The Story So Far

Reforming state-owned enterprises (SOEs) is critical to improve the competitive environment within China’s economy and in overseas markets where Chinese firms are engaged in trade and investment. Unlike other commercial entities, SOEs are tasked with economic and political objectives. The crux of SOE reform is delineating and separating these commercial and political activities.

During the 1990s, Beijing tried to reform the state sector by consolidating state control over large SOEs while withdrawing from small ones, which contributed to private sector prosperity and a decade of strong economic growth. In the 2000s, Beijing redefined SOE “reform” as concentrating state control over key and pillar industries with strategic linkages to China’s economic development and national security.

In 2013, the Third Plenum further clarified SOE reform as transforming SOEs into modern corporations, with the state exercising influence in the same fashion as other shareholders. The Third Plenum also envisioned that the state would reduce control of commercial SOEs while pushing SOEs in strategic industries to focus on their “core” business areas.

  • Starting in 2014, Beijing tried to improve SOEs’ competitiveness using ad hoc measures, such as mergers and mixed ownership programs (similar to those used in the 1990s) involving the sale of minority shares to private firms. These piecemeal efforts continue today. However, none of these measures has been sufficient to reshape SOEs’ incentives in line with market principles or redefine their role within the economy.
  • In September 2015, the State Council published a new set of “guiding principles” for SOE reform. The document was more conservative than expected. Rather than allowing the market to decide the future of SOEs, the State Council proposed utilizing market mechanisms to make SOEs bigger, stronger, and more efficient while maintaining control by the government.
  • The 2015 guiding principles reiterated a 2013 Third Plenum goal to transform the government’s role in managing SOEs from “managing assets” to “managing capital.” The plan was to allocate state capital toward strategic industries and reduce direct intervention in SOEs’ day-to-day operations, thereby improving efficiency. The government also stated that it would strengthen SOE corporate governance but made clear that it viewed Communist Party supervision as critically important.
  • Since 2017, the government has pushed to “corporatize” SOEs, including establishing boards of directors to replicate the structures of other commercial entities. But it also required all SOEs to institutionalize the role of Communist Party committees into their articles of association and give the party oversight of all strategic decisions. As a result, boards of directors still lack de facto authority to manage SOE operations.

Quarterly Assessment and Outlook

  • We further downgrade SOE reform progress, as the SOE revenue share in normal industries increased significantly in 1Q2019, meaning that the state has failed to reduce its footprint even in industries with no justification for state presence.

  • SOE profitability remains well below that of private firms and is flattening, which suggests that past policies framed as reform have failed to meaningfully improve SOE efficiency.

  • The latest policy developments run counter to market-oriented reforms and prioritize Party supervision and control, strengthening existing mechanisms such as central inspections, SOE reporting, and mergers.

This Quarter's Numbers

Our primary indicator deteriorated this quarter: the SOE share of listed company revenue in “normal” industries–those that Beijing identified as non-strategic and commercial–increased significantly, to 15.6% in 1Q2019 from 14.8% in 4Q2018. This increase is the first since 1Q2016, and it shows that the state is advancing even in industries where Beijing set out to withdraw influence in the 2013 Third Plenum Decisions (see The State’s Share of the Take). The increase was driven by faster revenue growth for SOEs than for private firms in the general trade and pharmaceutical industries, both likely related to the U.S.-China trade tensions, which have had the dual effect of exposing private firms to more volatile market conditions and strengthening Beijing’s imperative to control critical supplies like drugs.

The SOE shares of revenues in pillar and key industries are more consistent with stated objectives. In key industries that Beijing considers strategic to China’s national security and intends to exercise control, the SOE revenue share increased by 0.3% in 1Q2019. In pillar industries where Beijing sees strategic linkages to the country’s economic development but is willing to accept a larger market role, the SOE revenue share declined by 1.2% in 1Q2019; however, this decline was slower than that observed in 2016–2017 and insufficient to reverse the uptick in 4Q2018 resulting from state-led stimulus to stabilize the economy. Overall, we see little chance for SOE reform to break through in the next few quarters, as Beijing is more likely to prioritize political and economic stability over reform.

SOEs are also expanding faster than private firms in the industrial sector. SOE assets grew by 4% year-on-year in 1Q2019, faster than private asset growth of 1.4%. As a result, SOEs now hold 28.7% of total industrial assets, up from 27.9% in 4Q2018 (see Industrial Assets by Ownership). For now, private firms are still expanding thanks to easier credit conditions. Monetary easing will likely continue in the short term, given continued trade tensions and the emergence of new banking sector risks (see Financial System). As these risks play out, credit growth may stabilize and even slow again, constraining private companies’ ability to sustain asset growth.

SOE profitability flattened in 1Q2019, suggesting that past policies framed as reform (e.g., capacity cuts, deleveraging) have failed to improve SOE efficiency. Returns on SOE assets peaked at 4.5% in 3Q2018 and then declined to 4.0% in 1Q2019 (see SOE Return on Assets). Likewise, SOE interest coverage declined from 4.8% to 4.4% over the same period (see SOE Interest Coverage Ratio).

Policy Analysis

SOE policies in the review period emphasized stronger Party supervision of market reform, in line with our assessment in the Winter 2019 edition. Beijing expanded central inspections and SOE reporting coverage, but it has made little progress in granting more decision-making autonomy to normal commercial SOEs, let alone privatizing them.

Central inspections are increasingly used to detect corruption as well as to ensure compliance with policy priorities. On March 29, Beijing dispatched central inspection teams to oversee 42 of 49 core central SOEs, as well as three government agencies: the State-owned Assets Supervision and Administration Commission (SASAC, the owner and regulator of central nonfinancial SOEs); the National Energy Administration; and the State Administration of Science, Technology and Industry for National Defense. This was the second round of central SOE inspections under President Xi Jinping’s leadership and the first-ever inspection of those authorities. According to SASAC head Hao Peng, the goal of the inspections is not only to ensure SOE leader political alignment but also to oversee the implementation of central policies such as capacity cuts, risk prevention, and innovation.

Authorities are taking stock. On May 22, the National People’s Congress (NPC) published a Five-Year Plan (2018–2022) for reporting state-owned assets. The plan aims to collect information on financial SOEs in 2018 (completed, see Winter 2019 edition), administrative assets in 2019, nonfinancial SOEs in 2020, and natural resources in 2021. Like the central inspections, reports will cover SOE policy compliance in addition to financial performance. The plan also requires that provincial and local NPCs establish the same reporting mechanisms and report back to central NPCs by 2020 and 2022, respectively. This system will surely help centralize power; whether it will promote market principles of efficiency at SOEs is unclear.

On April 28, the SASAC announced it would delegate more decision-making authority to SOEs, but it offered no new measures. It reiterated the goals of reducing state intervention and empowering the board of directors, especially for SOEs identified as pilots to manage state capital instead of state assets (see Fall 2018 edition). Our data indicate that these measures have not meaningfully improved SOE efficiency in the aggregate. In a political environment with increased inspections and reporting requirements, market-based decision-making faces more obstacles than before.

Beijing also continued its recent penchant for brokering central SOE mergers. On July 8, Beijing announced the merger of China Silk Corp. and Poly Group Corp., part of an ongoing effort to merge financially distressed SOEs with more profitable ones in related industries. A week earlier, Beijing announced the merger of China State Shipbuilding Corp. (CSSC) and China Shipbuilding Industry Corp. (CSIC) to strengthen their competitiveness, similar to the merger of China CNR Corp. (CNR) and China South Locomotive & Rolling Stock Corp. (CSR) in December 2014. These arranged marriages run counter to the Third Plenum commitment to delegate more decision-making authority to SOEs. Mergers like these, based on political logic more than market principles and insulated from antitrust reviews, will impair the competitive environment in China and possibly abroad.


We use China’s own classification scheme to assess SOE reform progress. When information is available for listed companies, we gauge SOE revenue relative to all revenue in three clusters: (1) key industries (defense, electricity, oil and gas, telecom, coal, shipping, aviation, and rail); (2) pillar industries (autos, chemicals, construction, electronics, equipment manufacturing, nonferrous metals, prospecting, steel, and technology); and (3) normal industries (tourism, real estate, general manufacturing, agriculture, pharmaceuticals, investment, professional services, and general trade). As SOE reforms are implemented, the state firms’ share of revenue should at a minimum decline in normal industries – those that Beijing has identified as suitable to market competition as the decisive factor. To supplement this primary indicator, we look at the share of all industrial assets held by SOEs, leverage ratios at state versus private firms, SOE versus private returns on assets, SOE versus private ability to cover interest payments, and the SOE share of urban employment.

Additional Resources

State_Owned_Enterprise--Summer_2019 PDF Document

Explore the Reforms

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