Shanghai leads way on state enterprise reform

China’s local governments are pushing ahead with state-owned enterprise reforms even as national-level reforms stall, piloting initiatives being hailed as bellwether restructurings.  

Overhauling the inefficient state sector, which accounts for about a fifth of economic output, is Beijing’s toughest challenge as it seeks to revive a slowing economy. Analysts say job cuts and factory closures are crucial to a reduction in high corporate debt and industrial overcapacity but unemployment and reduced investment raise the risk of social instability.

Local governments are taking up the baton, with a rash of restructurings or other big changes prompting the suspension of share trading in 56 locally owned SOEs since the start of 2016, according to data from Wind Information.

The Shanghai reforms won praise from the People’s Daily, the party mouthpiece, in a front-page article this week. In June, Shanghai’s SOE watchdog divided its SOEs into three categories — competitive, functional, and public — for targeted treatment, a move Beijing also pledged to adopt.

Local SOEs control 46 per cent of all SOE assets, according to finance ministry data, and many of the worst “zombie” companies are owned by provinces and cities rather than the central government. 

“Looking afresh at SOE reform, one must look at Shanghai, which is a bellwether for reform,” Zou Hui, analyst at Orient Securities in Shanghai, wrote on Monday. “In the latter half of the year, we expect central enterprise consolidation to accelerate, and there’s hope that SOE reform will return as an investment theme.” 

Highlighting investor enthusiasm, China Universal Asset Management last week raised Rmb15bn for an exchange-traded fund that tracks an index of Shanghai SOEs. 

Mixed signals from policymakers have left analysts scrambling to interpret the overall direction of Chinese SOE reform. Shanghai and the megacity of Chongqing have established investment holding companies modelled on Singapore’s Temasek state investment agency to maximise financial returns. But other policymakers stress the need for tighter party control of SOEs, a move in the opposite direction. 

The classification of SOEs will serve as the basis for choosing between various approaches. “Competitive” enterprises will be subject to market reforms and lose explicit and implicit subsidies, while the public service enterprises will remain shielded from market pressures. 

“Using different reform methods for different types of enterprises and implementing differentiated reforms is precisely the exploration that Shanghai Sasac is carrying out,” the People’s Daily wrote. 

So far the most widely accepted approach has been megamergers between rival SOEs designed to create economies of scale and reduce competition. The city of Shenzhen is working on plans to establish a Rmb150bn ($23bn) investment fund to promote consolidation, according to the official Shanghai Securities Journal.

Of Shanghai’s 51 local SOEs, 27 were classified as “competitive”, including SAIC Motor, the carmaker, Bright Food, owner of the UK’s Weetabix breakfast cereal, and six locally owned banks. Three Shanghai SOEs were classified as “public service”, all of which are infrastructure groups. 

The “functional” category is a hybrid that includes 13 groups such as Shanghai Airport Authority and Shanghai Shendi Group, the joint venture partner in Shanghai Disney. Four remaining groups fall into miscellaneous categories.

Partial privatisation through stake sales and stock market listings is also on the agenda. The People’s Daily noted with approval an employee shareholding plan by Shanghai International Port Group. The company issued new shares to 16,000 of its 20,000 employees. 

Additional reporting by Ma Nan

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