Mixed-ownership reform should be about more than just SOE debt

With the Fosun-led group taking a 51 percent stake, and the State-owned China Railway Corporation, Zhejiang Communications Investment Group, and the local government holding the rest, the project will be the first of its kind in which a private firm has been allowed to take a majority stake. 　

In the past few years, China’s leadership has been pushing “mixed-ownership reform” in the State-owned enterprise (SOE) sector to grant private companies more access to sectors traditionally monopolized by SOEs. In December 2016, the National Development and Reform Commission, China’s top economic planner, pledged to open up some of the key sectors dominated by SOEs – including energy, railways, airlines, and communications – through mixed-ownership reform. Some see the PPP railway project in Zhejiang as a major breakthrough, particularly given the private sector’s majority stake. 　

The project does represent major progress in mixed-ownership reform, but there is a long way to go before mixed ownership can achieve its goals, and a number of issues need to be addressed before reform can really pick up momentum. 　

Mutual suspicion between SOEs and private companies has lead to slow progress of reforms. For many SOE executives (who are simultaneously government officials) working with private firms is a major political risk. For an SOE to turn a profit or make a loss on its own is just a matter of business management. But for a project jointly held with private companies, making a profit or loss could subject officials to claims of collusion with private firms and see them accused of transferring State assets to private shareholders. 　

At the same time, private companies are wary of forging partnerships with SOEs given their significant political influence. The companies fear being put in a vulnerable position and losing control of their investment. This may explain why private firms have not shown much enthusiasm for the initiative. 　

Another problem with the current reforms is that many projects, especially PPP ones, tend to focus on helping SOEs to solve their debt problems, rather than changing their corporate culture and increasing their efficiency. China Railway, for instance, has met significant financial difficulties in recent years. In the first three quarters of 2016, the company posted a loss of 5.58 billion yuan (US$850 million). Furthermore, it has accrued enormous debts valued at 4.72 trillion yuan (US$717 billion). 　

Cooperating with private firms like Fosun Group will allow China Railway to alleviate some of its debt. Under the partnership project, the enterprise will share the proceeds from the railway project with Fosun Group for the next 30 years. After that, the entire project will be transferred to China Railway. What remains unclear is how PPP projects like these can bring about systemic change to SOEs such as China Railway and boost their efficiency.　

The primary goal of reforming SOEs should be to restore the role of the market in their management, and to increase their overall efficiency, whereas alleviating their debts should be a short-term and secondary goal. China’s authorities should launch more drastic systemic reforms to institutionalize various practices. If it fails to do so, the partnership between Fosun and China Railway will just be an isolated case that will not have a significant influence.