China's state-owned enterprises (SOEs) reported a year of prosperity. Annual profits were forecast to surge 30 percent to nearly a trillion yuan (135.8 U.S. billion) this year, however, it was evident many still had a long way to go to become internationally competitive.
China currently has 152 centrally administered SOEs, all under the supervision of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). They embrace many leading enterprises in key sectors such as energy, mineral resources, transport, telecom, machinery manufacturing and defence, among others.
REFORMS LEAD TO GROWTH
The SOEs saw their combined assets climb to 14.6 trillion yuan in the January-November period, an increase of 21 percent over the same period a year earlier. Their number fell from 159 at the beginning of the year as a result of mergers and the sale of some aimed to improve the structure of state assets.
Meanwhile, the SOEs recorded gross profits totaling 918.66 billion yuan in the January-November period, up 31.7 percent from the same period last year. Net profits surged 33 percent to 552.21billion yuan.
Earlier statistics revealed that the total assets of central SOEs had already jumped 146 percent. In addition, profits increased two-fold when the number of SOEs dropped to about 160 last year from 196 in 2002.
Reforms were at the core of these impressive improvements of the SOEs, previously known for their "plump size and slack performance".
After China's SOEs were separated from administrative government bodies to exist as independent enterprises, a major shift from the planned economy, these enterprises went through further shareholder reforms to build themselves into real corporate entities.
In 2007, the pace of such reforms accelerated amid the country's efforts to further promote the leading role of these large enterprises, the "backbone" of the national economy, said Vice Premier Zeng Peiyan.
As an important part of shareholder reform, another nine central SOEs offered initial public offerings this year, adding to the 33 SOEs listed domestically and abroad since the listing scheme launched in 2003.
Li Rongrong, head of the SASAC, was supportive of the overseas listings of Chinese enterprises, saying overseas markets had more sophisticated approaches that could help improve management of Chinese SOEs.
In a pilot move, the SOEs began to have outside directors. This was meant to make decision makers more detached from executive staff to better protect the interests of the company and common shareholders.
Currently, 19 such SOEs, including China Baosteel Group and China Shenhua Group, have picked up 66 outsider directors. The outside directors at 17 companies consisted of half or more of their board of directors members.
Since 2003, the SOEs started to recruit senior managerial staff in a more open way, whereas in the past these posts were not publicly available.
This year, 22 vacancies for high-level positions in central SOEs attracted 1,603 applicants. These included 25 foreigners and 10 from Hong Kong, Taiwan and Macau.
Li Fangyong, deputy general manager of China Aviation Industry Corporation I (AVIC I), and Jiang Zhenxin, deputy general manager of China Netcom Group, were among those who finally beat their rival competitors. No foreigners have been recruited yet.
"Reforms have pushed central SOEs onto the front-line of the market to compete with other enterprises, including international companies. It is this kind of competition that has marked up the competitiveness of these SOEs," said SASAC analyst Peng Huagang.
BRIGHT FUTURE AHEAD?
Chinese SOEs are still dwarfed in strength and core competitiveness when compared with multinationals and first-class international companies, said SASAC head Li Rongrong. He cited development imbalance among these enterprises, even within a single enterprise.
Nearly 70 percent of aggregate profits were generated by nine leading enterprises, including China Mobile, China National Petroleum Corporation, China Baosteel and the State Grid in 2006.
Corresponding information for this year was not revealed by the SASAC. It only said that shipbuilding, automotive and shipping enterprises were becoming new, significant profit earners, joining those in the petroleum, power generation and telecom sectors.
However, Li did express concern over the financial conditions of central SOEs at a working meeting recently held in Beijing. "Profitability of some enterprises was not well-grounded as their profits were concentrated in a few subsidiaries. Some enterprises reported a lower profit rate in core businesses compared with a year earlier," he said.
About 31.2 percent of newly-earned profits of central SOEs were in the category of non-regular revenue. "This non-regular revenue usually comes from return from investment in other than core businesses, largely investment in securities," said Liu Cheng, a University of Science and Technology Beijing professor.
Yet, experts believed the growth of enterprises was undoubtedly behind the profit surge of central SOEs, and investment returns from securities had made limited contribution to their profitability.
Profits earned by central SOEs have been increasing steadily since 1998, and there was no such fluctuation as to copy that of the stock market, said World Bank (WB) economist Zhang Chunlin.
SASAC's Li also pointed out some SOEs relied too heavily on bank loans to expand their businesses. This increased their exposure to financial risk. The SASAC statistics showed that 18 enterprises expected to cover more than 70 percent of their investment budget with bank loans.
"These are 'life and death' issues of enterprises, and they deserve due attention from top management," Li said.
Experts also worried whether China's central SOEs could continue to increase profits in coming years.
Profit rise could continue into the next one or two years, however, key profit earners such as heavy chemical sectors could be strongly hit by competition from the private sector and foreign investment in future, said Zhang Wenkui, a researcher with the Development Research Center under the State Council.
The WB's Zhang expected a downward adjustment in profits of central SOEs if China should raise prices of natural resources to a higher level, as a big proportion of their profits were based on underestimated costs for natural resources.
Li said SASAC would further deepen reforms to build a modern corporate system into central SOEs in the coming year, upholding the goal of building "larger and stronger" individual enterprises.
The SASAC planned to cut the number of SOEs under its supervision to less than 100 by 2010. At the same time, it would get 30 such enterprises ranked among the world's top 500 companies by 2015 at the latest, up from 16 for 2007.
Despite arguments saying large and well-performing SOEs should get listed on the domestic market to avoid sharing profits with foreign investors that were largely a result of government support and monopolized access to state resources, Li said SASAC encouraged qualified SOEs to list as a whole in 2008, and to list on both domestic and overseas markets.
MONOPOLY OR NOT
These giant enterprises handed in 765.43 billion yuan to the national exchequer in the first 11 months, representing an increment of 148.18 billion yuan, or a 24 percent increase, from the same period last year.
Contributions from such central SOEs now accounted for 20 to 25percent of China's national fiscal revenue.
Along with jumbo revenue, which should have benefited common people, many constantly complained some SOEs were in such a monopoly position that they ate into consumer benefits.
For instance, expensive fees for making phone calls were brought up at meetings for the national congress every year. "Why should Chinese citizens be charged higher fees for making phones calls than in developed countries?" many queried.
The SASAC asked 116 pilot SOEs to turn in part of their revenue in 2006 to the government, a figure which was expected to hit 14 billion yuan. All central SOEs would hand in part of their revenue starting in 2007.
Eighteen enterprises that relied heavily on resources were required to hand in 10 percent of their revenue. Ninety nine others with a five-percent quota and two enterprises responsible for cotton and crop reserve were exempted from such obligations.
SASAC's Li Rongrong said the revenue would be used to finance reforms of SOEs, especially to support the arrangement of laid-off workers. It could be injected into the social security fund, if possible.
The news also prompted the Chinese public to anticipate that the revenue could be included into the public budget to give more support to needy sectors such as education and medical care.
Li also said the top annual salary for managerial staff of central SOEs was 1.18 million yuan. In addition, the SASAC would publish salaries of senior SOE staff in future to introduce more transparency amid mounting speculation due to secrecy of such wages.
Analysts said state-owned enterprises needed to have control of key sectors for the sake of national security. They agreed that the improvement of the public's welfare should be the ultimate purpose.
The WB's Zhang said the government should in particular guard against the privatization of monopoly gains.
Chinese authorities had reached consensus to bring more competition into monopolized sectors.
Zhang said the reforms of such sectors should continue to bring more market forces into play.
MORE SOCIAL RESPONSIBILITIES
Unlike companies in more sophisticated market economies, Chinese central SOEs were obliged to take up more social responsibility.
The country's two largest oil producers were asked to keep production at full speed to satisfy market demand with more refined products in the face of a shortfall. The move came at a time when some refiners chose to cut production due to the widening gap between domestic oil prices and international crude prices.
SOEs were also mobilized to keep prices of food, cooking oil and meat stable when more supplies were released into the market amid price hikes.
These state-owned enterprises were expected to also take the lead in fulfilling the country's energy conservation and emission reduction targets.
An earlier report said 14 central SOEs were organized by the Chinese government to offer about 1,000 jobs for fresh graduates by the end of 2008, those from low-income families in particular.
Eleven central SOEs have issued social responsibility reports so far, and the SASAC would publish a guideline for central SOEs to perform social responsibilities in the near future.