Enhancing Efficiency and Competitiveness in China’s
State-Owned Enterprises: Strategies for Reform
Muhammad Bilal Mahmood
Sun Jia
Dalian University of Technology
Dalian, China
bilal_mahmood@outlook.com
Dalian University of Technology
Dalian, China
sunjia@dlut.edu.cn
ABSTRACT
This report explores the pivotal role of State-Owned Enterprises
(SOEs) in China’s economy, focusing on their unique challenges and
proposing strategic reforms for their development. SOEs in China
are integral to the national economy, serving both commercial
and social strategic objectives. However, they face significant challenges, such as the multi-principle-agent problem, where conflicting
interests between various government stakeholders and SOE managers lead to inefficiencies, and policy burdens that detract from
their competitiveness by prioritizing non-commercial objectives.
This study suggests that reforming corporate governance to clearly
define the roles of stakeholders, introducing performance-based
management to align the objectives of SOEs with those of their
managers, and pursuing strategic restructuring to focus on core
competencies can significantly enhance the efficiency and global
competitiveness of Chinese SOEs. By addressing these issues, the
report argues that SOEs can better contribute to China’s economic
growth and resilience in the global market.
The Chinese government uses SOEs to advance its economic
and social policies, including employment stability and sectoral
development. However, SOEs face unique challenges, including
the multi-principle-agent problem and policy burdens, which can
impact their efficiency and competitiveness [2].
According to the Fortune Global 500 list 2020, 117 of the global
top 500 companies are based on the Chinese mainland and 91 of
those are SOEs. There are 121 companies from the United States in
the top 500, but none of them are government-owned [3]. Three of
World’s top 5 companies are from China are shown in figure 2.
KEYWORDS
China, State-Owned Enterprises, SOEs, Corporate Governance Reform, Performance-based Management, Strategic Restructuring,
Efficiency, Competitiveness, Multi-principle-agent Problem, Policy
Burden
1
INTRODUCTION
State-Owned Enterprises (SOEs) in China are businesses where the
state has significant control through full, majority, or significant
minority ownership [1]. These enterprises are crucial to China’s
economic landscape, playing a dominant role in the critical sectors
such as energy, telecommunications, and transportation.
Figure 2: World Top 5 Companies
2
The multi-principle-agent problem in the context of SOEs refers to
the complex relationship between the state (as the owner), SOE managers, and other stakeholders. In a typical principle-agent scenario,
there is one principal (the owner) and one agent (the manager).
However, in SOEs, multiple principals (different levels of government and government departments) with potentially conflicting
interests may exist. This complexity can lead to issues with governance, as it can be challenging to align the objectives of multiple
principals with the actions of the agents (SOE managers). The problem often results in inefficiencies, such as misallocation of resources,
corruption, and difficulty in implementing reforms [4].
3
Figure 1: State Owned Enterprises
MULTI-PRINCIPLE-AGENT PROBLEM
POLICY BURDEN
Policy burdens are the additional objectives placed on SOEs that go
beyond profit maximization, which is typical for private enterprises.
These may include social objectives like employment generation, industry development in less developed regions, and ensuring access
Muhammad Bilal Mahmood and Sun Jia
Table 1: Famous China State-Owned Enterprises
China State Owned Enterprises
Description
Sinopec Group (China Petroleum And Chemical
Corporation)
State Grid Corporation of China
One of the largest oil and petrochemical companies in the world, involved in oil and gas
exploration, refining, and production of chemicals.
The largest electric utility company in the world, responsible for the distribution of electricity
across China. It plays a crucial role in the country’s energy infrastructure and development.
The largest bank in the world by total assets and one of the most prominent commercial
banks in China, offering a wide range of financial services.
A major national oil company in China, focusing on the exploration, development, and
production of offshore oil and natural gas.
One of the leading telecommunications companies in the world, providing mobile voice
and multimedia services across China.
A leading construction company specializing in infrastructure projects, including railways,
highways, and urban transit systems.
Involved in the development and management of nuclear power projects and the production
of nuclear power plants in China.
Industrial and Commercial Bank of China (ICBC)
China National Offshore Oil Corporation
(CNOOC)
China Mobile Communications Corporation
China Railway Construction Corporation (CRCC)
China National Nuclear Corporation (CNNC)
Figure 3: A petrochemical refining production site belonging to China’s largest oil refiner, state-owned Sinopec Group, July 8,
2019. /CF
to services and goods considered essential for national development and security. While these objectives can further social and
economic goals, they can also detract from the competitiveness and
operational efficiency of SOEs, as they may be required to operate in non-profitable areas or maintain employment levels despite
financial pressures [5].
4
MEASURES TO DEVELOP SOES IN CHINA
To address these challenges and improve the performance and
competitiveness of SOEs, several measures can be implemented:
Enhancing Efficiency and Competitiveness in China’s State-Owned Enterprises: Strategies for Reform
4.1
Corporate Governance Reform
Reforming the governance structures of SOEs to clearly define and
separate the roles of government as a regulator and an owner. Implementing modern corporate governance practices, including the
establishment of professional boards of directors with the authority and responsibility to oversee management, can help align the
interests of various principals and the agents.
4.2
Performance-Based Management
Introducing performance-based management systems that focus
on efficiency, profitability, and achieving strategic objectives. This
can include setting clear, measurable targets for SOE managers
and linking compensation and career progression to performance
outcomes. Such systems can help mitigate the multi-principle-agent
problem by aligning the interests of managers with the strategic
goals of the SOEs and their owners [6].
4.3
Strategic Restructuring and Asset
Divestiture
Encouraging strategic restructuring of SOEs to focus on core businesses where they have competitive advantages and divesting noncore assets. This approach can help SOEs reduce policy burdens by
allowing them to focus on areas where they can be most efficient
and competitive. Additionally, opening up some sectors to private
and foreign competition can spur SOEs to improve efficiency and
service quality
5
CONCLUSION
In conclusion, addressing the challenges faced by State-Owned Enterprises (SOEs) in China, such as the multi-principle-agent problem
and policy burdens, is essential for their development. Implementing reforms in corporate governance, introducing performancebased management, and focusing on strategic restructuring are key
measures to enhance their efficiency and competitiveness. These
steps will ensure SOEs can contribute more effectively to China’s
economic growth while becoming more market-oriented and resilient in the global economy.
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