Shanghai takes major stride toward SOE reform

Local leaders flesh out plans to promote mixed-ownership in State sector

The Shanghai municipal government released guidelines in early July to reform ownership structures within the city's State-owned enterprises (SOEs) over the next three to five years, marking the first plan of its kind to welcome private capital into the local State sector.

Prior to this, in December, Shanghai authorities had issued similar, albeit less detailed, guidelines pertaining to impending reforms of State-owned assets (SOAs) and SOEs. This time around, officials have gone a step further by explaining their overall reform direction and describing specific reform measures. Among the measures outlined, for instance, Shanghai authorities will institute a platform to help SOEs convert into public companies through open, market-oriented capital operations.

Of course, for all of its detail, this latest plan is also freighted with symbolic meaning as it once again affirms the government's desire to revamp China's long cordoned-off State sector. As enthusiasm builds though, we cannot deny that many obstacles and difficulties could hamper the realization of the city's reform agenda.

State assets, in Shanghai and elsewhere, are spread widely across a multitude of industries, all of which are managed and regulated in their own specific ways. Most SOEs are also alarmingly short of both liquidity and innovative capabilities. Furthermore, it is still anyone's guess as to whether SOEs themselves will embrace ownership reforms or the dawning of a more competitive environment.

Local authorities will have to rely on market-based operations to distance the government from managing SOEs. They will also have to encourage SOEs to participate in mergers and acquisitions that can improve asset quality and enhance their competitive strengths. Behind all of this will be the central government, which has already committed to diversifying ownership rights within the State sector.

In my opinion, there are three key points to the mixed-ownership reform process.

First of all, the government should encourage qualified SOEs to go public on local exchanges as soon as possible to spearhead asset restructuring. Actually, local SOEs could be classified into three categories: competitive, functional and public utility, according to local reports.

Shanghai is also currently transforming two SOEs into professional asset managers. In the future, these two managers will divest their interests in the most competitive businesses and focus instead on handling State assets related to the stock and property markets.

As for functional enterprises and public utility SOEs, here the State should retain sole ownership or at the very least a majority stake. The same should hold true for strategic emerging industries, cutting-edge manufacturers and modern service companies.

Second, private equity funds and venture capital firms should take part in the reforms. With competitive enterprises in non-sensitive areas, State assets can be spun off from SOEs in order to encourage private capital to play a larger role in these fields.

SOEs are also encouraged to merge and restructure in order to become more competitive. For instance, the securities regulator recently allowed Guotai Junan Securities Co Ltd, China's third-largest stock broker by profit, to acquire a controlling stake in Shanghai Securities Co.

According to media reports, this deal will help the broker comply with regulatory requirements for its planned domestic IPO.

Third, qualified SOEs should provide stock ownership incentives to their key personnel. Over the long term, incentive mechanisms of this sort are expected to stimulate SOE vitality.

Already 2014 has been an important year for Shanghai as it pushes ahead with SOA and SOE reforms. As reform momentum builds, the government should keep an eye on the profits and market value of listed SOEs.