Government to Push Contractual ManagementSystem for Executives at All Levels of SOEs

China plans to complete more than 70percent of the tasks of its three-year (2020-22) action plan by the end of thisyear, further pushing forward the mixed-ownership reform and reorganizationprocess in its State-owned enterprises, a senior government official said.

The government will improve themarket-oriented operational mechanism and promote contractual managementsystems for executives at all levels of SOEs this year, said Peng Huagang,secretary-general of the State-owned Assets Supervision and AdministrationCommission of the State Council.

SASAC will support the corporate giants toactively and orderly offer the incentive to core talent in key positions, aswell as explore ways of providing medium and long-term incentives for theiremployees with outstanding performance, said the official.

China's Central Committee for DeepeningOverall Reform had reviewed and approved the three-year (2020-22) action planfor SOEs in late June. It called for renewed efforts to optimize the structureof the State-owned economy to make it more competitive, innovative, influentialand more able to withstand risks.

He stressed that works related toState-owned assets and SOEs during the 14th Five-Year Plan (2021-25) periodshould be conducted against the backdrop of the country's new growth paradigm.

China unveiled a move last year to pursuethe new development paradigm of dual-circulation, which allows the domestic andoverseas markets to reinforce each other, with the domestic market as themainstay.

Despite the COVID-19 pandemic effect, netprofits of China's 97 centrally-administered State-owned enterprises grew by2.1 percent on a yearly basis to 1.4 trillion yuan ($215.74 billion) in 2020,while nearly 80 percent of the central SOEs saw net profit growth on a yearlybasis, according to the latest data released by the SASAC.

Central SOEs gained 176 billion yuan in netprofit in December, the highest for that period in history. Their monthly netprofits have maintained double-digit growth for six consecutive months sincethe second half of last year.

The country's top State assets regulatorsaid that due to the pandemic, the total operating revenue of central SOEs fellby 2.2 percent on a yearly basis to 30.3 trillion yuan in 2020.

Aside from cutting SOEs' administrativefunctions and overcapacity in certain industries, China launched a200-billion-yuan fund in Shanghai late last month to facilitate mixed-ownershipreform and cutting-edge technology innovation at its SOEs.

The fund will support the reform projectsby setting up sub-funds, joint investments and other investment avenues tofacilitate the three-year action plan for SOE reforms.

As a major force in participating in thedevelopment of Belt and Road Initiative-related projects, China's SOEs haveovercome difficulties, with not a single project under the initiative havingshut down production, Peng said. They have to date been involved in 3,400 BRIprojects, with more than 600 completed already.

China Railway Group Ltd, known as CREC,reported that its annual output value amounted to $361.62 million for theconstruction work of the Jakarta-Bandung high-speed railway in Indonesia lastyear. Despite the epidemic, the work schedule was not disrupted, and thecompany has helped create more than 5,000 jobs for locals.

Supported by reforms, the improvedefficiency of the SOEs will benefit the whole corporate sector as they providebroad opportunities for the investment and growth of businesses with variedownership, as well as reinforce deep integration of industrial and supplychains for companies of different sizes in domestic and global markets, saidChen Yun, CREC's chairman.

During the 13th Five-Year Plan period(2016-20), SOEs have competently coped with complex and grim situations whiletheir economic efficiency steadily improved, with annualized operating revenue,net profit and labor productivity up 5.6 percent, 8.9 percent and 7.8 percent,respectively during the period, according to SASAC.

The SOEs have kept advancing supply-sidestructural reforms and other market-oriented reforms over the past five years,which have led to a marked improvement in the innovation capacity,competitiveness and capability of resisting risks in the State-owned economy,said Zhou Lisha, a researcher with the research institute of SASAC.

China will push corporate reforms at 8,000State-controlled enterprises during the country's 14th Five-Year Plan (2021-25)period to further optimize asset structures and improve market-orientedoperating mechanisms, said the country's top State asset regulator.

Total assets associated with these reformsare worth 1.3 trillion yuan ($198.12 billion). The campaign is conducive infundamentally solving outstanding issues among State-owned businesses and helpsthe country pursue high-quality growth over the long run, said Weng Jieming,vice-chairman of the State-owned Assets Supervision and AdministrationCommission of the State Council.

Unlike centrally administrated State-ownedenterprises, which are large groups within the jurisdiction of the centralauthorities, State-controlled firms refer to all enterprises owned partly oroutright by all levels of government across the country.

"Even though reforms will involve alarge number of companies, and some are also facing historical debt and otheroperational issues, the government will clarify approval procedures, assetevaluations, tax payments and land disposals for their corporate reforms in thenext stage," Weng said.

He added that all corporate reforms amongcentrally administered SOEs along with 96 percent of the country'sState-controlled enterprises supervised by provincial-level State-assetregulators to date have been completed.

Since central SOEs completed theircorporate system reforms, their scale, earning strength and operationalefficiency have all significantly improved in recent years, said Liu Xingguo, aresearcher at the Beijing-based China Enterprise Confederation.

Total assets of China's central SOEsamounted to 63.4 trillion yuan by the end of 2019, growing 16.12 percent from2017, while their net profits reached 1.4 trillion yuan, an increase of 32.32percent over 2017, government data showed.

Under new government policies announced inOctober, major SOEs will be encouraged to sell significant stakes to outsidestrategic partners during a three-year action plan for SOE reform, which willrun through 2022.

The plan is designed to implement measuresoutlined by the 19th National Congress of the Communist Party of China in late2017 to push SOEs to adapt to market-oriented and law-based rules and norms inthe new era as soon as possible and assume greater responsibility in an openand innovative environment.

The government encourages publicly listedSOEs to introduce strategic investors by offering them 5 percent or more equityto participate in corporate governance as active shareholders.

China Southern Airlines General AviationLtd, a unit of China Southern Airlines, has taken a mixed-ownership reform pathafter the parent firm brought in three new investors.

Following the move, the registered capitalof China Southern Airlines General Aviation Ltd will grow from 1 billion yuanto more than 1.34 billion yuan. The company currently operates 25general-purpose aircraft, including 16 S-series heavy helicopters, the airlinesaid in a statement.

Despite the new investors, Shanghai-listedChina Southern Airlines is still the largest shareholder in the company with a57.9 percent stake. SOE Reform Development Fund Management Co Ltd holds 14.1percent, China Southern Power Grid Industrial Investment Group Co Ltd 10percent, China Southern Airlines Capital 10 percent and a Zhuhai-based company8 percent.

Pang Xiaogang, vice-president of State GridCorporation of China, said that mixed-ownership reform has been actively andsteadily carried out over the past several years, and the role of State-ownedcapital has been further diversified.

Since 2013, China has completedmixed-ownership reform at more than 4,000 firms, with more than 1.5 trillionyuan of non-State capital involved, the SASAC said.

China's SOEs saw their aggregate net profitafter taxes rise 62.7 percent on a yearly basis in October, while operatingrevenue climbed 7 percent, the Ministry of Finance said.

SOEs reported 49.68 trillion yuan inrevenue between January and October, growing 0.2 percent over the same periodof last year, while net profit totaled 1.93 trillion yuan after taxes, down11.4 percent year-on-year, the ministry said.

China will continue to steadfastlyimplement the 2020-22 action plan for the reform of State-owned enterprises andpave the way for more productive collaborations between SOEs and privatecompanies in 2021, the country's top State asset regulator said.

The country's 14th Five-Year Plan willstart in 2021. SOEs will focus on their main responsibility and business,develop sound market-oriented operating mechanisms and increase corecompetitiveness next year, said Hao Peng, chairman of the State-owned AssetsSupervision and Administration Commission of the State Council.

The three-year action plan for SOE reformis part of the central authorities' efforts to boost productivity and makecorporate giants more marketized, Hao said.

The country will also encourage more SOEsto collaborate with private companies to increase China's economic growthmomentum, he said at the commission's meeting in Beijing.

To ensure all these works are conductedsmoothly, the task of relieving SOEs of their obligation to undertake socialprograms has been completed this year.

Greater efforts will be made in fosteringmixed ownership of businesses hitherto owned by SOEs, thus strengthening themodern corporate structure.

SOEs need to make continual efforts toachieve higher quality and efficiency, sharpen core competitiveness andstrengthen dynamism for sustained growth, in order to play their role inunderpinning the national economy better, he said.

The government will continue tounswervingly consolidate and develop the public sector, and encourage, supportand guide the private sector, said Hao, adding that SOE reform needs to achievehigher quality and efficiency, help facilitate deeper cooperation in theindustrial and supply chains and enhance SOEs' core competitiveness.

Under new government policies, marketaccess will continue to be broadened for private companies. Power gridoperators will accelerate the process of spinning off competitive operationssuch as equipment manufacturing. Oil and gas infrastructure will be made equallyaccessible to all businesses regardless of types of ownership.

Private companies will be supported toparticipate in the construction of major railway projects and have more accessto key national research infrastructure, especially those managed by SOEs.Accreditation of national-level technology centers in private companies will beaccelerated.

"SOEs will be supported in enhancingbasic research and innovation, advancing research in critical technologies andvigorously promoting entrepreneurship and innovation over the next fiveyears," said Peng Huagang, secretary-general of the SASAC.

By enabling SOEs to divest some of theirnon-core business units, they will be encouraged to sharpen their focus ongrowing their main business, Peng said. The government will continue toencourage SOEs to build more key infrastructure and manufacturing projects inthe country and partner economies involving in the development of the Belt andRoad Initiative over the next five years.

A shining example of that strategy comesfrom China Railway Group Ltd, known as CREC, which announced that it hascompleted all the main construction work at Xiong'an Railway Station, the railtraffic hub of the Xiong'an New Area－China's new landmarkeconomic zone.

As an essential part of a city, theintelligence of buildings and infrastructure facilities is key to developingfuture smart cities. Smart technologies have been adopted in the station forinformation sharing and unified management, said Wu Yadong, chief engineer forthe Xiong'an station project from China Railway Construction Engineering Group,an arm of CREC.

"Architectural concrete requires ahigh proficiency of construction to ensure the effectiveness of the building.The project model has been constructed dozens of times so that the waiting roomin the station can be built as a whole with beauty and aesthetic value,"he said.

Another SOE involved in building keyinfrastructure is CCCC Tianhe Mechanical Equipment Manufacturing Co, a unit ofBeijing-based China Communications Construction Co Ltd. The SOE reported thatit had excavated more than 200 meters of tunnels via using its self-developedtunnel-boring machine, or TBM, in the construction of a 22-kilometer-longexpressway tunnel, the longest of its kind in China, at Shengli Tunnel projectin the Tianshan Mountain area in the Xinjiang Uygur autonomous region.

Shengli Tunnel is part of a freeway linkingthe regional capital Urumqi with Yuli county. The construction of the six-yearproject is expected to complete in 2025.

Instead of the blasting method, engineershave adopted a number of alternative measures to improve efficiency of thewinter construction work, as the project passes through a cold and highaltitude zone, with harsh climate and geological conditions, said Li Baolong,CCCC Tianhe's site manager for the Shengli Tunnel project.

China will push "targetedintegration" in its centrally administered State-owned enterprises thisyear to improve their efficiency and encourage qualified SOEs to go public, thecountry's top State assets regulator said.

Peng Huagang, secretary-general of theState-Owned Assets Supervision and Administration Commission, said theauthorities will accelerate the pace of integration in areas of equipmentmanufacturing, chemicals, maritime engineering, and overseas oil and gas assetsthis year to enhance the earning capabilities of SOEs.

To improve the efficiency of State capital,China has reorganized 41 central SOEs since 2012, including the merger of ChinaState Shipbuilding Corp and China Shipbuilding Industry Corp, and thestructural reorganization of China Poly Group Corp and China Silk Corp.

The country will continue to spin off anumber of SOE subsidiaries that lose money, as well as non-primary businesses.And it will further cut the administrative functions of centrally governedSOEs, Peng said.

Thanks to progress of mixed-ownershipreforms in China and the reorganization and asset securitization of Statecapital, the country's central SOEs reported faster profit growth with lowerdebt-to-asset ratios last year compared with 2018.

Net profits at China's central SOEsamounted to 1.3 trillion yuan ($188.6 billion) last year, jumping 10.8 percentyear-on-year.

Peng said the growth rate had picked upsteadily in the second half of the year, and the SOE target of "ensuring 7percent year-on-year growth while striving for 9 percent" was attained.

At the end of last year, the averagedebt-to-asset ratio for central SOEs stood at 65.1 percent, a drop of 0.6percentage points from the beginning of the year.

Sixty-four central SOEs saw theirdebt-to-asset ratio drop from the beginning of last year. In industries such asmetallurgy, power, mining and construction, the ratio fell by more than 1percentage point.

"We will encourage central SOEs andtheir subsidiaries with strong technological innovation capabilities andpromising market prospects to go public," Peng said.

The government also supports central SOEsbeing listed on the Hong Kong Stock Exchange, Peng added.

China First Heavy Industries Co, which suppliestechnical equipment, high-tech products and services for a number ofindustries, including steel, nonferrous metals, electrical power, energy andautomobiles, suffered financial losses in 2016 but has seen a notable jump innet profits since 2018, after it steadily deepened its supply-side structuralreform and adjusted its operating model.

Liu Mingzhong, the group's chairman, saidit has upgraded its products and introduced wider mixed-ownership reform insome of its subsidiaries to tap new industries and provide more diverseproducts.

The improved efficiency of the SOEs willbenefit the whole corporate sector as they provide broad opportunities for theinvestment and growth of businesses with varied ownership, as well as promotedeep integration of industrial, supply and value chains for enterprises ofdiffering sizes in home and global markets, said Liu Xiangdong, deputy directorof the economic research department of the China Center for InternationalEconomic Exchanges in Beijing.

As a three-year action plan kicks economicreform in China into high gear, changes are gathering steam to remold thecountry's State-owned enterprises, China's economic backbone.

The 2020-22 action plan, part of thedecades-long effort to transform SOEs into competitive, modern enterprises, isexpected to leave a strong mark on the world's second-largest economy.

SOEs are active players in China'sstrategically important and most acclaimed industrial fronts. Thoseadministered by State-owned asset watchdogs, making up only a part of all Statefirms, account for about a quarter of China's tax income.

As China seeks to develop a modernizedeconomy amid challenges and uncertainties, reforms are the need of the hour. Aworld baffled by the COVID-19 pandemic, as well as protectionism andunilateralism, only puts this transition to the test.

"In the face of changes unseen in acentury, further intensified by the pandemic, it is particularly important toachieve major progress in reform, so that the SOEs can increase their vitalityand efficiency and drive broader development of various enterprises," saidLiu Xingguo, a researcher with the China Enterprise Confederation.

Despite the impact of COVID-19, centrallyadministered SOEs posted a 2.1-percent growth in net profits in 2020, officialdata showed.

China aims to achieve more than 70 percentof the goals in the three-year action plan by the end of this year and makesubstantial breakthroughs in key areas, said Peng Huagang, spokesman of theState-owned Assets Supervision and Administration Commission.

Central authorities deem the 2020-22 perioda "crucial stage" for SOE reform. Making the State-owned economy morecompetitive, innovative and resistant to risks is among the major goals theyhave in mind.

A key way to achieve such goals ismixed-ownership reform, allowing SOEs to introduce non-State capital, be itprivate or foreign.

Strategic investors from outside areencouraged to participate in the management of SOEs, injecting not just fundsbut also ideas.

In some of the most prominent cases inrecent years, private investors were brought into telecom giant China Unicom andbusiness units of major SOEs in sectors including energy, aviation andrailways.

In 2020, centrally-administered SOEs aloneinfused over 200 billion yuan ($31 billion) of non-State capital throughmixed-ownership reform.

Meanwhile, a national fund worth 200billion yuan was set up in December last year to encourage more such moves.

Non-State firms are also drawing investmentfrom State-owned ones. Central SOEs have become shareholders in more than 6,000non-State companies since 2013, SASAC data showed.

"Two-way mixed-ownership reform hashelped all types of enterprises complement each other and grow together,"Peng told a news conference recently.

The blending of State and non-Stateenterprises will increase the resilience of the country's industrial chains,according to Li Jin, chief researcher with the China Enterprise ResearchInstitute.

"The trend will become more prominentduring the three-year period. More cooperation between central SOEs, local SOEsand private companies will be forged," he said.

Bringing in non-State investors is deemedas a catalyst for better corporate governance.

Once publicly owned, China's SOEs have beenengaged in corporate reform since the 1990s to turn themselves into limitedliability companies or companies limited by shares.

This allows the introduction ofshareholders, paving the way for the much-advocated transformation into modernenterprises.

So far, such reform has been basicallywrapped up, according to Peng.

Authorities are pushing SOEs to overhaultheir payroll and human resource management, set up boards of directors, hireprofessional managers and provide equity incentives.

To encourage more efficient growth, theSASAC will start to assess performances of SOEs in terms of overall laborproductivity this year, along with other market-oriented measurements.

Sinopec Zhenhai Refining & Chemical Cois the epitome of the drastic corporate changes taking place in SOEs. Anunknown local refiner in the 1970s, it has become a top-notch industry playerglobally.

The Zhejiang province-based company hasstreamlined work procedures by 40 percent in recent years and adopted a highlymarket-oriented incentive system. With better corporate governance andtechnology, its per capita output surged to 15 million yuan in 2020 from 2 millionyuan in 2000.

"Our company's production capacity hastripled since 2000, while our headcount has been reduced and efficiency hasbeen boosted," said Mo Dingge, CEO of Sinopec Zhenhai.

The transition into modern enterprises isimperative as China continues to level the playing field, creating a fairerenvironment for competition.

Key industries like energy, railways,automobiles, telecommunications and public utilities have been gradually openedup for private and foreign investment.

Li expects "significant progress"to be made in further expanding non-State firm access to State-dominated areasduring the three-year period.

Meanwhile, SOEs are downsizing theirpresence in some fields. They have been asked to exit areas irrelevant to theircore business or where their investments lack efficiency and competitiveness.

Central SOEs have divested themselves ofsuch businesses, retrieving 3.45 billion yuan since the end of 2019, SASAC datashowed.

In sectors with overlapping investment orhomogeneous competition, restructuring between SOEs is encouraged. So far, 41central SOEs have been regrouped, reducing total central SOEs to 97.

The capital shake-up is directingState-owned assets to concentrate on key industries related to national security,economic lifelines and public welfare, or those with strategic importance.

Emerging technology is one of them. WengJieming, deputy head of SASAC, said more investment from central SOEs will beguided toward 5G, industrial internet, artificial intelligence, data centersand other "new infrastructure".

China Baowu Steel Group Co Ltd, the world'slargest steel conglomerate, was the outcome of reorganizations between severalState-owned steel giants. As a result of better allocation of resources,efficiency was improved and innovation fostered.

"We will spare no effort to buildourselves into a high-tech company," said Chen Derong, chairman of BaowuSteel. "Steel is a traditional product, but we will be a high-tech companyin terms of technology, means of production and services."

Cutting regulatory fetters is expected tohelp SOEs enhance their innovative prowess. Regulators are giving SOEexecutives more autonomy in making corporate decisions, including draftingannual investment schemes, arranging mixed-ownership reform of subsidiaries andissuing short-term bonds.

The new regulation approach willeffectively prevent excessive State intervention in corporate operations, Liunoted.

"Regulators are receding from thefront stage to the backstage," he said. "SOEs can decide what to doin accordance with market rules, which will make a big difference."

With the government pledging to enrichservices and help solve operational difficulties for both domestic and foreigncompanies, China's State-owned enterprises are partnering with more foreign anddomestic firms to remain competitive amid the economic fallout of the COVID-19pandemic.

Ansteel Group Corp Ltd, a Liaoning-basedcentrally administrated SOE, signed a cooperative agreement with DongfengNissan Vehicle Co－a joint venture between China's Dongfeng Motor Corp and Japaneseautomaker Nissan－to jointly develop technology solutions and new materials forapplication of new energy vehicles.

Tan Chengxu, Ansteel's chairman, said thecompany will cooperate in depth with Dongfeng Nissan in areas such as theresearch and development of new auto steel materials and high-strength steelcertification to achieve win-win results.

Supported by seven manufacturing basesacross China and iron mines in Australia, Liaoning and Sichuan provinces, Tansaid that as the contagion and other disruptions have severely impacted theglobal economy, the group will build more partnerships with both overseas anddomestic firms to build a three-pillar development platform of cement, new materialsand engineering services to enhance its competitiveness both at home andabroad.

Eager to pursue sustainable development,China National Building Material Co Ltd－a Beijing-basedcentral SOE, has been working with Europe's Schneider Electric to introducemore digital solutions in its cement mills in China to cut energy usage andupgrade efficiency.

Wang Jie, vice-president and head of thecorporate affairs and sustainability development division at Schneider ElectricChina, said this partnership has helped CNBM's cement plants save up to 5percent of energy in their production and raise employee work efficiency by 15percent.

"At Schneider Electric, we believedigital transformation is the most efficient way to realize sustainabledevelopment. The extensive use of digital technologies and new energy can notonly help enterprises to improve production efficiency and thus improveeconomic benefits, but also reduce emissions, improve energy efficiency andencourage enterprises to implement more green innovationtechnologies",Wang said.

To put the country's economic growth on afirmer footing, the State Council released a guideline in May to roll out moremeasures to better protect foreign trade entities, support the local growth offoreign companies and keep supply chains stable. The guideline urged moresupport for high-tech industries and stressed the need to encourage foreigninvestors to invest in China.

China is not only Schneider Electric'ssecond largest market, but also carries out plenty of technological innovation.All these factors offer multinationals strong confidence to enrich theirpresence in China, said Yin Zheng, executive vice-president of SchneiderElectric and president of Schneider Electric China.

Despite the pandemic adding a number of uncertaintiesto the global economy this year, Schneider's spending in research anddevelopment surged 15 percent year-on-year in China in the first seven monthsof 2020. The company is also eager to recruit more local talent.

Boosted by momentum such as 5G, newinfrastructure and next-generation factories, China's investment environmenthas become more attractive, Yin said, adding that the company has seen a largenumber of innovation results from its Chinese teams and SOE partners, and thecommercial environment in many sectors has notably improved in China.