Only the early bird catches the SOE worm

Shanghai does it again - as it always does in looking for the first-mover advantage as China changes.

This time, what it has done is seize opportunities from a new round of reform of State-owned enterprises, sometimes called SOE reform 2.0.

On Dec 17 the municipal government published its 20-point guideline, termed "opinions", on deepening Shanghai's SOE reform, a task officials said would remain their focus for the next three to five years.

In the national leaders' Third Plenum last month, furthering SOE reform was made part of the plan adopted. At the time, market watchers pointed out that any meaningful change in this direction would require more SOE restructuring in the capital markets. In the process, the early birds are likely to raise more funds and gain more elbow room to do what they want to do - such as shedding less profitable operations and concentrating on what they can do best.

Government data show that State-owned assets in Shanghai are worth 10 trillion yuan ($1.67 trillion), contributing about 20 percent to the city's GDP, which was 2 trillion yuan last year.

Yet there are problems, as Shanghai officials admitted, mainly the SOEs' general lack of business competitiveness, their lack of contribution to the government coffers and their lack of technological sophistication.

Some early-bird companies have already been on the move, announcing suspension in the trading of their shares to make way for innovations in internal management.

Nevertheless, stock options and hires from outside the system are not the most important things. What determines the success or failure in Shanghai's SOE reform 2.0 will be bigger issues, such as what role SOEs will play in overall economic development.

They play three different roles, according to official opinions - as competitive companies, functional companies (to perform certain functions as defined by the government) and public services. Up to 80 percent of Shanghai's SOEs will concentrate in the "strategic emerging industries, advanced manufacturing and providing public infrastructure and guarantees of people's livelihoods".

In three to five years, according to official opinions, the city will create two to three "capital management companies" that can effectively carry out international practices, five to eight multinational companies that are globally competitive with influential brands, eight to 10 companies each with core competencies, nationwide networks and overseas presence, and a batch of companies featuring advanced technology, unique market position and industrial leadership.

Obviously, it is direct competition in the global market, rather than the day-to-day services as required by the largest financial center in the second-largest economy in the world, that is the most important role that Shanghai has chosen for its SOEs.

Therein lies one possible concern: How can running two or three globally active investment companies have anything to do with the quality of service that thousands of companies, international and local, large and small, can get from a city?

Indeed, how can running two or three investment companies, backed by a municipal government's funds, compete with Warren Buffett's Berkshire Hathaway Inc (total assets $427 billion) and BlackRock Inc (assets under management of more than $4 trillion) be more meaningful than taking care of a beautiful city with so many stories to tell, keeping clean its water, air and streets, upgrading its public facilities and attracting ever more people from all over the world to do business there?

As for globally influential brands, how many words from modern China can readily evoke as much familiarity and curiosity as the very word "Shanghai"?

Perhaps, deep down, for planners raised in the early industrial age, a city bears no difference to a material product - once it rolls off the assembly line, its value is set and never increases. But this is not the proper way to treat what they are planning.

Providing ever-improving daily services to one of the largest cities in the world should be the planners' most important calling. Instead of making global competition the No 1 task for the local SOEs, they should harness the best resources they can to make Shanghai more competitive.