Recently, Chinas release of a reform of the SOEs, which control everything from

telecoms to banking but produce returns far inferior to their private peers, gives
bankers, investors, and me both resignation and hope. In the reform plan, it is easy to
observe, as ever, that the goal of this change, which hope to strengthen the overall
structure of the SOEs and improve control and influence of the government, has an
opposite direction against everyones expectation of outright privatization. This might
mean that deepening reform is to solidify the function of SOEs over the broader
economy but to weaken the negative impact that SOEs have brought.
So far three main models for the ongoing reform have been tried out: merger, spin-off,
and reverse merger. However, investors reaction to the transactions to date has
showed that pessimism overwhelms the market. For example, the reverse merger
exciting the most interest among bankers is so far best embodied by Citic whose
shares have fallen 11 per cent since its deal, although that beats the 15 per cent drop
in the Hang Seng index. Other models of reform also suffer while the merged
trainmaker, CRRC, is off 26% since the deal was declared. Chinese government should
launch a more complete plan with a transparent mechanism which brings confidence
back to the market or the situation will get even worse.
Though SOEs have been the black sheep in Chinas reform agenda even as
liberalization of the financial sector and markets has continued, there are still reasons
to expect big changes in the years ahead. By restructuring bloated SOEs, which
account for as much as 40% of the countrys economic output but produce poorer
returns than private companies do, Chinese economy could reach its peak with the
help of both market efficiency and full support from the government.
In my opinion, Chinese governments own seeming confusion about what it wants has
blocked the process of reform of SOEs. The ruling Communist party desires to
maintain its control to ensure the socialist direction of the sector that damping
hopes for meaningful privatization while it also hopes that the countrys economy
could turn China into a world market instead of a world factory. Therefore, several
suggestions with pros and cons are explained as follows:
1. Sheer privatization is not a good thing as a whole because various situations
should be considered and estimated. Chinese government should first define SOEs
status in different ways. First, SOEs should protect the overall economy when the
market works inefficiently as a tool to adjust macro economy. Next, holding
controlling shares of SOEs rather than absolutely occupying the shares, Chinese
government can withdraw from non-strategic and averagely competitive industries
more smoothly and protect the industries which relate to nations safety. With this
strategy, the government can have a dynamic management over the SOEs in the
future. Third, clarification between the politics and business is vital to create a
diverse regulatory system. Thus, separation of operation and supervision along
with effective boards of directors and supervisors must be achieved although it
might compromise the government's controlling powers and trigger the
unsatisfaction from those vested interests.
2. While introducing the mechanism for employees to hold the shares, SOEs in China
can improve its efficiency and structure wholly. This change can effectively mend
the phenomenon that state assets leach away or a good deal of the national wealth
fall into the hands of a relatively small group. With the injection of the new
operative mode, SOEs will soon refresh and make good use of the resources they
have to boost Chinese economy.
3. The most important factor in the competitive market, evaluation of performance,
should be promoted. Under different fields, various rating mechanisms are utilized.

For example, industries that are naturally monopolized can pay the employees
variously by different standards and criteria according to the reform of SOEs in
western countries.
4. While the ruling Communist party persists in socialist direction and concerns that
the lager-scale reform over SOEs would be seen as capitalization, this doubt is
redundant. This is because the core value of socialism is to share. It is peoples
right to own SOEs including the revenue of it. If the SOEs can be run with
efficiency, more profits will be earned and shared.
In a word, according to the current status and the performance of SOEs in every field,
Chinese government can conduct a dynamic management over SOEs. The profits of
SOEs then flow back to the public and a virtuous cycle is generated.