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China's central State-owned enterprises (SOEs) have performed much better than before, as evidenced by their soaring profits.

 

However, to build them into business giants capable of competing globally, the authorities need to do more than just regroup them into fewer key sectors. A more urgent task is to boost domestic competition, before large SOEs are left to withstand international competition by themselves.

 

The profits of China's 161 SOEs owned and operated by the central government reached 688.8 billion yuan (US$88 billion) in the first 11 months of the year, up 18.9 percent over the same period last year.

 

In fact, over the past three years, the average annual increase of these enterprises' profits exceeded 100 billion yuan (US$12.8 billion), and the average annual increase in taxes paid topped 100 billion yuan (US$12.8 billion).

 

The State Assets Supervision and Administration Commission (SASAC) should certainly be given credit for the better returns and improved quality of State-owned assets.

 

Since it was set up in 2003, the SASAC has made unremitting efforts to persuade key State firms to raise efficiency and optimize their business structure.

 

The vitality and competitiveness of State firms are clearly enhanced in the 1990s, when the majority of SOEs suffered losses.

 

A key factor behind the success of the SOE reforms was the reorienting of State capital away from non-critical areas towards strategically important sectors.

 

Less than 50 of the 161 central SOEs are now engaged in seven key industries armaments, power generation and distribution, oil and petrochemicals, telecommunications, coal, aviation and shipping. But their total assets account for three-quarters of all central SOEs and they rake in 79 percent of the profits.

 

In other words, while central SOEs as a whole are making big money, profitability appears distinctly patchy when looked at industry by industry.

 

Therefore, it is understandable that the SASAC is planning to cut the number of central SOEs from the current 161 to 80-100 in a few years, letting the struggling SOEs exit the market by 2008.

 

By doing so, the SASAC aims to develop between 30 and 50 globally competitive SOEs by 2010.

 

Nevertheless, the fact that many of the key sectors where large SOEs are concentrated are still not open to market competition does no good for the growth of these enterprises into global business giants.

 

Loud public complaints about disproportionately high wages at some State firms in monopoly sectors like the power generation and distribution industry shows that these SOEs, though big and profitable, are not good at cutting costs. Or, say, in the absence of competitors, they are just profiting from their monopoly status at the cost of consumers.

 

This would by no means help transform these SOEs into real business giants in the international market where fierce competition is the norm.

 

(China Daily December 20, 2006)