China State Company Research Head Eyes Temasek Model, Not Russia

  • Government officials see Singapore's wealth fund as a model
  • Skeptics remain to be convinced about China's SOE plan

China’s latest plan to shake up the nation’s bloated state-owned enterprises has drawn inspiration from a familiar role model: Singapore.

The Beijing-based State-owned Assets Supervision and Administration Commission has maintained "close contacts" with Singapore’s Temasek Holdings Pte and developed an "exchange mechanism" to learn from the government-owned investment company, Chu Xuping, the head of SASAC’s research center, said in a written interview with Bloomberg.

Singapore’s model is alluring to President Xi Jinping’s government, which wants to increase private ownership while avoiding the kind of mass privatization rapidly rolled out by former Russian President Boris Yeltsin. The Russian sell off in the 1990s saw state-owned enterprises end up in the hands of a small group of oligarchs.

"China views the Russian experience as a case study of how not to do SOE reform," said Australian National University’s Paul Hubbard, who studies Chinese state firms. "China’s leaders want the market to make SOEs a bigger, better and stronger foundation of China’s socialist market economy."

China said last month it aims to categorize state-owned enterprises into commercial and public-interest organizations, strengthen management and take a more hands-off approach to operations. The plan calls for selling shares of some assets and consolidating others, reforming unproductive “zombie enterprises” and encouraging a “blending” between state-owned capital and private investments.

State Role

At the same time, the reform guidelines dictate that the governing Communist Party of China will strengthen its "leadership role" over state companies, which range from oil giants PetroChina Co. and Sinopec Group to nuclear power plants and the maker of Great Wall Wine.

"The party’s organ has an irreplaceable role in corporate governance," wrote Chu, who heads a research group of about 40 people to give policy advice to SASAC’s leadership. "This is the key advantage of our state-owned enterprises that distinguish them from other types of enterprises."

Even as some state companies will introduce private capital, there’s no contradiction between Communist Party leadership and "mixed ownership," Chu said.

Not everyone is convinced.

If the reform plan sought to balance the competing interests of different groups, it ended up getting a “uniformly negative” reception from investors and was a missed opportunity to boost investor confidence after a $5 trillion stock market rout, according to Wang Tao, chief China economist at UBS Group AG in Hong Kong.

“Since major restructuring will be negative for growth and employment and will likely proceed gradually, we see limited impact” on the economy in the coming year, she wrote in a Sept. 21. report.

Old Drivers

Underscoring challenges facing the nation’s old growth drivers, China’s official manufacturing purchasing managers index remained near a three-year low in September, data Thursday showed.

China has been reforming its inefficient state sector for more than three decades. In the late 1990s, then-Premier Zhu Rongji fired millions of state employees in a strategy known as "grabbing the big ones and letting go the small."

As part of that process, SASAC was created in 2003 to look after the biggest state-owned conglomerates. Bloomberg economist Fielding Chen estimates that if SOEs -- with assets of 109 trillion yuan ($17 trillion) -- had expanded at the same pace as private firms in the first half, industrial production growth would have been 8.5 percent year-on-year rather than 6.3 percent, taking GDP growth to 8.2 percent from 7 percent.

In northeast China, Heilongjiang LongMay Mining Group Co., a state-owned company under the provincial government, said last month it is cutting 100,000 jobs in the next three months, or more than 40 percent of its workforce, to survive amid falling coal prices and mounting debts.

Temasek, founded in 1974 and with assets of S$266 billion ($186 billion) as of March 31, has Singapore’s Finance Ministry as sole shareholder. It originally owned shares in former state-owned companies and began buying foreign equities in 2002. It is the biggest shareholder in about a third of the 30 members in the Straits Times Index, including Singapore Telecommunications Ltd., DBS Group Holdings Ltd. and Singapore Airlines Ltd.

While Temasek offers China a useful model, it remains to be seen whether officials in Beijing will fully embrace it, said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington and author of the book "Markets Over Mao: The Rise of Private Business in China."

"The record is not encouraging," said Lardy. "SASAC has a penchant for intervention in firm decision making that is the opposite of the Temasek model."

— With assistance by Keith Zhai, and Xin Zhou

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