November 10, 2013 7:06 am

China reform puts executives on defensive as plenum begins

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The men and women who command the heights of China’s economy are on the defensive at a meeting that will set the direction and tone of the country’s new leadership for the next decade.

Senior executives from large state-owned enterprises joined governors, generals and ministers as the 376 full and alternate members of the Chinese Communist party’s 18th Central Committee gathered in Beijing at the weekend. Of these four constituencies, it is China’s SOE managers who have attracted the most scrutiny in the run-up to the committee’s “third plenum”, which opened on Saturday.

SOE bosses are selected by the party and have been required over recent months to join in exhaustive rounds of “criticism and self-criticism” under orders from Xi Jinping, China’s president and party general secretary.

Analysts say that Mr Xi’s revival of Maoist-era slogans and practices, such as a “mass line” campaign urging party cadres to engage more directly with the public, is primarily aimed at asserting his own authority and restoring discipline within the party ranks.

But it has had a demoralising effect on at least some of the SOE executives who are required to manage some of the world’s largest companies while simultaneously taking orders from party central.

“These guys are complaining they don’t have any time to run their companies because they’re so busy writing thousands of words of self-criticism and pretending to ‘learn from the masses’ in order to meet their political requirements,” said one senior western banker who works closely with the heads of major Chinese SOEs.

“In the last few years they only had to attend important party meetings and make sure their companies were in line with party policy, but now they are being stretched very thin by all these campaigns.”

One senior party member echoed that sentiment, saying he had also heard grumblings from state sector executives.

“Xi has spent a lot of time focusing on party matters,” the banker added. “There has been an emphasis on politics and ideology, which can create concern about where the country is heading . . . But in China things can coexist. Strengthening the party doesn’t mean Xi is not going to proceed with the economic reform agenda.”

Alongside reform of a residency system that imposes a form of apartheid on China’s 260m migrant workers the pre-plenum hopes of many reform-minded analysts and academics are focused on an overhaul of the power and privileges enjoyed by the country’s largest state-owned enterprises.

“SOE reform has to feature at the plenum. It is impossible not to tackle this issue,” said Ma Guangyuan, a Beijing-based economist. “The biggest problem we face is an uneven economic playing field.”

In July the State Assets Supervision and Administration Commission, which oversees 113 large SOEs controlled by the central government, reported an 18.2 per cent year-on-year jump in first-half net profit at the companies under its supervision, to Rmb631.5bn ($103.7bn).

According to Jiang Jiemin, then head of Sasac, over the same period their revenues rose by half that rate while they paid more Rmb1tn to the government in taxes and fees.

In a research note, Andrew Batson, research director at GK Dragonomics in Beijing, observed that while SOE assets more than tripled between 2006-08 on the back of a Rmb4tn central government stimulus package, their return on those assets subsequently fell from 5 per cent to 3 per cent.

Many observers are pessimistic about the party’s ability to discipline one of its most important power bases.

“Telecoms is a classic government monopoly,” said Gao Minghua, director of a corporate governance centre at Beijing Normal University. “The public is unhappy with high prices, slow network speeds and poor service. But I don’t think there will be any dramatic breakthroughs.” The trio of telecom players are all state-controlled.

Other widely reviled industries represented on the Central Committee include airlines, infamous for rage-inducing delays; banks that pay depositors low rates of interest and pass on cheap funding to their industrial SOE cousins; and energy companies, associated with the smogs that routinely blight Beijing and other large Chinese cities.

Mr Jiang, who previously worked in the state-controlled oil and gas sector, has since been detained as part of a wide-ranging party investigation of possible corruption at PetroChina , the country’s largest energy firm. Mr Jiang’s plight highlights another common complaint about SOE executives – like their government and military colleagues, they are routinely caught up in corruption investigations.

Executives at government-controlled enterprises with relatively small free floats on the Hong Kong and Shanghai stock exchanges frequently disappear during the course of corruption investigations conducted by the party’s Discipline Inspection Commission, after which investors receive vague assurances that the arrests of senior staff “will not have a material adverse effect on the group”.

However, many SOE failings can be attributed to policy directives from the government, which expects state companies to prioritise its interests – such as supporting short-term economic growth objectives – over their own. “Growth in the total assets of SOEs has remained high since 2007, despite a substantial deterioration in the returns on those assets,” Mr Batson noted. “The political pressure on SOEs to invest looks to have trumped their response to market signals . . . China needs to stop forcing SOEs to make lousy investments.”

For example, the country’s large mobile operator was compelled to develop a 3G network standard that was incompatible with Apple’s popular smart phones, while the delays airline passengers rail against are a result of the military’s refusal to open up more airspace to commercial carriers.

Similarly, oil and gas companies have been prevented from raising domestic energy prices in line with the international market, undermining their ability to refine the cleaner fuels that would help reduce pollution.

“The sectors that we’ve made great returns in have been the ones that have had very little state sector involvement to begin with – IT services, medical devices and retail,” said one Shanghai-based private equity investor who asked not to be identified. “I’m not sure SOEs have overwhelming advantages and they definitely suffer from one very jarring disadvantage, which is one of motivation [for senior management]. We believe in markets and stay away from companies whose fortunes depend on government policies. We view that as a risk factor.”

Additional reporting by Wan Li

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