SOEs should exit some sectors according to Third Plenum Resolution, Yang Ruilong highlights
Renmin University professor and ex-Dean of Economics says the "optimization" of SOEs in Chinese economy means they should focus on strategic sectors ONLY - and exit others.
In the flurry of annotations on the July 2024 Resolution of the Third Plenary Session of the 20th Central Committee of the Communist Party of China (CPC), Yang Ruilong, Professor and former Dean of the School of Economics, Renmin University of China, recently highlighted that, yes, Beijing intends to grow China’s state-owned capital and enterprises bigger and stronger; at the same time, Beijing doesn’t intend for SOEs to take “leading positions in every sector”, and the call for SOEs to “concentrate” in strategic sectors means they should also exist others to make away for private companies.
His analysis was published in the July 29 edition of Beijing Daily, the flagship paper of Beijing municipal committee of the CPC. It is also accessible on the official WeChat blog of the National Academy of Development and Strategy, Renmin University of China.
Here is the relevant text of the Resolution
We will deepen reform of state capital and state-owned enterprises (SOEs), improving the institutions and mechanisms for management and oversight, strengthening strategic coordination between relevant administrative departments, and working to refine the layout of the state-owned sector and adjust its structure. All this will help state capital and SOEs get stronger, do better, and grow bigger, with their core functions and core competitiveness enhanced. We will clearly define the functions of different types of SOEs, improve the management of their primary responsibilities and core business, and identify the key areas and orientations for state capital investment. State capital will be steered toward major industries and key fields that are vital to national security and serve as the lifeblood of the national economy, toward sectors such as public services, emergency response, and public welfare, which concern our country’s prosperity and our people’s wellbeing, and toward forward-looking and strategic emerging industries. The institutional framework under which SOEs pursue original innovation will be improved, and the reform of state capital investment and operation companies will be continued. We will establish a system to assess SOEs’ performance in fulfilling their strategic missions, refine the category-based SOE evaluation system, and introduce value-added accounting in the state-owned sector. While promoting independent operation of natural monopoly businesses in sectors such as energy, railway, telecommunications, water conservancy, and public utilities, we will advance market-oriented reforms in the competitive areas of these sectors and improve regulatory institutions and mechanisms.
At the same time, Zhang Yuzhuo, chairman of the State-owned Assets Supervision and Administration (SASAC), who is a full minister in the Chinese government hierachy and oversees numerous SOEs under SASAC, also hinted at something similar to Yang’s, although in my opinion much more vague and circumsvent. Zhang wrote
Improve the state-owned enterprise investment management system, refine the negative investment list, and establish a post-investment evaluation system to resolutely curb the tendencies of some state-owned enterprises toward blind diversification and over-expansion. Promote the optimization of the layout and structural adjustment of the state-owned economy, coordinate the major productivity layout of the state-owned economy, clarify the key investment areas and directions of state-owned capital, and guide state-owned capital to focus on key industries and sectors related to national security and the lifeblood of the national economy. Focus on public services, emergency capabilities, and public welfare sectors that are critical to the national economy and people's livelihoods, and concentrate on forward-looking strategic emerging industries. Improve the rational flow mechanism of state-owned capital, coordinate and promote strategic restructuring and specialized integration, accelerate the adjustment of the existing structure, optimize new investment directions, and strengthen investment and layout in key core technologies and forward-looking strategic industries. Increase the effective supply of public services in areas such as healthcare, elderly care, disaster prevention and mitigation, and emergency protection, enhance the role of important energy resources as a safety net, and safeguard the security of industrial and supply chains. Deepen the reform of state-owned capital investment and operating companies, build a specialized platform for state-owned capital investment layout, integration operations, and entry and exit, effectively leverage the industrial investment function of investment companies and the capital operation function of operating companies, promote the revitalization of existing assets and the disposal of inefficient and ineffective assets, and focus on being long-term capital, patient capital, and strategic capital.
Yang’s brief but more explicit analysis, or a form of advocacy as I’d like to put it, is translated below, and all emphasis are added by mine. I’ll leave you to judge whether there is some subtle difference in his emphasis from that of Zhang, the minister who is apparently more authoritative. - Zichen
(Yang Ruilong)
加快国有经济布局优化
Accelerating Layout Optimization of China's State-Owned Sector
The Third Plenary Session of the 20th Central Committee of the Communist Party of China (CPC) pointed out the need to "refine the layout of the state-owned sector and adjust its structure," with the aim of "helping state capital and state-owned enterprises (SOEs) get stronger, do better, and grow bigger, with their core functions and core competitiveness enhanced." Building a high-standard socialist market economy requires optimizing the layout of the state-owned sector of the economy. This means that the scope of state ownership should be balanced—neither too narrow, which could undermine China's basic socialist economic system, nor too broad, which might crowd out the private sector and hinder the market's decisive role in resource allocation. The optimization should follow the principle of increasing state capital investment in certain sectors while reducing it in others, and proactively engaging in some areas while refraining from others.
Optimizing the layout of the state-owned sector requires SOEs to get stronger, do better, and grow bigger. The SOEs are vital material and political foundations of socialism with Chinese characteristics, serving as key pillars supporting the CPC in governing and rejuvenating the country. Therefore, they have to get stronger, do better, and grow bigger. In a world with changes unseen in a century unfolding at an accelerating pace, and given the increasingly complex and challenging external environment, it is necessary to cultivate a group of SOEs with strong international competitiveness. By strengthening, enhancing, and expanding these enterprises, they can be better positioned to participate in global competition.
The emphasis on proactive engagement of state capital does not imply leading positions in every sector. To ensure the state-owned sector's leading role, efforts should focus on enhancing its control within its own domains, while adjusting the layout, structure, and organization according to the needs of productive forces. The key lies in correctly delineating the boundaries of the state-owned sector. State capital should be directed toward key industries and crucial sectors through layout optimization and structural adjustments. It is essential to cultivate a group of world-class leading SOEs and work to make the state-owned sector more competitive, innovative, risk-resilient, and capable of exerting a greater level of influence and control over key areas such as the national economy, science and technology, defense, and security. SOEs should not only become market entities with core competitiveness through reforms, but also take on greater roles in driving innovation, leading the advancement of value and supply chains, fulfilling a protective role in ensuring social welfare and responding to major challenges, and serving as a foundational force in safeguarding national economic security. Particularly, SOEs should focus on the real economy, refining their main businesses to create high-level, high-quality, and highly efficient economic and social value, thereby laying a solid foundation for their high-quality development.
The layout optimization of the state-owned sector requires state capital to adhere to the principle of proactively engaging in some areas while refraining from others. It has been shown that if sectors, where state-owned capital maintains control, become overly market-oriented, the state-owned sector may not only fail to fulfill its leading role but could also exacerbate market failures, hindering the provision of essential conditions for economic development and ultimately jeopardizing the establishment of an efficient market system. On the other hand, if state capital excessively intervenes in sectors that should be market-driven, it may "crowd out" private businesses, thereby undermining the market's decisive role in resource allocation. State capital is, in fact, a scarce resource. It is essential to channel this limited state capital into major industries and key fields through system development and policy-making to maintain overall control of the national economy while avoiding disorderly and inefficient state capital investments. Layout optimization of the state-owned sector can also be advanced at the micro level, with deepening SOE reforms as a key measure. This includes refining the modern corporate system with distinctive Chinese features, centered on the separation of government functions from enterprise management and clearly defined ownership, and continuing to advance mixed ownership in SOEs. The mixed-ownership reform of SOEs involves SOEs taking equity stakes in private enterprises, private enterprises acquiring shares in SOEs, as well as implementing employee stock ownership plans (ESOP) to optimize the layout of the state-owned sector through the integration of state and private capital. Additionally, state capital can orderly exit certain competitive industries and enterprises. Due to previous investment errors or management failures, there are a number of so-called "zombie companies" that have been loss-making for years and should be eliminated through bankruptcy or restructuring processes. Underperforming SOEs in competitive sectors should undergo restructuring, ownership transfer, or direct acquisition by private capital.
The broader implication of optimizing the layout of the state-owned sector is the need to clearly delineate the boundaries between the state-owned and private sectors in terms of investment and operational areas. First, it is crucial to further strengthen the definition and protection of property rights for the private sector, creating institutional conditions and a market environment that support its robust development. Second, SOE reforms should be deepened with consideration of the broader context of marketization. To build a microeconomic foundation that supports the mutual advancement of the state-owned and private sectors, it is essential for SOEs to get stronger, do better, and grow bigger in the areas where they should play a leading role. In sectors where private businesses are better suited to thrive, the principle of efficiency should be upheld, allowing market mechanisms to allocate resources. The relationship between the state-owned and private sectors should be managed based on different categories [tier-1 commercial SOEs, tier-2 commercial SOEs, and public service SOEs], thereby optimizing the layout of the state-owned sector.
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