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Key of SOE reforms lies in details, execution, coordination

The long-awaited guidelines to SOE reforms is a comprehensive overhaul of how state companies are owned, managed, and supervised. How will the 20-page document spark a transformation of China’s underperforming state sector?

Big but not strong? Fat on resources but slim on returns? Just some of the criticisms leveled at China’s state sector — made up of 155,000 state-owned companies. With SOE returns on assets at about half those of their non-state peers — reform is badly needed.

Not all state firms will be reformed in equal fashion.

For public goods and services SOEs — like China State Grain, the focus would be on cost control, efficiency and service quality.

All SOEs will need to pay higher dividends to the government by 2020 — 30% of profits, versus the current 5-20%. The money will help fill the gap in China’s welfare funding. Huang says whether the reforms can weed out underperformers is cricitcal.

For investors, the reform plan outlines opportunities in seven industries — oil, gas, power, rail, telecom, resources and utilities. More restructuring among SOEs is on the cards. The latest moves by China Railway Group, China COSCO are part of the reform push and they have created much market buzz. The future SOE may look a lot different to the bureaucratic giants of the past.

At a micro-level, remuneration will become more market-based. Employee stock incentives will be explored. Duration bonus will be paid to encourage executives who are civil servants to have long term vision. Market-based pay would be adopted to attract more executives from the private sector. Right now they make up only one tenth of the top honchos at SOEs.

To shake things up in the boardroom, the guidelines state that outside directors would make up the majority of the board. Better governance should help companies in their globalization.

The broad reform guidelines come at a time when state firms’ profits are falling and the economy needs extra impetus. More details are due out within two months. China’s 37 years journey of reforming its state sector — enters its most complex and challenging leg yet.