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The State-owned Squeeze

As State-owned enterprises won praise for their quick switch to mask production and mobilized support during the coronavirus pandemic, private sectors now fear a possible retrogression in SOE reforms - leaving them even less room to compete

By NewsChina Updated Jul.1

The world was in awe over the speed in which China built Huoshenshan Hospital. Workers completed the modular building for 1,000 beds in 10 days in January to contain the spread of the coronavirus in Wuhan, Hubei Province, the first epicenter of the Covid-19 pandemic. Behind was the rapid response and mobilization of State-owned enterprises (SOEs), which kept excavators working day and night and construction supplies steadily flowing to Wuhan.  

SOEs were mobilized during the country's anti-pandemic efforts to provided essential services from building hospitals and transporting materials to supplying daily necessities and personal protective equipment (PPE) such as masks.  

SOEs shone in the crisis, showing that they could direct all their resources during an emergency. As China’s domestic Covid-19 fight draws to a close, private companies are restarting production as demand grows again. However, they are also increasingly vigilant of the power SOEs wield and their new market shares.  

Rally and Rescue
SOEs came to the rescue in January as China scrambled for masks following the outbreak of Covid-19 just as production capacity plummeted. According to market consultancy China Industry Research Institute, 353 companies are licensed to produce surgical masks. But because the pandemic broke out while the country’s workforce was home for the Spring Festival holidays, the lockdown orders compounded the challenge of starting up production and shutting down upstream and downstream companies essential to the supply chain. Working overtime and at full capacity, daily mask output was 8 million units. It was a tremendous gap in supply for a country with a population of 1.4 billion.  

The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) established a special work group in February mobilizing SOEs to ensure the supply of PPE and other medical equipment. Many SOEs, including military industrial firms like China North Industries Group Corporation, oil companies like PetroChina and Sinopec, and heavy machinery and food enterprises stepped up to fill the gap, from supplying raw materials to equipment or technical support.  

To ease shortages, for example, many SOEs began producing the melt-blown fabrics that medical-grade masks use to filter dust particles and airborne bacteria. PetroChina Petrochemical Research Institute took 15 days to R&D its own melt-blown materials and switch the machines to production. By February 28, PetroChina was making two tons a day. By February 29, the oil company had fired up its six fresh assembly lines. By March it added 21 more production lines for a total daily yield of 1.5 million masks.  

Sinopec, originally a polypropylene (PP) producer in the upstream of the mask supply chain, also became involved in producing melt-blown materials, fabrics and masks to further guarantee supplies. 

“We mobilized all our resources and channels to produce whatever the country needed, from masks, PPE, disinfectants, petroleum products and gasoline at a moment’s notice,” said a manager from PetroChina who requested anonymity.  

Sinopec and PetroChina gas stations are providing a new outlet for people to buy masks.  

Thanks to these switches to mask production, by the end of February, the daily output of masks (both surgical and N95) rose to 116 million, 12 times the capacity on February 1, according to the National Development and Reform Commission (NDRC) on March 2.  

Guo Peiyuan, founder of SynTao, a consultancy focused on corporate social responsibility, told NewsChina that this “rescue operation” spotlighted the unique strengths of SOEs to function during an emergency, despite handling other products and services in normal times. 

In an online forum held by Jilin University on March 8, Zhang Huiming, an economics professor from Fudan University, said that SOEs showed their competence including integrating resources andrisk tolerance amid the anti-pandemic efforts, whether in building hospitals or supplying PPE. Several experts commented that their performance showed the institutional advantages of SOEs under socialism. 

Excess Capacity
But gradually problems emerged. Huang Qunhui, director of the Institute of Economics at the Chinese Academy of Social Sciences, said that while the quick shift to mask production shows a sense of duty among SOEs, capacity changed as private enterprises rushed to the market.  

By the end of March, daily mask output surpassed 200 million, reported All Weather TMT, a new media outlet focusing on technology. 

Before the outbreak, that number was only 20 million, according to statistics from China’s Ministry of Industry and Information Technology.  

Meanwhile, demand both at home and abroad will gradually drop to previous levels as the pandemic comes under control in the next months. So where should the extra masks go?  

An oversupply is already evident in falling mask prices. On some online platforms, the price of a single-use mask dropped from about 7 yuan (US$1.10) in January and February to around 1 yuan (US$0.14). 

To encourage production, the NDRC pledged in February that the government would purchase excess masks as the pandemic ends. But most SOEs involved have not yet announced plans to absorb overcapacity or deal with their newly built assembly lines. 

Meanwhile, some have called on SOEs to stop flocking to mask production, which is not their principal job, and to leave room for private companies. 

According to Huang, the market should correct this problem. Market mechanisms work for both State-owned and private enterprises, so if producing masks remains profitable, SOEs could compete with private enterprises or return to their sectors and sell off their PPE assembly lines. 

“It’s all up to the companies’ judgement of the market, which doesn’t have to do with ownership,” Huang said. 

Face masks produced by China National Petroleum Corporation are now available at gas stations

Blurred Lines
The advantage SOEs had over private enterprises during the pandemic raised concerns about changes or even setbacks in ongoing market-oriented SOE reforms that aim to level the playing field regardless of ownership. 

The past four decades saw tremendous effort from China to steer its sluggish SOEs into a market-oriented orbit with more autonomy, modern corporate hierarchies and mixed ownership reforms through injections of non-State capital.  

But questions remain as how to ensure fair competition between SOEs and private companies. Particularly, the specific functions of SOEs, a concern of private enterprises, have been vague. 

SOEs play a complicated role. The central government expects them to shoulder social responsibilities during crises and remain competitive on the market at other times. For example, despite SOE contributions in coronavirus control efforts, Hong Bin, vice director of SASAC, said in February that the council would not adjust its economic goals set at the start of 2020. This means SOEs still have an uphill battle to fight after the pandemic subsides.  

“More often than not, SOEs are stuck in a dilemma too. They are always expected to be an all-round player, able to shift freely between multiple roles, controlling the country’s economic lifelines or fully taking part in market competition, and wearing different hats at different times,” a manager at an SOE who requested anonymity told NewsChina. 

But this vagueness means uncertainty for private enterprises, as SOEs from any field could enter their markets whenever deemed necessary, just as they did during the pandemic.  

To address this problem, authorities proposed classifying SOEs between those that principally deal with public welfare and utilities (oil, electricity and gas), competitive markets (steel, food and automobiles) and a “mixed mission.” 

As early as 2011, Shao Ning, then vice director of SASAC, suggested that SOEs gradually adjust their focuses to either public welfare or making a profit to prevent abuse of their monopolies, and take on risk of bankruptcy and join in market competition more fairly.  

In September 2015, the State Council released an SOE reform guideline that proposed dividing SOEs into two categories, “commercial” and “public welfare,” for more targeted reforms and development. Commercial companies are divided further into those in competitive industries, and those in fields pertinent to national and economic security.  

“Now the difficulty lies in categorizing SOEs with a mixed mission: What companies qualify and when should they serve the public or play a role in market competition? Reforms are hard to realize without answering these questions, and also mean uncertainty for private enterprises,” Huang said.  

As SOE reforms continue, there is concern and controversy over the development space for private enterprises, particularly in areas where SOEs have clear strengths and advantages. SOE classification would help to ease these concerns, a reason for the anticipation surrounding the upcoming three-year action plan for SOE reform, which aims to set goals and timetables and address unresolved issues. 

Originally slated to roll out in the first quarter of 2020, the plan has been submitted for approval, Peng Huagang, secretary general of the NDRC, said at a press conference in April.

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