Since 2013, Chinese Communist Party is Strenghtening the State Owned Sector By Mixed Ownership Reform
Prof. Pei Changhong Department of Economy of CASS
Mixed ownership is a form of ownership formed by combining several ownership components.
In November 15, 2013: The ” Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning Comprehensively Deepening Reform ” was released. The “Decision” for first time pointed out that it is necessary to actively develop a mixed-ownership economy sector.
The mixed ownership economy with cross-holdings and mutual integration of state-owned capital, collective capital, and non-public (private) capital is an important form of realization of the socialist basic economic system of China. It is conducive to the amplification of the functions of state-owned capital, the preservation and appreciation of its capital assets value, and the improvement of competitiveness of state-owned capital. This reform is also conducive to the mutual learning of strengths and weaknesses of various ownership capitals, mutual promotion, and common development and allows more state-owned and other ownership economies to develop into mixed ownership economies. Non-state-owned (private) capital is allowed to participate in state-owned capital investment projects. This reform allows mixed ownership companies to implement employee shareholding in enterprises, forming a community of interests between capital owners and workers.
Although the default ratio of State-Owned Enterprise bonds has increased recently, it is still lower than the market average, and the default risk is generally controllable. And the watchdog will jointly establish an SOE bond risk prediction and early warning mechanism with the People’s Bank of China and the China Securities Regulatory Commission. The number of central State-Owned Enterprises with mixed ownership accounts for more than 70 percent, especially in such areas as civil aviation, telecommunications, petroleum and the military. Now listed companies have become the main carriers for the mixed-ownership reform.
China optimized the distribution and structure of state capital during the 13th Plan period with 24 centrally controlled SOEs completing their reorganization. The number of centrally controlled SOEs was adjusted from 106 to 101..
Reform aims to improve the state-owned assets management system, strengthen the supervision of state-owned assets with capital management as the main focus, reform the state-owned capital authorization management system, aims to establish a number of state-owned capital operation companies, and support the reorganization of qualified state-owned enterprises into state-owned capital investment companies.
State-owned capital investment and operation should serve the national strategic goals, invest more in important industries and key areas related to national security and the lifeline of the national economy, focus on providing public services, developing important forward-looking strategic industries, protecting the ecological environment, supporting scientific and technological progress, and ensuring national security.
Reform aims to transfer some state-owned capital to enrich the social security funds. Improve the state-owned capital operation budget system and increase the proportion of state-owned capital income paid to the public finance, raising its level to 30% by 2020, so that more can be used to protect and improve people’s livelihood.
Development Path of Mixed Ownership Reform
The Decision of the Third Plenary Session of the 18th CPC Central Committee (2013) proposed to actively develop a mixed-ownership economy and stressed that a mixed-ownership economy with cross-holdings and mutual integration of state-owned capital, collective capital, and non-public capital is an important form of realization of the basic economic system. The 2013 Government Work Report emphasized the need to accelerate the development of a mixed-ownership economy. In the new stage, the development of a mixed-ownership economy should start from the two aspects of property rights opening and industrial opening.
From the perspective of property rights opening, the development of a mixed-ownership economy should be implemented in four parallel lines.
The first line is to base on state-owned enterprises and attract private capital, foreign capital and state-owned capital to merge with state-owned enterprises.
The second line is based on private enterprises and integrates state-owned capital, foreign capital and private capital.
The third line is based on foreign-funded enterprises and integrates state-owned capital, private capital and foreign capital.
The fourth line is to focus on the company’s employees and aims to implement employee stock ownership.
Among these four lines, the first two are the key points, and the first line is the most important. The two key lines are actually two ideas: one is the “state-owned enterprise reform model” targeting state-owned enterprises; the other is the “private enterprise development model” based on private enterprises. The two are not contradictory or exclusive, but they promote equal competition and common development.
From the perspective of industrial opening, the focus of developing a mixed-ownership economy is to promote the reform of monopoly industries.
The reform of monopoly industries should clarify the “three no-breaks” and “three breaks”. The “three no-breaks” means: the real natural monopoly links will not be broken, but a certain range of market competition must be implemented; the real legal monopoly (such as the tobacco industry) is not broken; the industrial concentration formed on the basis of competition will not be broken.
The focus is on the “three breaks”: the competition links in outdated, counterfeit or originally monopolistic industries must be resolutely broken; unreasonable administrative monopolies must be resolutely broken; economic monopolies that hinder and restrict competition, such as price manipulation, collusion among manufacturers, vertical constraints, vertical integration, predatory pricing and tie-in sales, must be resolutely broken.
How can private capital enter monopoly industries?
From a strategic perspective, we must first clarify the bottom lines of state-owned capital control: first, industries involving national security; second, real natural monopoly links, which refer to links with network systemic characteristics, such as power grids, communication networks, civil aviation networks, railway networks, postal networks, etc.; third, the production and service industries of public products; fourth, enterprises that undertake special government tasks. Above these bottom lines, we should actively promote the opening of monopoly industries and gradually allow private capital to enter monopoly industries.
Finally, it should be emphasized that in order to prevent someone from embezzling state-owned or private capital by mis-using mixed ownership, strict control must be exercised over asset evaluation, asset buying price determination, transaction transparency, and funding, so as to ensure standardized operations and equal treatment.
Pioneer Companies in this Reform
“Marriage” between China Unicom and privately owned large company Tencent.
On April 26, 2023 a reporter wrote that Yunzhou Times Technology Co., Ltd. (hereinafter referred to as “Yunzhou Times”), jointly invested by China Unicom and Tencent, was officially established. The company’s operating information shows that its main businesses include Internet data services, artificial intelligence public data platforms, quantum computing technology services, and cloud platform-based business outsourcing services. Shareholder information shows that the company is jointly held by China Unicom Innovation and Entrepreneurship Investment Co., Ltd., Shenzhen Tencent Industrial Venture Capital Co., Ltd. and Tianjin Digital Aviation Technology Partnership (Limited Partnership), with China Unicom Venture Capital and Tencent Industrial Investment holding 48% and 42% of the shares respectively, and Tianjin Digital Aviation company holding 10% of the shares.
In October last year, the State Administration for Market Regulation announced that the establishment of a joint venture between China Unicom Venture Capital and Tencent Industrial Investment was approved.
Specifically, with the support of both shareholders, Yunzhou Times company will, through independent research and development, construct a self-controllable, differentiated CDN acceleration, MEC product series and related digital innovation business system. Relying on China Unicom’s powerful network resources and capabilities, combined with Tencent’s related technologies, consumer and industrial Internet ecology, Yunzhou Times will focus on the core technology of computing power boutique network, strengthen the CDN and edge computing industry chain, and provide a new generation of CDN and edge computing services for digital government, artificial intelligence and other fields.
Senior chief analyst Yang Guang previously told reporters that China Unicom, as one of the three major operators, has high-quality data centers and network resources, while Tencent has the best CDN capabilities. This may be the basis for the two companies’ decision to cooperate, namely, complementary resources, strong alliance, and each taking what it needs.
China Unicom and Tencent’s cloud dream
In the industry’s view, behind the efforts of CDN, China Unicom and Tencent also have deeper considerations. “Both parties are essentially laying out the layout for cloud business.” Zhou Guijun said that CDN and edge network are both important links to improve the quality of cloud services. At the current critical juncture, China Unicom Cloud and Tencent Cloud obviously want to have more competitiveness.
Sinopec Oil
Sinopec Oil began to introduce private capital into its sales business to test mixed ownership.
Sinopec announced that the company’s board of directors agreed to reorganize the company based on the audit and evaluation of the existing assets and liabilities of Sinopec’s oil product sales business segment, and at the same time introduce social and private capital to participate in the operation to achieve mixed ownership.
The shareholding ratio of social and private capital will be determined according to market conditions. The board of directors authorized the chairman to determine the investors, shareholding ratio, shareholding terms and conditions, and organize the implementation of the shareholding plan, etc., provided that the shareholding ratio of public and private capital shared does not exceed 30%.
PetroChina
PetroChina actively promotes mixed ownership of oil and gas pipeline network
“Oil and gas pipelines are an important aspect of actively promoting mixed ownership. In the process of promotion, we should focus on complementary advantages and further enhance the vitality, competitiveness and influence of state-owned enterprises.” At the China Petroleum 2013 annual performance conference held on March 20, 2013, PetroChina Chairman Zhou Jiping responded to questions related to the company’s mixed ownership reform.
State Grid Company
State Grid is planning mixed ownership reform and plans to open up three areas.
“First, it is to respond to the country’s reform of the monopoly industry; second, in the five years of investing in charging and swapping facilities, State Grid has accumulated a certain amount of investment losses. In some places, half of the charging stations are idle, and the company itself is burdened with heavy problems. These problems are a headache for the company.” An insider of State Grid admitted the reasons behind the liberalization of charging and swapping facilities.
China Metallurgical Group Corporation
China Metallurgical Corporation is vigorously promoting mixed ownership reform
China Metallurgical Corporation achieved a net profit of 2.981 billion yuan in 2013, successfully turning losses into profits. Zhang Zhaoxiang, the company’s president, said at a media communication meeting that on the basis of following market principles, the company will vigorously promote the pilot reform of mixed ownership in 2014, which is also one of the key reform tasks to be promoted by the company in 2013. But due to the large size of the company, the pilot will not be fully launched for the time being, and will focus on its subsidiaries and third-tier companies.
China Power Investment Corporation
China Power Investment Corporation takes the lead in power mixed ownership reform.
Lu Qizhou, member of the National Committee of the Chinese People’s Political Consultative Conference and general manager of China Power Investment Corporation, said during the two sessions meetings that China Power Investment Corporation will launch mixed ownership reform in 2013 and will allow private capital to participate in some of its subsidiaries and construction projects, with the proportion of private capital participation reaching % 33. This is the first power company in the power industry to clearly state that it will launch mixed ownership reform.
Different Attitudes from State-owned and private enterprises
There are Four paths for state-owned enterprises to achieve mixed ownership
■ A small number of state-owned enterprises, state-owned capital investment companies, and state-owned capital operation companies that involve national security sector will adopt the form of wholly state-owned capital.
■ State-owned enterprises in important industries and key areas related to the lifeline of the national economy can maintain absolute state control
■ Important state-owned enterprises involved in pillar industries and high-tech industries can maintain relative state control.
■ State-owned enterprises that do not need to be controlled by state capital and can be controlled by public or social capital can adopt the form of state-owned equity participation or can withdraw completely.
How to ensure that the reform of state-owned enterprises is not compromised?
Win-win situation between state-owned enterprises and private enterprises is conditional.
The bosses of private enterprises are no longer the mother-in-law.
Classified supervision will benefit people’s livelihood more.
And to develop mixed ownership reform: fairness is the only way to achieve success.
As long as there are perfect and feasible laws and regulations and sound supporting mechanisms to guarantee them, the “loss of state-owned assets” that central srare owned enterprises are worried about and also the “sheep falling into the tiger’s mouth” that private enterprises are worried about can be avoided.
Not only are the managers of central state owned enterprises worried, but private enterprise bosses are also hesitant. The main concern of the managers of central state owned enterprises is that the asset evaluation of state-owned enterprises and the introduction of private enterprises are likely to cause suspicion of “money-for-power transactions” from the outside world. While the suspicion of private enterprise bosses is mainly focused on whether private enterprises will become “accompanying the prince to study” in the mixed ownership system under the central enterprises (including state-owned enterprises) if they do not release the controlling rights.
This cognitive conflict between state-owned enterprises and private enterprises is not unreconcilable, nor is it unsolvable.
In fact, the root cause of the cognitive conflict between state-owned enterprise bosses and private enterprise bosses can be traced back to one thing, namely, “fairness.” Private enterprise bosses worry that without controlling rights, they will easily fall into the trap of a tiger. Private enterprise bosses only invest money but have no say, and “fairness” is difficult to guarantee.
Managers of State-owned enterprises, on the other hand, worry that if they develop mixed ownership with greater discretionary power, even if they are “upright,” they will be suspected by the outside world of “a crooked shadow.” To put it bluntly, they worry that the lack of “fair” rules will easily lead to misunderstandings.
Mixed ownership reform becomes an opportunity for central state owned enterprises to stop losses
In early 2014, Sinopec took the lead in piloting mixed ownership reform, which marked the beginning of the deepening reform of central state owned enterprises. Total 101 Central state owned enterprises are the best among state-owned enterprises and control the lifeline of China’s economy. They have continued to grow bigger and stronger over the past decade, which has also triggered questions such as monopoly and “state-owned enterprises advancing and private enterprises retreating”.
In recent years, with the slowdown of China’s economic growth, the profitability of central state owned enterprises has declined, the losses have expanded, and institutional problems have begun to emerge.
The “Decision” of the Third Plenary Session of the 18th CPC Central Committee (2013) pointed out that we should vigorously develop a mixed-ownership economy with cross-holdings and mutual integration of state-owned capital, collective capital and non-public capital. The “Decision” made it clear that mixed ownership will be the form of realization of the China’s socialist basic economic system, which pointed out the direction for the reform of central enterprises.
The mixed ownership reform will help central state owned enterprises break free from improper government control, facilitate the entry of various investment entities, and help strengthen the market status and development space of enterprises, thereby improving the governance structure of state-owned enterprises and providing opportunities for central enterprises to stop losses.
According to data from the State-owned Assets Supervision and Administration Commission, 70% of China’s central state owned enterprises (total 101 companies) and their subsidiaries have implemented mixed ownership, but this is mainly done through the securities market, with few of them implementing property rights reforms, most of which remain at the second and third tier companies, and are also small in scale.
Sinopec company has already fired the first shot in mixed ownership reform. In comparison, the reform of loss-making central state owned enterprises is more urgent. Loss-making central state owned enterprises should explore various forms of mixed ownership reform, such as selling non-performing assets to “lose weight”, allowing employees to hold shares, and taking out some high-quality assets to attract private capital for restructuring, so as to activate the vitality of central enterprises, improve corporate governance, and stop losses as soon as possible. At the same time, fair protection of property rights should be regulated to prevent the transfer of interests.