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Innovation and Development of State-owned Enterprises in Shanghai

Dec 26, 2017

The Shanghai Municipal Government’s Information Office held a press conference on November 16 on innovation and development of state-owned enterprises in Shanghai. Following are the highlights:

Jin Xingming, deputy secretary-general, Shanghai Municipal Government and Party secretary and director, Shanghai State-owned Assets Supervision and Administration Commission

Wang Yayuan, deputy director, Shanghai State-owned Assets Supervision and Administration Commission

Dong Qin, deputy Party secretary, Shanghai State-owned Assets Supervision and Administration Commission

STV: It is a national strategy and a task given to Shanghai to build Shanghai into a science and technology innovation center with global influence. The Shanghai Municipal Government and the State-owned Assets Supervision and Administration Commission of the State Council held a conference this August on hastening the steps in the strategy. The state-owned assets and enterprises also have an important role to play. So what systemic changes has SASAC of Shanghai made to speed up the innovation process for state-owned enterprises? And how do they work out?

Jin Xingming: SASAC of Shanghai has done a series of research and work to undertake that task as well as for local development. For example we have thought about measures to introduce resources like central enterprises to serve Shanghai’s construction of the science and technology innovation center. Presently these central enterprises are contributing about a quarter to the Shanghai economy, while local SOEs, private firms and foreign-invested enterprises, have each contributed a quarter.

Like the central enterprises in Shanghai, similar companies elsewhere in the country have the same ability to do so. They also wish to join Shanghai’s platform of building the center and enjoy a series of preferential policies in the process, which will in turn boost their own development. SASAC of the State Council is the project leader and it has signed a strategic agreement with Shanghai to encourage central enterprises to settle in the city and support Shanghai’s work on the science and technology innovation center.

Shanghai held a promotion event in Beijing this June, which attracted more than 100 central enterprises. Six zones and other sci-tech bases and parks from different city districts provided briefings at the event, drawing the enterprises’ attention. They held multiple negotiations.

On August 28, an official promotion event was held to involve central enterprises in Shanghai’s construction of the sci-tech center. It worked well. Contracts for more than 20 projects were signed at the venue, totaling more than 220 billion yuan. These projects will be very helpful in the process.

Also it is the SASAC’s job to work on how to improve the environment for innovation and encourage SOEs to play an active part.

First, relevant policies will be designed. In terms of performance evaluation, we have included input in the research and development, innovative transformation and overseas purchase of innovation resources as annual profits for assessment. We encourage enterprises to invest more. Over the past three years, the 34 billion yuan invested in 30 companies has been deemed as profit. Meanwhile the assessment for the business operator in his or her term will lay more emphasis on innovation. The SASAC has used one third of its asset profits to encourage enterprises to put more into innovation and then drive social capital investment.

We are also working on a reward mechanism. Altogether 338 companies have stimulated science and technology investment and encouraged talents with methods like stock equities, share options and dividends. Intangible assets are transferred through agreements to encourage individual investment in enterprises and this part of the income will not count towards the salary.

Meanwhile we support innovation. The Shanghai People’s Congress has released a decision on promoting reform and innovation. It is written that when a project fails to meet the reform and innovation goal, the directors responsible will not be given negative comments as long as they have been working on it dutifully with integrity. SASAC has also suggested that enterprises put this in their association articles. A dozen companies, including SAIC, have done so, which has worked well.

SAIC, for example, is being driven by technology now. Its new energy fuelled vehicles and intelligent connected vehicles have become so popular that they are in short supply. This is the outcome of innovation from several years ago. This year SAIC paid 100 billion yuan in tax and made another 100 billion yuan profit. Shanghai Zhaoxin CPU has also reached the international level with products well received in the market. The transformation has been realized in the process of innovation and the effects will gradually be felt. We also expect SOEs to play a bigger role in Shanghai’s construction of the sci-tech innovation center.

CBN TV: Shanghai International Group and Guosheng Group played a significant role in the state-owned enterprise reform and guided the proper circulation of state assets. How are the two groups now? Is there any case of successful innovation? What’s the next step for them?

Jin Xingming: The two groups were platforms based on Shanghai SASAC’s 20 rules for reform. As to their position, Shanghai SASAC supervises the state-owned assets and in future, the two platforms will be responsible for running the capital while the enterprises will undertake the daily production and operation. Also, they will be the main shareholders of some SOEs and the execution body for the operation of state-owned assets marketization. They will be where the state-owned assets withdraw to when they leave the common competition areas.

The framework should be made clear after their positioning. Shanghai has set up a Shanghai Committee of Investment Decisions. Its director will be the municipal leader in charge of the state-owned assets and the office is set at the SASAC, too. The committee is now working on the platform operation plan.

A series of mechanisms will then be established. SASAC has to first determine the decision procedure, the mechanism and the rules for financial management and cost regulation. Rules for their daily operation need to be settled to guarantee that decisions are reasonably made within the rules and the operation is in order.

The two platforms were strategically transformed in 2014. The International Group has completed the vertical reshuffle for financial enterprises, including SPD Bank and Shanghai Trust, Guotai Jun’an Securities and Shanghai Securities and China Pacific Insurance and AAIC; Guosheng, on the other hand, completed the horizontal reshuffle between Shanghai Vegetable Incorporated and Bright Food Group, Shanghai Building Material Corp and Shanghai Land Group. They have been operating well since the revamp in 2014 and hold 80 billion yuan of stock and are efficiently using 20 billion yuan of capital in strategic emerging industries and people’s livelihood construction. Measures like negotiating transfer, secondary transaction, exchangeable bonds and exchange of ETF and stocks have been applied according to market value management.

A typical case would be the restructuring of SIPG and Jinjiang Shipping by the International Group in 2015. Through market operation, the construction of the Shanghai International Shipping Service Center has been boosted with port resources and shipping resources pooled together. The profits herein have been all invested into strategic emerging industries and people’s livelihood.

In 2015, Guosheng issued exchangeable bonds based on Shanghai Construction Group’s stock, the lowest interest rate of which was set at 1 percent. It was popular on the market with no upper limit and the lower 1 percent of profit secured. The amount issued was 5 billion yuan; still it was in short supply. It was the most successful large-scale exchangeable bond that year.

The two groups have made great contributions. After three years, we are concluding the earlier practice. How the two platforms work now will depend on further reforms.

Shanghai Securities News: The National Development and Reform Commission has designated 31 SOEs in the third batch of mixed ownership reform. Are there any Shanghai enterprises in this batch and how will they carry out the reform? The second question is whether there is any ongoing work to speed up the strategic reshuffle of SOEs and central enterprises? The third question, in the future, there will be an annual increase in investment of 800 billion yuan in strategic emerging industries. Specifically, which industries are they?

Wang Yayuan: For your first question, we haven’t received any further notice about the 31 enterprises, but we will tell you when we are informed. The second, we welcome the restructuring of central enterprises with local state-owned enterprises. We have been promoting the joint restructuring between central and Shanghai enterprises and there are already successful cases. We will share the news when we have mature plans for the next step.

Jin Xingming: As to the third question you are concerned about, Shanghai state-owned enterprises are investing more each year, as you have mentioned 800 billion yuan of investment increase annually. The investment in the industrial enterprises is about 300 billion yuan while another 400 billion yuan will go to financial enterprises. They are mainly in the fields of strategic emerging industries, advanced manufacturing, modern service industry, and infrastructure construction and people’s livelihood. But our focus will be strategic emerging industries. The construction of basic urban functions includes railway, water, electricity, gas and other infrastructure. Much of the investment is from SOEs, too. We are doing statistical work on the plan and will make it public later.

21st Century Business Herald: My first question is that cultural educational companies were incorporated into the overall layout of the national capital in 2017. Could you tell us something more about that? Secondly, can you give us updates on the reorganization of China Fluorochemical?

Wang Yayuan: About the first question, the incorporation of cultural educational companies, the scope involves administrative units and companies affiliated to institutions. Through comprehensive planning, they were incorporated into the integrated supervision of state-owned assets. For your second question, China Fluorochemical is a listed company; I suggest you refer to their company announcement.

Jin Xingming: When cultural companies are included in the scope of reform, such as the Paper’s restructuring and multiple investment, they utilize industrial resources of the state capital, about six state-owned real economy companies bought a share, which strengthened their supervision as cultural companies. Next, the CPC Shanghai Committee and the Shanghai Municipal Government will strengthen cooperation between cultural companies and other firms.

Wenhui Daily: Talents are needed to develop business and also in the construction of the technology and innovation center. So what will the SASAC of the State Council do to cultivate talents and to inspire entrepreneurship?

Dong Qin: Whether it’s the construction of the technology and innovation center or the Shanghai Free Trade Zone, talents are always the core resource. The Shanghai Municipal Government has always valued the cultivation of talents, and SOEs have always treated talents as the primary productive force. The cultivation of talents mainly focuses on three highs and three systems.

The three highs are high-management talents, high technologies management talents, and high skill talents. They will be cultivated through three systems. The first is the use of multiple channels to recruit and gather talents; the second is a parallel reward system for technicians and management talents; and the third is a multilevel talent reward and punishment mechanism. Through this we are trying to build a more positive and attractive talent management system.

To be more precise, there are three aspects: the first is to attract talents through multiple channels. The SOEs in Shanghai have always applied global standards for talent cultivation, including mentorship, tutors, and a dozen other programs. The companies also have their strategic development laid out globally according to their industries and development planning. As of now, they have built training centers in Chicago and six other American cities, and hired about 40 high-level management talents. Among which, Shanghai Jin Jiang International Hotels (Group) Co Ltd has taken a leading position by mapping out its global strategic plan, and also it is much advanced in attracting talents. Annually, about 100 talented people are being trained to international standards.

The second aspect is the parallel reward system for technicians and management talents. Other than management posts, there will be a series of technical posts such as chief engineer, technical director, forming technique-oriented and innovation-oriented career development channels. In many SOEs, an internal technician hiring system has also been set up, such as in SAIC Motor Corp Ltd, which has established a career development channel for talents in management, skills, and technique.

The third aspect is a multilevel talent reward and punishment mechanism, especially the diversified salary system, according to the high-level management talents’ performance. The rewards could be restricted to stock, middle and long-term reward such as stock options, pension, medical care, and different salary levels according to the technician’s skill classification.

As for stimulating entrepreneurship, it’s getting more and more recognition in society. Especially in SOEs, the recognition for entrepreneurs has reached a new level. The 19th National Congress of the CPC called for further stimulation and preservation of entrepreneurship; urging entrepreneurs to be more responsible and effective in innovation, reforms and industry development. Shanghai SOEs have always valued entrepreneurship; they get a lot of respect, and are cultivated. The SASAC of the State Council and the SASAC of the Shanghai Municipal Government are trying to work out a series of measures and policies to encourage entrepreneurs to be more capable in their respective industries. The measures include resource distribution, reward system, innovations, fault tolerance, and giving them respect. Entrepreneurship has always been valued in Shanghai’s tradition and its state-owned enterprises, and an environment will be created for them to play an even more important role in the enterprises’ reforms and development.

Jin Xingming: I would like to add something. With regards to entrepreneurship, at the 19th National Congress, President Xi Jinping pointed out the direction of stimulation and preservation of entrepreneurship. In September, the CPC Central Committee released a document, the Guideline for Building the Environment for Entrepreneurs, for implementation nation-wide. From the viewpoint of the SASAC of the State Council, we should further implement the direction of the CPC Central Committee and the 19th National Congress.

Our goal is to cultivate entrepreneurship, realize entrepreneurs’ value. Behind every successful company, there is always a capable entrepreneur. Because of this, they should be granted trust and the freedom according to the principle of “Freedom Granted Under Regulations, Power Exerted Not Beyond the Law”. The SASAC of the State Council has also pledged that once a contract with the entrepreneur is signed, it won’t change any regulation and evaluation criteria, won’t intervene in their lawful business operation, and reward them accordingly.

Secondly, there should be requirements set up for entrepreneurs as well as rewards. They include what President Xi proposed at the State-owned Companies Internal Party Building Conference, “Be Loyal to the Party, Be Innovative, Manage the Company well, and Be Honest and Upright.” Then let the market mechanism play its role to stimulate the entrepreneurs, such as the professional managers’ rewarding system we introduced, as well as the differential salaries according to the entrepreneur’s capability.

Thirdly, we should be tolerant towards entrepreneurs. In 2013, the Shanghai Municipal People’s Congress released the document, Encouragement on Reforms and Innovations, in which the fault tolerance mechanism was established. Companies were encouraged to incorporate the mechanism into their regulations to take the burden off the entrepreneurs’ shoulder. So, as long as the innovation and reform project is lawful, and the entrepreneur is not seeking personal gain unlawfully, they will be granted more rewards and freedom to throw themselves into the endeavor.

Xinhua News Agency: In 2016, the unified management of state-owned companies in sports and finance, such as SPD Bank, and China Pacific Insurance (Group) Co Ltd, was achieved. The guideline mentioned that the integration of industries and finance should better serve the real economy. Can you elaborate on the current results and the next goal?

Jin Xingming: We imposed the unified management according to the 20 Reforms on Shanghai State-owned Companies, which specified that unified management should be imposed on state-owned companies, whereas categorized management should be imposed on private companies. The state-owned companies were managed by trustees, financial Party Committees, and municipal financial offices. According to the requirements of the municipal government, from June 2016 onwards, SPD Bank, and China Pacific Insurance (Group) Co Ltd will be managed by the SASAC of the State Council.

After the unified management, our challenge lies in how to let financial companies play their role, and how to better integrate financial companies with real economy companies.

Firstly we need to implement the spirit and direction of the Party. The CPC Central Committee set three directions at the National Congress on Financial Works and the 19th National Congress; they are to serve the real economy, to manage and prevent financial risks, and to stimulate financial innovations.

We need to implement the directions and push forward the integration of industries and financial companies. We need to set the evaluation as a guideline for financial companies according to their characteristics. For example, we hope financial companies can strengthen the partnership with real economy companies, achieve parallel development with real economy development. When it comes to the evaluation of financial companies, we need to be specific about the positioning of the company in the industry, such as we would consider how many joint-stock banks there are in China, and where do they rank. Also, for securities companies, we need to consider how they are ranked in the industry. With clear positioning, we encourage product innovation, prevent financial risks, and encourage innovations on grounds of risk management.

Secondly, we need to bring together advanced real economy manufacturers, and service industries, and financial companies by holding seminars, exchanges, and entrepreneur salons.

Thirdly, we need to encourage financial companies to be innovative. For example SPD Bank’s key innovation project, Cloud Fund Supervision, the Public-Private Partnership Industrial Investment Fund with Shanghai Construction Group; Guotai Jun’an Securities’ Cross-border All-Industries Chain PB Comprehensive Financial Service; Bank of Shanghai’s financial service for diversified ownership state-owned companies; Guotai Jun’an Securities’ compressive financial plans for Shanghai Lingang Group; CIPC’s equity investment solution to the renovation of shanty areas in Hongkou district. All these innovations have promoted the service of financial companies towards real economy companies.

One thing about the report of the 19th National Congress; it laid the emphasis for the future economy on the construction of the real economy, technological innovation, modern finance, and human resources working with industries. The implication is that modern finance needs to better serve the real economy with the help of technology.

Fourthly, no matter whether it’s the development of companies or the integration of real economy and financial industries, they all need risk management. After the financial companies have been incorporated into the supervision of the SASAC of the State Council, we strengthened the supervision on the daily operation of the financial companies to prevent systemic or regional financial risks. Risk management is the whole country’s major issue, in serving the real economy; it also serves the financial companies. The state-owned financial companies’ assets account for 68 percent of all the state-owned companies, and their revenue accounts for 60 percent. Because the total assets of financial companies are usually higher, so is their asset-liability ratio, and financial leverage. Whereas their net assets are usually lower than real economy companies, so the revenue ratio financial companies generate is far higher than real economy companies. So obviously we can’t just compare their total assets.

In summary, the future development and integration of financial companies and real economy companies will be beneficial to Shanghai’s financial companies.

The Enterprise Observer: Generally speaking the mixed ownership reform has made a breakthrough in development. Does Shanghai have any solid measures in the operation procedure of reform, pricing of state assets, construction of the board, marketization of the supervision, industrial upgrade and stock ownership incentive?

Wang Yayuan: Shanghai launched the mixed ownership reform long ago and it is also an important part of the reform for state-owned assets and enterprises. Since the release of the 20 rules on SOE reform in 2013, Shanghai has released opinions and guidance on actively boosting the process. We started rather early.

We have emphasized three general guidelines.

First we have three combinations. We combine the mixed ownership reform with the adjustment of state asset layout and the reorganization of an open marketization. Then we combine the proper circulation of state assets with the right use of state asset stock. Finally we combine the work of completing the corporate governance structure in SOEs and further establishing the modern enterprise system.

Second, special attention needs to be paid to three steps in the process. In the beginning we need to make reasonable decisions in planning; when the plan has been nailed down, we need to be cautious about the audit and assessment session and the final trade session in the operation.

Third, there are three paths for us to push forward the reform. The first and most important path is the overall listing of SOEs and their core assets. Most big groups have chosen this path. In this round of reform, 16 enterprises have completed the process of overall listing and core asset listing. The Bank of Shanghai that went public last year was the biggest IPO in 2017.

The second path is opening the reorganization through marketization, which means introducing social capital into the reform. Last year, the mixed ownership reform of the Shanghai Research Institute of Building Sciences Group involved two private enterprises, which added up to 15 percent of the stock rights.

The third path is the trial for employee stock ownership. We have piloted this in Shanghai International Port Group Co Ltd, SAIC Motor Corp Ltd and Shanghai Construction Group. Then according to SASAC’s arrangement, another 8 companies will carry out the reform in two batches. We hope that in this way, the core team members, including technological staff and managing staff, will link their interest with the enterprises and they can share the fruits of the enterprise reform as well.