Private firms shy away from SOEs

Entrepreneurs wait for concrete laws as mixed-ownership pushed

Although the central government is encouraging private companies to enter sectors traditionally dominated by State-owned Enterprises, most entrepreneurs still balk at the doorstep of these sectors, according to an informal survey conducted on Wednesday at the Boao Forum for Asia.[Special coverage]

More than 30 entrepreneurs at a panel discussion were asked if they became more optimistic about the future of private enterprises after the Third Plenum of the 18th Central Committee of the Communist Party of China last November. The plenum promised a "decisive" role for the market in the economy.

But only just over 10 percent of the respondents in Boao said they are optimistic, with 80 percent saying they're unsure about the specifics of the plenum's announcement. More than half of the executives said they're waiting to see how things actually develop before they invest in State-dominated sectors, even if it means losing the advantages of being an early mover.

The responses underscore the stiff challenges the government faces in pursuing the model of mixed ownership as a means of stimulating economic growth, increasing efficiency and improving the governance of State-owned enterprises.

One high-profile initiative after the plenum's announcement came in February when Sinopec, as China Petroleum & Chemical Corp is known, said it would open at least 30 percent of its massive retail and marketing arm to private investors.

But that move, although generally welcomed by the private sector, also sparked concerns that if SOEs only allowed private companies to take minority stakes, it would limit outside investors' ability to influence decisions and would undermine the attractiveness of the investment.

Those concerns were voiced at the Boao forum as well. When asked what factors deter them from investing in SOEs, private entrepreneurs said the biggest obstacle is "overly low allowed equity shares". Low profit margins came in second on the list.

Concerns about profitability arose in response to another question, which asked entrepreneurs what sectors that are traditionally dominated by SOEs are the most viable investment targets.

Petroleum did not make its way into the top three, which were finance, exploration of other natural resources and public services (such as medical care and education).

Asked what sectors do attract them, regardless of SOEs' role, mobile Internet and services for the elderly - already thriving with private capital - took the highest score.

Bao Yujun, president of the China Private Enterprises Association, who presided over the panel, said the results reflect the existing gap between vision and reality.

He said many private entrepreneurs see that the pledge to give private companies a greater role in the economy is only stated in the Party document, and they believe it would be much better if it could be written into law.

"They think policies might change along with changes in leadership. Only specific stipulations in the laws could give them a guarantee," he said.

He suggested amending several laws, ranging from civil and criminal law to land management law, and even the Constitution, which contain articles that discriminate against private companies.

Li Zibin, president of the China Association of Small and Medium Enterprises, said this year and next will be a "critical time" for SOE reform. If substantial reform moves are taken during this period, it will send strong signals to private investors and facilitate subsequent reform; otherwise, the market will be disappointed and a critical window of time will pass.

What reforms will eventually persuade entrepreneurs to take bold moves? According to the Boao survey, improving the legal environment and fundamentally changing the government's role are most urgent, followed by market access.

"We don't want favorable policies so much as we yearn for a level playing ground," said one entrepreneur.