Wang Yong, Vice Director of the Institute of Minsheng Economic Research, Tsinghua University
Chinese enterprises face global competition
Since last year, some major changes have taken place in the international economic situations China faces, for example, China-US trade friction. At present, China-US trade negotiation is in an intense process. No matter what results the negotiation will reach, one thing is sure, that is, China will open wider to the outside world and pursue higher-level opening-up, which means that a big batch of enterprises with global competitiveness will enter China quickly, and inevitably cause great competitive pressure on Chinese enterprises. For instance, Tesla, by continuously lowering the price, has effectively leveraged the electric vehicle market of China and badly impacted Chinese electric vehicle producers, regardless of state-owned ones or private ones, to such an extent that insiders of electric vehicle industry have to cry out the “wolf” has really come.
Facing such a situation, Chinese enterprises urgently need to make concerted efforts and sharpen their competitiveness in real earnest, and the reform in mixed ownership serves as a workable even the only path. In his report to the 19th National Congress, General Secretary Xi Jinping, far-sighted, pointed out: “We will further reform on state-owned enterprises, develop mixed-ownership economic entities, and turn Chinese enterprises into world-class and globally competitive ones”. It can be seen that China has taken the mixed ownership reform as the road to global competitiveness. In his Report on the Work of the Government in 2019, Premier Li Keqiang further made specific arrangement for the mixed ownership reform of state-owned enterprises (SOEs): “We will accelerate state capital and SOE reforms. We will strengthen and improve the regulation of state assets, and continue to conduct trial reforms to establish state capital investment and management companies, so as to maintain and increase the value of state assets. Reforms to introduce mixed ownership will be actively but prudently advanced. We will improve corporate governance structures, make their operating mechanisms market-based, and introduce measures and practices such as hiring professional managers. We will work in accordance with law to address “zombie enterprises.” Reforms will be deepened in sectors including power, oil and natural gas, and railways. In natural monopoly industries, network ownership and operation will be separated in light of the specific conditions of these industries to make the competitive aspects of their operations fully market based. SOEs should get stronger and healthier through reform and innovation to continue increasing their vitality and core competitiveness.”
In the above speech, Premier Li Keqiang not only pointed out “reforms to introduce mixed ownership will be actively but prudently advanced”, but more clearly put forward “to make the competitive aspects of their operations fully market based”. We think the mixed ownership reform is a practical choice of path of SOE reform suitable for China’s national conditions. Under current economic situations of China, actively developing mixed-ownership economy can effectively give comparative advantages of state capital and private capital, enhance social resource allocation efficiency, promote exchanges between enterprises inside and outside the state-owned system, and increase social liquidity. Therefore, the reform is a key move in strengthening the global competitiveness of Chinese enterprises.
2.Only “integration” can sharpen competitiveness
Based on national conditions of China, enterprises in China are subject to various forms of ownership, state-owned, collective, private or JV. Such enterprises feature specific advantages and disadvantages. SOEs boast mammoth assets and resource advantages, private enterprises have flexible mechanism and sufficient incentives, and JVs are characterized by standardized management and smooth international market channels. Therefore, to enhance competitiveness of Chinese enterprises, it will be needed to actively promote cross shareholding and mutual integration of state capital, collective capital and non-public capital, develop mixed-ownership economy, and drive capital under all forms of ownership to complement and promote each other and realize common development. If, in moving ahead with “mixed ownership”, private capital is allowed to invest in SOEs and state-owned solely-funded enterprises are transformed into ones with diversified investment entities co-existing even private capital accounting for higher proportion gradually, it will be possible to solve problems that are hard to solve by radical treatment for a long time such as owner absence and negative externality with state-owned enterprises.
Addressing such aspects, Lian Weiliang, Vice Director of the National Development and Reform Commission, pointed out, mixed ownership reform should “open the door of access, improve the quality of reform, guarantee the rights and interests of participation, and make smooth the channel of withdrawal”. To open the door of “access”, the reform in key field should encourage private capital to invest the fields, and the reform in fully competitive field should allow private capital to control interest; to improve the quality of “reform”, relevant works should center on “perfecting governance, intensifying incentive, highlighting main business and improving efficiency”, to drive all enterprises in the reform to really build sound corporate governance and realize advantage complement and common development of state capital and various forms of private capital; to guarantee the rights and interests of “participation”, measures should be taken to protect property rights and lawful rights and interests of all shareholders and really practice the system of voice by capital and vesting by shares of shareholders; to make smooth the channel of “withdrawal”, the principles of market-based and rule-of-law operation should be followed, to allow orderly entry of private capital and guarantee its withdrawal according to law.
We think that the essence of the above 4 phrases is to realize mutual incentive and compatibility of state capital and private capital. In other words, mixture of ownership should guarantee real win-win effect for all parties, regardless of state capital or private capital. The fundamental interests of state capital are to maintain and increase the value of state assets, thereby to improve welfare for the whole society. As for private capital, the top concern about participating in mixed ownership reform lies in potential embezzlement and stripping from private capital by state capital as controlling shareholders. Many research literatures indicate that controlling shareholders may undermine and strip the holding companies under their control in manner of related party transaction, occupation of funds (account receivable, account payable, other receivables and other payables) and loan guarantee, to damage interests of external non-controlling shareholders. Therefore, to make private capital “profitable” from capital mixture in the same manner, relevant institutional arrangements are necessary to keep balance and guarantee interests of different-background shares. One of the institutional arrangements is control right arrangement in corporate governance. Particularly, in fully competitive fields, allowing control by private enterprises is a very effective control right arrangement.
The purpose of control right arrangements is to solve the problem of incompletion in investment contracts. As all investors of enterprises are hard to foresee the future, so it is impossible to specify all responsibilities and obligations that may occur in future operation of companies in relevant contracts, leading to incompletion of investment or financing contracts. Therefore, it is needed to deal with the “matters not mentioned” through control right arrangements. Oliver Hart, Winner of the Nobel Prize in Economics in 2016 thinks that the right of dealing with “matters not mentioned” should not be fixed and unchangeable, but should be distributed to the party relatively more important to enterprises’ operation according to the business situations, by which business decision-makers can get more incentives, thus to make the operation more efficient and the market competitiveness stronger.
In view of relevant practices in China, reasonable control right arrangements have rapidly enhanced SOEs’ competitiveness at the same time. In July 2014, China National Building Material Group Co., Ltd.（CNBMG） and China National Pharmaceutical Group Corporation （Sinopharm）became leading enterprises for the pilot of deepening the reform in state-owned enterprises. CNBMG, as a central enterprise in fully competitive field, is a “grassroots” one with poor foundation and funds compared with other central enterprises. Forced by pressure and through active selection for development, CNBMG started its reform and explored the “3-level mixture” mode, namely attracting private capital for cross shareholding with private enterprises, retaining partial equity of former owners of the business companies and implementing 3-level mixture to introduce market mechanism, transfer control right and enhance competitiveness. Similarly, Sinopharm is also a central enterprise in fully competitive field. Through multiple forms of “investing others” and “attracting investment from others”, it introduced strategic investors, mixed with private capital and realized diversification of equity and advantage complement between central enterprises and private enterprises, not only sharpening its market competitiveness but boosting its industrial integration and upgrading. In 2015, 2016 and 2017, CNBMG realized y-o-y growth of operating income by 1.2%, -17.7% and 25.7% and Sinopharm’s y-o-y growth of operating income reached 15%, 25% and 16%, respectively. By March 8, 2019, CNBMG’s market value had increased to RMB 54.3 billion, up 48.4% or so compared with the RMB 36.6 billion before the mixed ownership reform; and Sinopharm’s market value had risen to RMB 15.6 billion, up 48.6% compared with the RMB 10.5 billion before the mixed ownership reform.
In Aug. 2017, China Unicom announced execution of mixed ownership reform, introduced multiple strategic investors including Alibaba, Tencent, Baidu and JD.com and implemented equity incentive to its mid-level managers and core personnel. In Aug. 2018, China Unicom made public its financial report for the first half of 2018, showing the main business revenue up to RMB 134.4 billion, a y-o-y growth of 8.3%; net profit up to RMB 2.6 billion, a y-o-y growth of 232%; quick growth of 2I2C business (Internet and consumer business), and total users of about 77 million. By March 8, 2019, China Unicom’s market value had risen to RMB 200.8 billion, up 27.2% or so compared with the RMB 157.9 billion before the mixed ownership reform, meaning splendid results.
Regardless of theory or practice, all indicate that effective control right arrangements can bring incentive compatibility, properly safeguard rights and interests of capital of various types, form joint forces, reduce unnecessary frictions and enhance global competitiveness of Chinese enterprises. With the implementation and progress of the Belt and Road Initiative, Chinese enterprises are going abroad to compete with enterprises of other countries globally. In fierce international competition, all countries will neither be generous to Huawei as it is a private enterprise, nor keep turning on a green light for China Railway Group Limited as it is a SOE! In the eyes of rivals, there is no difference between SOEs and private enterprises, but only Chinese enterprises play! Shouldn’t we think so in our mind？！
From www.cfbond.com
