Control on SOEs to be tighter to avoid risk
(China Daily)
Updated: 2004-12-14 00:59

The central government plans to keep tighter controls on State-owned enterprises (SOEs) that fall directly under the State Council's umbrella, an official said at a work conference on the central SOEs in Beijing.

The move follows China Aviation Oil (Singapore) Corp's loss of US$550 million in speculative trading.

"Leaders of the central SOEs must have a strong sense of risk management to maintain sound development," said Li Rongrong, minister of the State-owned Assets Supervision and Administration Commission (SASAC), the watchdog that acts as the State owner of these SOEs.

"Had we had a sound internal auditing and risk management system, the incident of China Aviation Oil (Singapore) could have been avoided."

The company, which is listed and headquartered in Singapore but primarily-owned by the Chinese mainland Aviation Oil Holding Co, racked up huge losses after gambling on the movement of oil prices.

To prevent something like this from happening again, a slew of supervision regulations focusing on subsidiaries of big SOEs will be released next year.

As part of the new plan, a supervisory committee will play an increasingly important role in protecting State-owned assets. SASAC is working on a system to track liabilities after investment blunders.

"A timely reporting system on big investment decisions and a performance evaluation system will also help fence off various risks that enterprises may come across," Li added.

Currently, detailed risk analysis for investment is drawing more attention among big SOEs leaders. Decisions on high risk investments, such as futures, should be more deliberate.

"We have to make an overall risk evaluation before making a big decision," said Hu Zhanyun, president of management commission of Ernst & Young (China).

"Leaders of enterprises should keep a close eye on their capital and cash flow."

To better control the internal risks, Hu pointed out that the annual report and balance sheet should receive more attention.

"Leaders of enterprises tend to attach most of their attention to sales revenue but neglect the importance of their financial performance," Hu said."A well-developed restraining scheme among interest groups can also prevent potential risks."

Li Rongrong echoed Hu's viewpoint.

"A sound corporate governance and an effective restraining scheme are the two fundamentals for a solid risk management system."

Despite the lagging risk management system, China's big SOEs reported a profit hike of 419 billion yuan (US$50.5 billion) in the first ten months of 2004, up 53.2 per cent.

Theses enterprises, the flagships of their industries, realized accumulated sales revenue topping 4468 billion yuan (US$538 billion) by October this year, an increase of 29.2 per cent on a year-on-year basis.

Their assets quality and management efficiency were further improved, with the total assets of 186 big SOEs hitting 9,215 billion yuan (US$1,110 billion), a jump of 10.5 per cent.

Li Rongrong said that rosy growth in profits and turnover of these firms laid a solid basis for the central government's macro-controls and overall economic development.

But behind these rosy figures are also structural problems they have to tackle, including a bottleneck in resources, excessive expansion in some industries and rising prices for production materials.

"Enterprises should not be complacent with the achievements," Li said. "A close look on the source of those profit hikes shows that we are still lagging behind in terms of technical innovation and management improvement."

The growing domestic demand, expansion of production scales and soaring sales accounted for 42.8 per cent of the total profit.

Price hikes in production materials brought about 37 per cent of profit.

Only 20.2 per cent of profit came from management optimization.

Moreover, seven big SOEs involved in energy, telecommunications and transportation contributed 66 per cent of profits while other SOEs were still plagued by losses.

Shareholding restructuring, bettering corporate governance, building up stronger core businesses and gradually withdrawing from side businesses remain the key issues of SOE reform in 2005.

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