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China People's Congress

Private investors to be allowed control over some Chinese SOEs

While grip on strategic sectors tightens, state to pull back from competitive industries

Maintenance and repair depot of China Railway High-speed (CRH) rail service in Beijing: China's state-owned sector has lagged far behind the private sector in job creation and productivity.   © Reuters

BEIJING -- Even as the Chinese government strengthens its overall hold on state-owned enterprises, plans are under way to yield control of businesses in highly competitive domestic industries.

While China's state-owned sector has long benefited from preferential access to bank loans, it has lagged far behind the private sector in job creation and productivity. To invigorate state companies, Beijing has for several years been seeking to bring private capital and strategic input into their operations under a program known as "mixed ownership reform."

The program has had limited impact so far on China's massive public sector as officials have allowed private investors to take only small stakes in the few companies that have been opened to investment. That could now be set to change.

"In industries characterized by perfect competition, we will allow 'social capital' to take controlling stakes," Lian Weiliang, deputy director of the National Development and Reform Commission, said during a news conference in Beijing on Wednesday.

Social capital, in the evolving official parlance, includes both private investors and state companies. Lian did not specify what sectors he saw as eligible for such privatization, but the reach of state companies in China extends into heavily competitive sectors such as hotel management and stockbroking.

In such industries, private companies usually already dominate, according to Dan Wang, an analyst with the Economist Intelligence Unit in Beijing. Yielding control of state-owned ventures in these sectors is thus "not exactly necessary," she said.

Some observers, though, see Lian's statement as a potential turning point.

"It is a great step forward in Chinese SOE reforms," said Liao Qun, chief research economist at state-owned China Citic Bank International. "[Private investors] have not wanted to go into SOEs because they would not have a final say over companies' operations."

Until now, telecommunications operator China Unicom has been the flagship example of mixed ownership reform. In 2017, the utility received an injection of 75 billion yuan ($11.18 billion) from 14 investors, including internet companies Tencent Holdings, Baidu and Alibaba Group Holding and retailer Suning.com as well as state companies like China Life Insurance.

Unicom's business performance has improved significantly since the ownership overhaul. Some analysts have credited strategic input from the new shareholders, but critics see their contributions as primarily financial and passive.

Officials have indicated this week that more state companies will follow Unicom's example. "State-owned enterprise reforms, particularly in power, oil and railway sectors, have been labeled as a priority for testing the mixed ownership structure," wrote Aidan Yao, senior emerging Asia economist at AXA Investment Managers, in a research note on Wednesday.

Along these lines, China Railway Group said last month that it would hold an initial public offering for its subsidiary that operates the high-speed rail line between Beijing and Shanghai while China Eastern Airlines said it would list its logistics unit.

Beijing plans to experiment with other models as well. The annual government work report presented to the National People's Congress on Tuesday sketched out plans for Singapore-style state investment and management companies.

"This could improve efficiency and sharpen the delineation between business and the state, addressing one of the common concerns from reformers and foreign observers," economists Louis Kuijs and He Tianjie of Oxford Economics wrote in a report Wednesday, adding, "It remains to be seen to what extent it will happen."

At any rate, President Xi Jinping's government remains keen on supporting the state sector, they noted, saying the work report "illustrates China's distinct approach to economic policy, which sees a strong role for the government and SOEs."

As the work report stated, "We will remain committed to strengthening, expanding and increasing the returns on capital."

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