7. State-Owned Enterprises
China has approximately 150,000 wholly-owned SOEs, of which 50,000 are owned by the central government, and the remainder by local or provincial governments. SOEs, both central and local, account for 30 to 40 percent of total gross domestic product (GDP) and about 20 percent of China’s total employment. Non-financial SOE assets totaled roughly USD30 trillion. SOEs can be found in all sectors of the economy, from tourism to heavy industries. In addition to wholly-owned enterprises, state funds are spread throughout the economy, such that the state may also be the majority or largest shareholder in a nominally private enterprise. China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.” SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals. SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt. A comprehensive, published list of all Chinese SOEs does not exist.
PRC officials have indicated China intends to utilize OECD guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence. Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers who have produced mixed results. However, analysts believe minor reforms will be ineffective if SOE administration and government policy remain intertwined, and Chinese officials have made minimal progress in fundamentally changing the regulation and business conduct of SOEs. SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy. Among central SOEs managed by the State-owned Assets Supervision and Administration Commission (SASAC), senior management positions are mainly filled by senior CCP members who report directly to the CCP, and double as the company’s party secretary. SOE executives outrank regulators in the CCP rank structure, which minimizes the effectiveness of regulators in implementing reforms. The lack of management independence and the controlling ownership interest of the state make SOEs de facto arms of the government, subject to government direction and interference. SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail. U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.
Since 2013, the PRC government has periodically announced reforms to SOEs that included selling SOE shares to outside investors or a mixed ownership model, in which private companies invest in SOEs and outside managers are hired. The government has tried these approaches to improve SOE management structures, emphasize the use of financial benchmarks, and gradually infuse private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance. In practice, however, reforms have been gradual, as the PRC government has struggled to implement its SOE reform vision and often preferred to utilize a SOE consolidation approach. Recently, Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the state as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.