China unveils details of state-firm reforms as growth sputters

BEIJING — China unveiled details on Sunday of how it would restructure its state-owned enterprises (SOEs), including partial privatisation, as data pointed to a cooling in the world's second-largest economy.

The guidelines, jointly issued by the Communist Party's Central Committee and the State Council, China's Cabinet, included plans to clean up and integrate some state firms, the official Xinhua news agency said. It did not elaborate.

Reform of underperforming state-owned enterprises is one of China's most pressing needs. But if not handled well, the restructuring could lead to hundreds of thousands of people being laid off and social instability.

According to Xinhua, the plans included introducing "mixed ownership" by bringing in private investment, and "decisive results" were expected by 2020.

The government will not force "mixed ownership", nor will it set a timetable, giving each firm the go-ahead only when conditions are mature, it said.

"This reform will be positive for improving the impetus of the economy and making growth more sustainable," said Xu Hongcai, director of the economic research department at the China Centre for International Economic Exchanges, a Beijing-based think-think.

Partial privatisation, he added, would help establish "check-and-balance and incentive systems" at state firms.

China's government manages 111 companies centrally under the State-owned Assets Supervision and Administration Commission. Local governments own and manage around 25,000 state-owned companies and the sector employs nearly 7.5 million people.

State firms will be allowed to bring in "various investors" to help diversify share ownership, and more state firms will be encouraged to restructure to pave the way for stock listings, Xinhua indicated.

Private investors will be encouraged to buy stakes in state firms, buy convertible bonds issued by state firms, or swap shares with state firms, it said, adding steps will be taken to curb corruption during reforms.

SOEs will be divided into commercial and public welfare-related businesses during the reform process. Oil and gas, electricity, railways and telecommunications were identified as sectors that could be suitable for limited non-state investment.

However, Beijing will have to persuade entrenched interests at local, provincial and national governments to relinquish some control over state enterprises and attract investors to buy shares after one of the worst stock market crashes in China's history.

Missed forecasts

And Xinhua indicated that full-scale privatisation was not on the cards, saying the government was aiming to "cultivate a large number of state-owned backbone enterprises with innovation capability and international competitiveness".

The guidelines called for a flexible and market-based compensation system at state firms by linking pay with company performance.

The details were issued after the government said growth in China's investment and factory output missed forecasts in August. The data followed weak trade and inflation readings, raising the chances that economic growth may dip below 7 per cent in the third quarter for the first time since the global financial crisis.

"Overall, the economy is very weak and the central bank may have to continue cutting interest rates and banks' reserve requirement," said Zhou Hao, senior economist at Commerzbank AG in Singapore. Zhou says growth would probably dip below 7 per cent in the July-September quarter.

Some economists believe growth is already much weaker than official data suggests.

August power output, for example, rose just 1 per cent year-on-year, and production of key industrial commodities such as steel and coal weakened.

Growth in fixed-asset investment, a crucial economic driver, slowed to 10.9 per cent in the first eight months of 2015, the weakest pace in nearly 15 years, National Bureau of Statistics data showed on Sunday.

Analysts in a Reuters poll had forecast an 11.1 per cent rise, compared with 11.2 per cent in January-July.

Factory output rose a weaker than expected 6.1 per cent in August from a year earlier. Markets had expected a 6.4 per cent increase, up from July's 6 per cent.

Annual growth in real estate investment also continued to cool to 3.5 per cent in the first eight months, the weakest since early 2009, from 4.3 per cent in January-July.

While home sales and prices are slowly recovering from a slump last year, property area sold rose at a slightly faster pace of 7.2 per cent in January-August, analysts say it will take time for developers to work off a huge overhang of unsold houses.

Single positive

Retail sales were the single positive surprise, growing 10.8 per cent in August from a year earlier and above forecasts of 10.5 per cent, the same as July.

But the increase did not appear to chime with corporate reports of slowing sales.

China's yuan devaluation in August and a plunge in stock markets since June have fuelled fears of more economic shocks, although Premier Li Keqiang has brushed off concerns of a hard landing.

Most analysts say the economy is slowing gradually, but not facing a hard landing.

China's central bank has cut interest rate five times since November and repeatedly relaxed banks' reserve requirements to try to boost the sputtering economy.

Further policy easing is widely expected and the government is trying to boost infrastructure investment.

The government is aiming for 2015 economic growth of around 7 per cent, which would be the slowest in a quarter century.

Separately, a senior central bank official was quoted as saying that downward pressure on China's economy will persist in the second half of the year as growth in infrastructure spending and exports is unlikely to pick up.

Chinese companies are not optimistic about business prospects according to the central bank's second-quarter survey, Sheng Songcheng, the director of the statistics division of the People's Bank of China, was quoted as saying by the National Business Daily.

Pressured by uneven domestic and export demand, cooling investment and factory overcapacity, China's economic growth is expected to slow to around 7 per cent this year, the lowest in a quarter of a century, from 7.4 per cent in 2014.