, China Nuclear Power group, and China Ship Building. The SASAC will soon publish the second and third batches of SOEs for mixed-ownership reform.

The SOEs in the first batch are classified by their nature and state sensitivity, and thus apply different mixed-ownership reform measures:

? For commercial SOEs in pure competitive industries, all sorts of capital is welcome to invest and form real mixed-ownership companies;

? For commercial SOEs in important sectors that matter to state safety, state capital must take the holding position (normally more than 50% of shares);

? For SOEs in sectors with natural monopolies, the government will stay out of the business itself but will take on the role of market regulator and supervisor; business operations will be in the form of a franchise; and

? For SOEs in sectors relating to public interests, such as power electricity, water supply heating, gas supply, public transportation, and public facilities, mixed-ownership reform

will involve government purchases of services, with private businesses granted franchises or otherwise being entrusted to operate the businesses.

We believe the market sees mixed ownership as highly positive because of its profound impacts and implications, though it will take longer for real benefits to be visible. In the meantime, mixedownership reform will reduce: 1) state holdings in shares, and 2) government control and intervention. It will also reorganize management structures, simplify administration and help reduce non-productive staffing. Having multiple shareholders should help resist the government』s political demands, and help businesses focus on profit maximization. Professional management and market-oriented compensation systems should improve efficiency and control risks. Worker』s share schemes should help improve workers motivation, enthusiasm and loyalty.

It should also help reduce worker resistance to privatization, which is often a big issue.