China’s SOEs are ‘shifting gears’ to boost earnings, adding innovation and supply-chain security to performance: Tsinghua analyst

The new approach, spelled out by Beijing earlier this year, represents a “distinct departure” from past efforts to lift the operational efficiency of these central government-controlled SOEs, said Zhou Lisha, research director at Institute for State-Owned Enterprises in Tsinghua University.

“Today, in addition to staying profitable and competitive among their peers, SOEs also need to develop an edge in innovative and strategically important areas such as renewable energy and artificial intelligence,” she said at a conference organised by China Securities in Beijing on Thursday. They also need to “make sure that their supply chains are safe and controllable”, she added.

China’s SOEs reported a 42 per cent drop in net profit to 1.1 trillion yuan (US$152 billion) last year, according to the State-owned Assets Supervision and Administration Commission. The nation’s economy grew 5.2 per cent versus 3 per cent in 2022, aided by the end of its zero-Covid policy.

In a late January directive, the commission emphasised income and value-add from “strategic innovative sectors” as key performance evaluation metrics for listed SOEs in 2024.

China must boost battered valuations of SOEs, Shanghai stock regulator warns

Besides innovation and R&D, the commission said it would include “market-value management” as part of its overall assessment of listed SOEs and their executives.

“The market has historically undervalued SOEs because a lot of these companies were focused on public welfare-related and positive social-impact agendas,” Zhou said. “As you can see now, SOEs are shifting gears.”

Morgan Stanley, in a late March report, said measures to revamp the SOE appraisal system could “structurally improve” the investment potential of China’s stock market in the long term.

MSCI cuts dozens of Chinese stocks from global indices, raises India’s weightage

As SOEs steadily improve their profitability and dividend payout ratios, the MSCI China Index is expected to see a 50-basis point increase in return on equity and a 200-basis point increase in dividend yield, the report said.

“With China’s population ageing faster than expected, improving the return on assets for SOEs will help relieve pressure on social security and maintain social stability, all of which can support the investability of the Chinese market,” Laura Wang, chief China equity strategist at Morgan Stanley, said in the report.

The latest SOE reform is a contrast to changes over the past decade, and unlike more recent tweaks between 2020 and 2022, Tsinghua University’s Zhou added.

“Raised on western economic theories, we tend to think that only when companies are privatised, and only when the market is free, can we optimise the allocation of resources,” she said. “But China’s SOEs are embarking on a path for reform that is uniquely its own, and unlike anything that we have seen in the West.”