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　　REFORM PRESSING AHEAD: Shao Ning, Vice Chairman of the State-owned Assets Supervision and Administration Commission of the State Council, sees ownership diversification as key to the refom of state enterprises
　　At a seminar on the operation of state-owned enterprises (SOEs) in September, Shao Ning, Vice Chairman of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), China’s top watchdog of state-owned assets, suggests that the top priority for SOE reform is to introduce more outside investors and make more effort in realizing ownership diversification. Shao shares his unique insight into China’s future reform on state-owned assets in an interview with The 21st Century Business Herald, one of China’s leading business newspapers. Excerpts of the interview follow.
　　
　　The 21st Century Business Herald: What is the latest progress on the reform of SOEs and state-owned assets management system in major cities?
　　Shao: At present, major reform has been seen in small and medium-sized state-owned enterprises, while plans for the bigger ones have been on trial or under assessment.
　　Referring to the ownership reform, more than 90 percent of small and medium-sized state-owned enterprises are involved in the program. One thing worth mentioning is that new ownership structures have been initially established in east China’s middle and small-sized SOEs, but for state-owned businesses located in the poorly developed western area and old industrial cities, progress seems slower.
　　As restructuring and mergers progress, by the end of last year, we had closed up to 3,658 bankrupt state enterprises, with 7.19 million employees involved. Actually, we are drafting a new four-year plan to bring an end to the 2,100 loss-incurring enterprises being kept afloat by government and hope to properly accommodate the transfer of 3.5 million laborers to the market by 2008.
　　
　　
　　What is your next step in the reform process of big SOEs in major cities?
　　In addition to pushing forward the reform within a legal framework, improving the procedure efficiency and regulating the flow of state-owned assets, we still have to be rational in deciding which way to take for specific enterprises, and to reduce reform costs to the minimum.
　　Though the reform shows signs of initial success, we are still worried about the transfer of state assets in terms of the proportion, believing that a large part of them have been in transactions to business operators and employees. Internal transfer would be the easiest solution for ownership reform without giving the reins over to outsiders, thus it will not face much resistance in the process. However, because of the unequal access to information, it might enable some people to reap unfair gains during the reform process.
　　At the same time, without introducing the capital, products, techniques and corporate governance measures that the enterprises really need, the reform might not be helpful for the future development of the involved businesses.
　　The bigger the enterprise, the more help it needs from outside partners with adequate capital, advanced techniques and products, as well as fresh ideas in corporate governance. In most cases, strategic alliance with outsiders proves better for future development, at least more effective than relying on internal operators.
　　Of course, the lack of an authoritative government agency to well protect state assets should also be blamed for excessive internal transfers.
　　
　　SIMULTANEOUS LIST: The H shares of the Industrial and Commercial Bank of China (ICBC), China’s biggest lender, start trading in Hong Kong on October 27. Stock market listing is considered an effective recipe to vitalize China’s large state businesses
　　
　　How will the reform of big SOEs be carried out?
　　In a macro perspective, the big SOEs will withdraw from the economic sectors where they have no competitive advantage, to leave the market space to small and medium-sized enterprises. Meanwhile, as for the key industries vital to national well-being, the livelihood of the people and national security, such as infrastructure construction, it would be better to allow SOEs to hold major shares.
　　The national economy and livelihood of the people is a dynamic concept, and much thought needs to be given to key industries relating to economic security as well as the core enterprises playing leading roles in the industries.
　　The increasing number of mergers and acquisitions of China’s leading industrial companies by overseas investors are of great concern, forcing us to make transactions transparent to the public. It is very likely that we will devise a method by which the whole process can be placed under public supervision.
　　For other big SOEs left in market-oriented competition, the business strategies, to pull back or to enter into the market, will be decided by their shareholders based on their interests and benefits. Frankly, this issue was not listed on our agenda until the country’s state-owned asset management system was installed by and large recently. Now, after state-owned assets supervision and administration commissions at all levels are in place to exercise the power of investors on behalf of the government, they will make the final decision.
　　To sum up, I think the readjustment in structure of state assets should be classified into three major components. For the industries where SOEs have no competitive advantages, they will gradually drop out; however, they should remain active in major industries of vital importance. For other average industries, the government should set up a good business environment to allow businesses featuring various types of ownership to compete on an equal footing. As for the role of SOEs in these fields, it depends on the maintenance and increment in value of state-owned assets as well as the natural selection of stakeholders.
　　How will the big SOEs develop themselves in the competitive fields?
　　The driving force and direction of the reform would be the diversification of ownership, which could be realized through two channels: partnerships with outside investors and listings. Most outside strategic investors ask for a controlling stake. As for the large SOEs, which play a special role in our economic system, the pragmatic solution would be listing on stock markets, including domestic or overseas share sales, or simultaneously. In my view, it would be very helpful for the big SOEs to change their business operation methods.
　　For wholly state-owned enterprises, the SASAC is piloting its board of directors system in the management reform. As a matter of fact, most SOEs overseen by SASAC are not yet operating under a modern corporate governance system, since their boards of directors are mainly made up of personnel chosen within the enterprises. Instead, they should implement a system with clear accountability, to ensure a balance of power and protection of outside investors.
　　The external board directors, selected by the SASAC and directly responsible to the SASAC, will play a bigger role in supervising the use of state assets and the collective decisions made by the leadership of the enterprises.
　　The aim of SOE reform should be the actual combination of the state-owned economy and market economy.
　　
　　How do you define the success of SOE reform?
　　SOEs were born with the centrally planned economy, suited to the specific environment in China’s old system. As the economy moved from a planned to a market-oriented one, problems emerged showing that the SOEs were not in tune with the emerging market economy. This was obvious in all areas, ranging from the enterprises themselves to employees and rapidly changing social environment.
　　In response we have to push reform forward to make the SOEs and state-owned economy eventually become adaptable to a market-oriented economy, meaning the eventual realization of a seamless combination of market economy and state-owned economy.
　　If we look at issues plaguing enterprises, they can be divided into two. First, whether the enterprises that we withdraw support from can survive in the market or not. If the troubles facing them can be solved after the reform, it becomes a success.
　　The second is whether the shift in role of state-owned businesses after reform could make them market-oriented entities and whether their management methods can catch up with the market changes or not. As a matter of fact, the diversification of ownership will help the establishment of a streamlined corporate governance system and getting rid of the heavy financial burden left by history. What is more, the ownership can be freed up along with the marketization of both the employees and business operators, which indicates the upgrading of both the labor force and business owners.
　　Market rules should not only apply to the way of doing business, but also to the withdrawal of enterprises by sale, auction, reorganization and closure.
　　The reform should consist of the combination of state-owned economy and market economy, making it an organic component of the latter, rather than an inflexible one. To realize this, we should seek more help from government departments in fulfilling their social responsibility and other facilitating reforms.

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