SOE reforms may provide opportunities for foreign investment

In fact, with overcapacity, inefficient cost control, and slow industrial upgrading, they are hindering the urgent transition of economic growth pattern in a big scale. Though the reforms of SOEs have been undergoing for many years, the SOEs have grown bigger and bigger. This time, the reform is needed to be different.

Under such a background, the reform is very much anticipated.

According to the two files, the reform is aimed at introducing "mixed ownership" by bringing in private investment. The initiative also set out to improve the competence of SOEs and turn them into fully independent market entities. These measures finally may provide more space for other forms of enterprises.

Since China has liberalized foreign direct investment (FDI), provided channels such as QFII and RQFII, has simplified the investment procedures and given foreign companies national treatment, the foreign companies can share the opportunities along with the private companies.

First, since the reform encourages private capital including foreign investment to participate in State-owned enterprises, the non-State firms including foreign companies will be encouraged to join the process through various means, including buying stakes and convertible bonds from or conducting share rights swaps with SOEs.

Second, since the reform divide the SOEs into two categories, for-profit entities and those dedicated to public welfare and the former will be market-based and stick to commercial operations, the foreign companies may have more opportunities in the for-profit entities. But they can also take the advantage of the latter categories in that the reform encourage that non-State firms provide public goods and services through public–private partnership and other forms.

Third, since the reform will change the way the SOEs are managed by playing a role more like fund managers, which means that boards of directors will have greater decision-making powers and intervention by government agencies will be forbidden, the foreign investors can be more safe to participate as financial investors or strategic investors to play special roles in improving corporate governance.

We expect that the newly issued reforms of China's state sectors can provide opportunities for foreign companies and foreign companies can contribute as a unique force to help China's economic transition, too.

The author is a lecturer at the Management School of the Shanghai University and a research fellow at the China Europe International Business School Lujiazui International Finance Research Center. The views do not necessarily reflect those of China Daily.