The vision for SOEs can be summed up in a statement by the SASAC published at the end of 2019: “The focus will be on ramping up technological innovation by [SOEs], and making the most of SOEs to encourage innovation and develop the advanced manufacturing sector.”9
The reforms needed to achieve these goals are multifaceted. According to Chinese president Xi Jinping, the government will “promote strengthening, improvement, and expansion of state capital, effectively prevent [the] loss of state assets, deepen the reform of [SOEs], develop a mixed-ownership economy, and cultivate globally competitive world-class firms.”10
It is important to note that in this process, not all SOEs will be treated equally. To optimize the allocation of resources, a threefold criterion for identifying the SOEs to be reformed is in place. Only those SOEs that are most representative of their industries, have the most potential to benefit, and have the greatest capacity to integrate the reforms successfully will be chosen.
The how-to of mixed-ownership reforms
The success of China’s reforms – again, in view of SOEs becoming world-class enterprises – hinges on their approach to further introducing mixed-ownership and equity diversification into their business models. There are six important strategic points to be aware of.
Preparing for reform
To ensure the reforms are effective in their target organizations, certain preparations are necessary. These include SOEs examining the market environment such as the competitive landscape; identifying industry trends and tailoring their strategic planning accordingly; taking an inventory of existing resources relative to their business objectives; and mapping out clear, long-term development goals. These prescriptions for SOEs are to ensure they gain the most benefit from the implementation of the reforms.
Mixed-ownership describes the ability of an investor to take a financial stake in an SOE. The implications require SOEs to balance the interests of three core stakeholders. One is the company itself and its long-term development needs, which is to say a given SOE should not build an asset portfolio that is misaligned with its own interests. The second is the company’s prospective investors, whose interests revolve around their ability to see returns from their positions. The third is the government, which wants to the see the reforms implemented in the optimal and most cost-efficient way. Aligning the interests of these three stakeholders is critical for the present reforms to return the desired benefits.
Good corporate governance
Corporate governance is another strategic element of the current reforms. As China’s SOEs have “corporatized” – that is, adopted the characteristics and structure of modern corporations – they have also maintained their identity as part of the state economy. The intention behind what has been called the “three groups and management” corporate governance framework is to advance SOEs’ marketization, competitiveness, and accountability. The “three groups” refer to shareholders, boards of directors, and supervisory committees; while the “management” dimension refers to SOEs’ senior management. The roles and interests of each are important to note.