State-owned enterprises (SOEs) play a pivotal role in China’s economy, accounting for nearly 60% of the nation’s total assets and almost 70% of its GDP in 2021. As foundational pillars, SOEs have historically enabled the government to swiftly execute policies, accelerate industrial transformation, and mitigate economic risks. However, they have also been less efficient than private businesses, particularly in returns on assets, prompting a renewed focus on reform.
The Push for ‘Bigger, Better, Stronger’ SOEs
Chinese leadership has consistently advocated for making SOEs “bigger, better, and stronger” to enhance their competitiveness in global markets. At the 20th Communist Party of China (CPC) National Congress, two unwavering principles were emphasized: improving the core competitiveness of SOEs and optimizing the development environment for private enterprises.
Specific policies aim to rectify arbitrary fees, fines, and assessments, and address the issue of SOEs’ accounts payable in arrears. Historically, some SOEs have been lax in paying bills and servicing debts owed to the state, a practice the leadership is determined to change.
Reforms Targeting Efficiency and Innovation
Ongoing reforms include various measures such as enhancing board responsibility, introducing private investors through mixed-ownership models, and encouraging enterprises to venture, invest, and take risks to actively create markets. Current reforms also stress the importance of SOEs focusing on key technologies and expertise, strengthening corporate governance, providing employee incentives, prioritizing profitability and cash flow, and designing new valuation systems—all aimed at enhancing market competitiveness.
Preference is now given to innovative SOEs with specialized, sophisticated technologies and practical products. This strategic focus seeks to position SOEs at the forefront of leading-edge technology, high-end manufacturing, and the digital economy.
Challenges Ahead
Despite these efforts, challenges remain. In advanced industrial economies like the United States, breakthrough technologies and transformative products often originate from small and medium-sized entrepreneurial enterprises. This raises questions about the effectiveness of relying on large SOEs to spearhead innovation.
Moreover, on the 2022 Fortune Global 500 rankings, China had the most firms, surpassing the United States with 136 companies compared to 124. While Chinese firms boasted the largest combined assets, they also had the lowest profitability in terms of profit margins and returns on assets. Notably, 71% of these Chinese firms are state-owned, representing 78% of total revenue and 84% of total assets.
The Road Ahead
As China continues to reform its SOEs, tracking these changes and their impact on profitability will be crucial for assessing and forecasting the country’s economic performance. The government’s commitment to making SOEs more efficient and competitive indicates a strategic move to balance state control with market principles, aiming to bolster China’s position in the global economy.
Reference(s):
cgtn.com
