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It is widely expected that the year 2007 will witness acceleration in the restructuring of large State-owned enterprises.

 

The giant State-owned enterprises (SOEs) are mostly under the direct management of the central government. After the restructuring of the past several years, the number of central SOEs is down from 196 in 2003 to 159 in 2006.

 

The central SOEs make fat profits every year for the State, but most have much to improve in corporate governance, management, innovation and efficiency. Some are even under question about their ability to remain profitable.

 

From an academic perspective, there are several reasons that the central SOEs should sharpen their competitive edges through fundamental reform.

 

First, incompetent central SOEs may spoil the efforts of promoting the market economy in China. The weak central SOEs may create the market expectation that central SOEs can only make money under State protection.

 

With this expectation, private businesses and foreign invested businesses are probably willing to invest in connections with the central SOEs in an attempt to share their profits gained through the assumed protection. This is certainly fatal to the establishment of a free economy.

 

Second, if the central SOEs remain incompetent, they may hurt the public welfare. This is easy to understand when the SOEs collect higher-than-normal prices for their products or services.

 

But even if their prices are not out of line thanks to administrative controls, these SOEs still create government expense in the form of special subsidies to inefficient businesses.

 

As a non-profit organization, any subsidy from the government is paid for by the taxpayers. In this way, the incompetence of central SOEs always hurts the public interest.

 

Third, central SOEs are mostly the suppliers of products and services either key to the national security or indispensable to everyday life.

 

If they are not strong in efficiency or creativity, their services or products will not be good enough to satisfy the market. This will not only harm consumers' confidence in SOEs but also pose substantial threats in case of national emergency.

 

The government has acknowledged the importance of reforming the central SOEs. As the transition period for China's World Trade Organization membership came to an end in December, 2007 is the first year of fully opening up.

 

The Beijing Olympics in 2008 and the Shanghai Expo in 2010 will both create abundant commercial opportunities for the Chinese market.

 

Success depends on the competence of businesses as well as the government's management of the State-owned resources as to whether the country makes the best use of these precious opportunities to complete its transition to a real market economy.

 

Therefore, the central government will definitely speed up reforming the SOEs.

 

Some are worried that the mergers and consolidation of the central SOEs may enhance their monopoly, worsen the unfair competition, and hurt the private sector.

 

Such worries are not baseless and the academics have been discussing this issue for decades. Though there is not unanimous consent among researchers on the relationship among the government, the market and business, it is certain that a mechanism encouraging regular cooperation between the government and business would lend a strong hand to boosting the country's strength in global commerce.

 

Therefore, the authorities should attach top priority in restructuring the central SOEs to reorganizing resources and improving their business efficiency to make them better positioned in global competition.

 

Since the central SOEs are meant to focus on core industries related to national security, they have a good opportunity to establish cooperation with private businesses and foreign-invested ventures.

 

However, if the central SOEs do not have modern corporate governance, innovative research and development, and proper market targets such cooperation may not come easily.

 

In the latest round of restructuring, some of the central SOEs obtained listings on the stock market.

 

The shares of the central SOEs were warmly received. It is a clear signal from the market that the restructuring of the central SOEs is considered beneficial to their business.

 

Actually, some central SOEs made remarkable progress after their restructuring, which has verified market expectations.

 

As the supervisors of the central SOEs, the State-owned Assets Supervision and Administration Commission (SASAC) should take seriously its role in the restructuring. It should choose the SOEs to be restructured according to the national strategies for industrial development and national security.

 

SASAC needs to draw a clear line between the rights of ownership and management during the restructuring.

 

On the one hand, SASAC should keep a close watch on the SOEs as the representative of their owner the State. On the other hand, it should also refrain from intervening in business decisions that should be made by an SOE's board of directors.

 

It is also an important part of the duty of SASAC in the restructuring to introduce strong incentive policies for the SOEs.

 

(China Daily March 8, 2007)