SOE reform is making good progress

SOEs have made notable progress in reducing excess capacity, optimizing balance sheets and enhancing corporate governance

Mar 23, 2018 | Mike Shiao and William Yuen

2018 marks the 40th anniversary of China’s reform and opening-up. As an integral part of the Chinese economy, the state sector has undergone tremendous transformation over the decades, and SOE reforms have been closely scrutinized by the investment community. After all, inefficient SOEs, which are generally highly geared and less profitable, represent a large part of China’s debt problem and hinder productivity growth. Without reform measures, many SOEs will remain loss-making and might default on their liabilities, putting strains on the financial system and unsettling the economy.

While disappointments in this area have been common, we have seen some positive developments recently. SOEs have made notable progress in reducing excess capacity, optimizing balance sheets and enhancing their corporate governance structure — steps that have helped to improve their financial conditions. We believe these developments have resulted in the following profound impacts that could benefit the Chinese economy and investors if relevant reform measures are consistently implemented going forward.


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