Debate heats up on role of govt giants

Despite the rationalization, the value of the assets held by the SOEs has risen over the past decade from 8 billion yuan to 190 billion yuan.

"We have made a lot of progress but it is the intention of the new central government leadership to speed up the reform,"he says.

However, some would like to see much more significant progress.

Zhang Weiying, one of China's leading economists, takes an almost polar opposite position to that of Hu An'gang, the arch defender of SOEs.

The professor of economics at the Guanghua School of Management at Peking University says China now needs the sort of privatization that Margaret Thatcher carried out as British prime minister in the 1980s.

"We can learn from Mrs Thatcher's privatization program to reduce State shares gradually. If State control was brought down from 70 or 80 to 40 or 50 percent, it would still hold the biggest share but it would be an important signal about which direction the country was going,"he says.

He believes the dominance of the SOEs crowds out the private sector and there needs to be a more level playing field.

"Technically, it wouldn't be very difficult because most State-owned firms are already listed on the stock exchange."

Diluting State holdings is very much on the agenda for reform, as are encouraging joint ventures with foreign companies and new listings on China's stock markets.

In recent years, SASAC has focused on three main reform areas: driving economic efficiency, getting SOEs to internationalize and getting them to reorganize their internal procedures and share ownership.

By the end of last year, 953 SOEs had gone public, accounting for 38.5 percent of all the companies listed on the A-share market, according to SASAC.

The companies had a total market value of 13.71 trillion yuan, worth more than half of the total market.

Miranda Carr, head of China research at NSBO, a strategic investment research company, who is based in London, says SOE reform is a more difficult process than many imagine.

"It is certainly not as straightforward as saying that we need to get the State out of everything because some sectors, particularly the strategic ones, are fairly natural monopolies or oligopolies.

"Some of the heads of SOEs are also very powerful figures in their own right and are often resistant to reform imposed from the center."

Back in Harbin, Yu Ningjiang, 53, vice-general manager of Wondersun Dairy Group, says the existing SOE operating model has certain strengths.

His company, one of China's major milk producers, is part of the Beidahuang Group, which is controlled by SASAC.

"Of course there are advantages. They (SOEs) have resources, all kinds of resources, including access to financing,"he says.

The company, recently voted among the top 500 Asia brands according to China Central Television, employs 20,000 people and is well-known throughout China for its dairy products.

"The State-owned enterprises under the control of the central government are the pillar industries of China,"Yu says.

Yu, who joined the company as a college graduate 30 years ago and whose father was a manager in the company, also hits back at foreign companies which complain that SOEs have unfair advantages in China.

"For the first three years, foreign companies entering China don't have to pay any tax, and for the next two years they pay just half the tax. This is not a benefit that SOEs enjoy."

For David Shambaugh, author of the recent book, China Goes Global: The Partial Power, it is not the ability of SOEs to compete in China that is in question but their performance in overseas markets.

The professor of political science and international affairs at George Washington University says that only three of the 64 Chinese companies on the Fortune 500 list that Hu An'gang cites as trailblazers for the economy make more than half their revenue outside China.

"They are not multinational corporations; they are Chinese companies,"he says.

"Chinese corporations will never be innovative, at the cutting edge of product lines and technologies, on a global basis and they will always be followers and copiers rather than pace setters so long as State-owned enterprises get the lion's share of state investment."

Qiu Xiliang, president and general manager of Harbin Electric Machinery, says his is a Chinese company that has gone global, with an export record to prove it.

The SOE, which was listed in 1994, has sold its power generation equipment to more than 50 countries with exports making up 29 percent of sales last year.

It has been particularly successful in Africa, working for companies such as Sinohydro and Gezhouba Group Co in such countries as Sudan, Ethiopia and Nigeria.

"We cooperate well with Chinese companies since we have worked with them in the domestic market for several years, and so we know each other well. That is not to say that we haven't also had export success in the United States and Europe,"he says.

In the somewhat retro wood-paneled boardroom of the company's imposing new offices in Harbin, Wu Zhijun argues that too many people try to caricature SOEs as merely State-owned leviathans.

He is vice-manager of Harbin Pharmaceutical Group, one of China's leading pharmaceutical companies. Despite being State-owned, it has two listed subsidiaries, Harbin Pharmaceutical Group Co Ltd and Sanjing Pharmaceutical, and has outside investment from Citic Capital and US investment company Warburg Pincus.

"We are essentially the same as a private company or a foreign company. There is no advantage really to us being a SOE.

"Our strength is not the status of our organization but the fact we are able to compete effectively in the market with our own strong brands."

Wu, 56, says it is possible the remaining 45 percent of the Harbin government's investment in the company may be reduced over time.

"You can see that with our two quoted subsidiaries all the capital has been listed, so maybe in the future the State investment in the group will be gradually reduced,"he says.

Gao Xiaohua, board secretary of Harbin Modern Group, believes some element of privatization would benefit smaller SOEs like hers.

Her company is best know for running events like the 80-day Harbin Ice and Snow World and the Harbin International Beer Festival, which takes place this month. It also makes the well-known Modern ice cream and owns the Modern Hotel, the landmark local hotel built in 1906.

"There is a need for reform. The current system is not perfect for a group like us to develop. Sometimes we want to implement big projects but we are short of funds."

Gao, who joined the company as a graduate in 1996, says the SOE model of ownership only tends to benefit the companies in key strategic sectors.

"We really don't get the government support like the SOEs in the utility or power generation sectors. We would actually like to form partnerships with international companies that might invest in us. That would improve our brand recognition."

Carr at NSBO argues that the dominance of the larger SOEs not only affects the smaller ones but the private sector in general in China.

"Being part of the government, they get all kinds of preferential treatment. The other advantage is that they get cheap capital, and this makes it very difficult for private companies to compete because they can't match the returns on capital when their costs are so much higher."

Martyn Davies, chief executive of Frontier Advisory, a research and strategic advisory firm based in Johannesburg, believes the Chinese economy will stall without major reform of its SOEs.

"They have done their job driving growth for the past three decades but now it is time to move on. Every Chinese SOE friend I speak to knows this. They also tell me it is going to change quicker than people think."

Kerry Brown, executive director of the China Studies Center at the University of Sydney, says the slowdown in the Chinese economy makes SOE reform even more vital since new growth will only come through driving efficiency.

"China now needs to deliver growth through efficiency. No one pretends SOE reform is going to be straightforward but it is extremely necessary in the battle to produce the efficiency the economy now needs.

"I don't think that the central government can put off reforms. The issue is how quickly, and how far they go."

Qiu, 45, of Harbin Electric Machinery, looks the very epitome of a modern industrial boss, wearing the company's blue uniform.

He says he is aware that China's SOEs still need to bridge a gap between them and the major foreign multinationals.

His company has sent 60 employees to train with General Electric Co in the US and Hitachi Corp in Japan as well as being involved in collaborative ventures.

"Many of the major multinationals have been operating for more than 100 years, and we have a lot to learn from their techniques, their marketing and their project executions. It is our dream to be as famous as them in the world."