CFA Society Singapore
HONG KONG (Sept 9): China’s desire to improve the efficiency of its state-owned enterprises (SOEs) is real, just don’t expect the reform process to follow a Western model.
That’s the view of Goldman Sachs Group Inc.’s Chief Economist for Asia Pacific, Andrew Tilton.
"While there’s certainly a desire to improve the efficiency of those SOEs, it’s not clear that the meaning of reform is necessarily what some western observers or others might think of as market-oriented reform," Tilton said in an interview in his Hong Kong office.
Reform of the state sector in nations from Britain to Poland has typically involved efforts to level the playing field between state and private companies with more equal access to credit, government contracts and previously closed sectors, along with privatizations and asset sales. China seems to be taking a different tack.
"The intention seems more about efficiency and creating national champions that can compete globally," Tilton said. "Whether that includes an active attempt to limit the role of SOEs in sectors they currently dominate is much less clear. In sectors that might be deemed strategic, I think the willingness to cede that territory to private companies will be more limited."
In some cases, the Party is tightening, not loosening, its grip over government enterprises, with some modifying their bylaws to give the Communist Party more oversight of management decisions. In the last 20 months, the government has announced SOE deals involving 6.9 trillion yuan ($1 trillion) of assets in what’s shaping up to be the biggest overhaul of SOEs since the 1990s.
The SOE sector’s annual revenues in 2014, the last year for which data are available, were almost as large as Japan’s GDP, according to Bloomberg Intelligence Economists Tom Orlik and Fielding Chen. Yet the return on assets of the state sector as a whole in that year was just 4 percent compared with 11 percent in the private sector. China’s latest five-year plan, adopted in March, included a section on the need to push forward SOE reforms.
There has been some progress. In August, plans were unveiled to quicken the clean-up of excess capacity in state-backed companies and level the playing field for private and foreign investors with new access to previously off-limit sectors. President Xi Jinping has also called for solid efforts to push forward reform plans to meet the government’s previously-charted timetable.
Tilton said the success of efforts to rebalance China’s economy away from investment and manufacturing to a model based on services and consumption is "inevitable."
"As China gets richer, and we’re already seeing this, much more of the incremental demand is coming in services rather than goods, and household savings are quite high, so there are lots of reasons to expect a transition from goods to services, from investment to a more consumption-oriented model. I think that’s inevitable."