CCTV:
We have noticed that the performance of SOEs has improved greatly in the last half of year, and the monthly profit even set a new historic record. Can you please explain what elements prompted the SOEs' big growth?
Shen Ying:
Thank you for your question. The SOEs have indeed maintained a stable and positive development trend. Their layout has been optimized through deep reform, their development dynamic has grown due to innovation, while the quality and benefits have improved through transformation and upgrading. Thus, the monthly benefit was able to reach an historic high. At the same time, we analyzed the benefits and profits structure, and felt that the growth of benefit was seeing clear improvement in terms of cooperation and stability, which was mainly reflected in the following areas. First, the main profit centers made a greater contribution. A SOE usually has various sources of profit, but the main profit is the core and represents stability. In the past half year, the main profit of the SOEs increased by 4.8 percent as a component in overall profitability. Second, we feel there has been a boost in synergy due to the improved dynamic from traditional industries as well as new areas of dynamism. The traditional petroleum and petrochemical, steel and coal industries have achieved a large rebound in terms of their benefits, which helped lay the foundations for benefit growth; meanwhile some equipment and advanced manufacturing industries, as well as elements of the modern service industry, all continued to achieve better growth. Third, the scale and benefit both saw significant growth. In the half year, the scale increase rate reached 16.8 percent, the year-on-year profit growth rate was 15.8 percent. We like to stress that the development quality of an enterprise doesn't just rely on expansion. If you expand in scale, but the benefit doesn't grow at the same time, it shows operational efficiency is limited. From current indicators, the matching rate is quite good in historical terms.
Meanwhile, the growth rates of profit, net profit, and profit solely accruing to the parent company have also basically kept pace. Profits grew by 15.8 percent, net profit 18.6 percent, while the profit accruing to the parent company grew 14.7 percent. The three figures indicate the foundations have been laid for enhanced growth for various subsidiary companies inside corporate groups.
There's another thing worth noting: the benefit growth should mostly be attributed to the release of potential production capacity. Through reform, readjustment, transformation and upgrading, certain dynamics and potentials were released, sustaining benefit growth, if you look at the sources of benefit increase for the past half year.
If you want to know why, we have concluded there are three reasons. First, China's macro-economic situation is becoming better, while maintaining stability. As you know, in the past half year, the macro-economic situation was very positive and stable; in particular, the PMI has now stayed above the threshold for 11 straight months. This indicates that the market situation is becoming better. The macro-indexes, including economic growth, employment, price of commodities, international balance of payments, etc., were all better than expected. China has adopted precise and efficient macro-control measures since the beginning of the year, including fiscal and monetary policies, that have greatly sustained the real economy. This is particularly true in regard to the reforms for streamlining administration, delegating more powers to lower-level governments and society, improving regulation and optimizing services. This created a good environment for business and cut the fees and pressures on them, creating good circumstances for the real economy's further development. Besides, the implementation of China's big strategies, including the integration of Beijing, Tianjin and Hebei Province, the Yangtze River Economic Zone, as well as the Belt and Road Initiative, provide great space for enterprise development. The macro-situation has laid a good foundation for SOEs to achieve rapid growth in revenues and profits.
Secondly, the better performance is also a result of central SOEs deepening the supply-side reform. These enterprises expanded economic benefits in the first half of this year after having well implemented the strategies charted by the Central Committee of CPC and the State Council, especially the supply-side reform, which have improved their structure, transformed and upgraded them, and fostered new growth drivers. We're increasingly aware that the supply-side reform is an essential therapy applied to unravel the structural conundrums of economic development while sustaining long-term growth.
We are determined to advance the supply-side reform of central SOEs and cut overcapacity in iron and steel as well as coal by addressing the problem of zombie enterprises first so as to balance supply and demand from a macro-economic viewpoint. All the above are designed to ensure stringent actions based on strong resolution. At the same time, we have encouraged the central SOEs to reorganize and different industries to cooperate to achieve synergy.
Thirdly, the achievements can also be attributed to the central SOEs' relentless efforts to improve themselves and expand economic benefits. Since last year, SASAC has led a program for the central SOEs involved to improve themselves and expand economic benefits, requiring them to pay high attention to stabilizing growth so as to support the national economy. The central SOEs have acted as required, exploring new markets, cutting costs, increasing economic benefits and pursuing industrial coordination in a bid to stabilize growth.
That is why they were able to secure a good performance in the first half this year.
Phoenix TV:
You mentioned just now the reorganization of central SOEs. What do you think is the biggest challenge in advancing the reform? Will the number of corporate reorganizations peak in the second half of this year?
Shen Ying:
SASAC has paid close attention to inter-enterprise reorganization and integration regard to the central SOEs since its establishment. Under current circumstances, reorganization and integration is not only an important initiative to adapt to and guide the economic "new normal", but also a normal operational move by enterprises in a market economy. In pursuing reorganization, we focus on whether we can achieve the desired results. In recent years, the central SOEs mainly adopted the following three approaches for their mergers and reorganization.
The first approach is reorganizing two equally-sized big enterprises in the same industry. Such merger and reorganization is intended to reduce overlapping investment and construction and lower operational costs. Cases in point are the merger of COSCO and China Shipping, Wusteel and Baosteel, and CNR and CSR.
The merger of COSCO and China Shipping to become China COSCO Shipping has produced obvious positive results. The new entity reported a profit of over 10 billion yuan in the first six months of this year, representing a significant rise from the before-merger figures. The merger of Baosteel and Wusteel into Baowu Steel has also been successful as the two are now synergizing their industrial strength and the supply of 180 types of products and services on their respective business portfolios. Such synergy will help avoid repetitive industrial investment, which is usually a common issue. In the first half of this year, Baowu Steel reported a profit of 8.7 billion yuan, wiping out losses from the same period of last year.
The second approach is incorporating one enterprise into another, as exemplified by the incorporation of Sinotrans & CSC Holdings into China Merchants Group. The two overlapped in part of their shipping business, and their deal has increased their shipping capacity, optimized their industrial layout and therefore brought greater benefits.
The third approach is reorganizing upstream and downstream enterprises to form an industrial chain to improve the industrial layout and jointly resist the risk of market fluctuations. One instance is the reorganization of two enterprises in supply of raw materials and processing respectively. Generally speaking, the positive effects of reorganization are gradually showing up, and are expected to be greater in the future.
As for the challenges emerging in the process, I take integration of corporate cultures as one of the biggest. Such cultural integration is an important guarantee for the alignment of corporate strategies.
Another big challenge is how to deal with the problems caused by the inevitable stripping of low-end businesses by the involved companies as they seek higher-end business. Such problems include the resettling of sidelined employees, disposal of assets and debt restructuring.
For example, Baowu Steel has to take care of the large number of sidelined employees in the process of stripping out some low-end productivity. Last year, Wuhan Iron and Steel carried out meticulous work to ensure the resettling of more than 30,000 employees as it cut overcapacity. Such work determines to a large extent the effects of the reorganization.
Therefore, reorganization of central SOEs in recent years is not simply a merger, but is more about the post-merger integration. Generally speaking, the process is smooth and achieves the desired results. Thank you!
CRI:
The Chinese economy is undergoing a shift in regard to its growth drivers. Can you introduce the measures the central SOEs have taken to develop new drivers of growth? And what achievements have they made so far? Thank you.
Shen Ying:
Thanks for your questions. The sustainable and healthy development of central SOEs depends on the cultivation of new growth drivers. We must change our developmental concepts and facilitate advancement through technological innovation. In recent years, SASAC has made some achievements in this regard, which can be summarized in the following aspects:
First, we've strengthened top-layer design and improved the innovation mechanism. In January, we issued the SASAC Work Measures to Facilitate Technological Innovation in Central SOEs, which includes a full set of policies and measures addressing key links in promoting innovation, such as creating a favorable environment and other means to stimulate initiative. In March, a leading group for technological innovation work in the central SOEs was established to coordinate relevant work, such as discussing innovation strategies, major policies, tasks and assignments.
Second, we have pushed forward the drive to strengthen the innovation capacity of the central SOEs. We have organized and supported those enterprises to comprehensively participate in major technological tasks, and encouraged them to increase investments in research and development. Up to now, there are 808,000 R&D personnel working in the central SOEs, involved in 3,063 R&D institutes and 635 national-level R&D platforms.
Third, we have promoted the integration of technology and capital. On May 16, a 150 billion-yuan fund was launched by the China Aerospace Science and Technology Corporation (CASC). Now, a preliminary framework for innovation funds has emerged, with more than 200 equity investment funds playing active roles.
Fourth, we have established high-level platforms for mass entrepreneurship and innovation. Up to now, a total of 518 such platforms have been set up by the central SOEs, including internet platforms, business incubators, and various other activities and funds to encourage innovation and entrepreneurship. The platforms substantially promote SOE restructuring and upgrading, promoting innovation both internally and society-wide.
Fifth, we have formulated mechanisms to stimulate innovation. In order to motivate the researchers to overcome difficulties and produce technological innovations, SASAC has explored and put into effect some measures regarding performance evaluation and salary distribution, such as the mid- to long-term incentives empowering state-owned technology enterprises to reward employees through equity share-outs and dividends.
Such incentives have produced remarkable outcomes. This year, the Chinese-made C919 airliner made a successful maiden flight. The first domestically-built aircraft carrier, jointly developed by the China Shipbuilding Industry Corporation (CSIC), was launched. The underground tunnel section of the Hong Kong-Zhuhai-Macao Bridge was completed. All these projects featured significant progress in technological innovation.
Meanwhile, a large number of advanced manufacturers and hi-tech sectors have significantly driven SOE profit growth. For example, the heavy equipment manufacturing sector in the half-year saw an investment increase of 12.9% year-on-year, with orders up 46%. Other sectors, such as medicine, military and electronic manufacturing, all have shown good momentum.
Wall Street Journal:
Hello Ms. Shen, you just mentioned that, since last year, SASAC has been attaching great importance to the role of the reform plan of making central SOEs "leaner and healthier for better performance." My question is, in the actual operation of the process, are there any contradictions and conflicts between the goals for steady growth and deleveraging?
Shen Ying:
Thank you for your question. The reform plan of making central SOEs "leaner and healthier" is an important measure in deepening supply-side structural reform. It is an effective way to improve the quality and efficiency of the central SOEs. At the beginning of the year, SASAC proposed 58 specific measures covering eight aspects in the 2017 plan of "leaner and healthier for better performance." The purpose was to tap potential and improve resource allocation efficiency. We have been earnestly implementing the program for cutting overcapacity, destocking and deleveraging, while in particular increasing productivity, focusing on risk control and improving quality and efficiency.
For example, concrete measures have been taken in "condensing the managerial tiers and cutting legal person units of enterprises." SASAC has carried out the campaign of "Reducing the Management Levels in Central SOEs" since May 2016, requiring a cut of central SOEs' subsidiary legal entities by about 20 percent and a reduction of management levels to within four tiers over a period of three years. Over the past year, SASAC, together with the central SOEs, vigorously promoted the implementation of [this program], and has made significant progress. As of the end of June 2017, 5,997 central SOEs' legal person units had been cut, producing labor cost savings totaling 26.8 billion yuan and management cost reductions of 10.2 billion yuan.
Another example is dealing with the historical problems of SOEs under the central government and transferring their obligations of "supplying water, electricity, heat (gas) and real estate property management." Currently, things are going smoothly with those SOEs in spinning off their social functions and solving problems left over from history. By the end of June 2017, over 50 percent of the work had been completed by those SOEs under the central government to spin off and transfer their obligations of "supplying water, electricity, heat (gas) and real estate property management" in their residential communities. Pilot programs for social management of SOE retirees have been carried out in five cities, namely Shanghai, Chongqing, Dalian, Jixi and Changsha. All are now on course to scale up by the end of the year based on the cities' practice and experiences. The transferring of SOEs' social responsibilities in regard to community management, fire control, healthcare and education is also going ahead smoothly. As we are now halfway towards the deadline, half of the work has been completed. I believe we are bound to complete our program to make SOEs under the central government leaner and healthier while improving their performance and efficiency.
SASAC attaches great importance to risk prevention of central SOEs as an important basis for stable growth. It has implemented control on both debt ratios and debt scale for some enterprises with high debt. The administrative efforts have been strengthened through the management of budget, personnel assessment, remuneration and investment.
21st Century Business Herald:
Central SOEs' profits have enjoyed rapid growth in the first half of 2017. As a matter of fact, their profits have registered stable growth for over eight consecutive months since last year. Does SASAC take this momentum as a sign that China's economy has achieved its L-shaped recovery? If so, will management policies for central SOEs be changed? In addition, out of the 102 central SOEs, a total of 99 gained profits, while the other three suffered losses. Did their losses become increasingly heavy? If so, can the losses be reduced via M&A, or will the three file for bankruptcy? Thank you.
Shen Ying:
Despite different opinions about China's general economic trend, we can be assured that the momentum of making progress while maintaining stability will be consolidated. The central SOEs, as stabilizers of the economy, can help strengthen the momentum by deepening reform and improving management. Opinions differ about China's growth trajectory: some say it is L-shaped, while others hold that it is U-shaped or V-shaped. Since the 18th CPC National Congress, the CPC Central Committee with Comrade Xi Jinping as the core has declared that China's economy is stepping into new normal, developing major economic policies including supply-side structural reform. It shows that we have found the measures that can achieve sound and sustained economic development. As long as we intensify our efforts to implement those measures and make steady progress to solve problems, we believe that the good momentum for growth will be consolidated.
As you have mentioned, we have a total of 99 SOEs under central government that made profits, while there were three who recorded minor loss. There is a mixture of being in an initial investment period, or of suffering temporary losses. At a time when Chinese economy is showing positive signals, SASAC will continue to focus on building world-class enterprises, and push forward supply-side structural reform, especially on structural adjustment, transformation and upgrading, in order to enhance core competitiveness. Meanwhile, according to the needs for marketization and globalization, the building of a modern enterprise system will be speeded up, especially in regard to corporate governance. Through the reform and optimization of the system, enterprises will be given fresh impetus and possess the ability for sustainable development, making more contributions for national economy to maintain a sustained, rapid and sound development.
Xi Yanchun:
As for China's general economic trend, there will be a series of press conferences in July by different departments from multiple aspects. Please look out for our further notices. Thanks for the introduction by Shen Ying, and thank you all. This is the end of the press conference. If there are any other questions, reporters could contact the Press Office of SASAC. Thanks.
