I'm Robert Lawrence Kuhn, and here's what I'm watching: The continuing need to "deepen," as they say, reform of state-owned enterprises, SOEs.

In 2021, SOE assets accounted for nearly 60 percent of China's total assets and SOE revenues accounted for almost 70 percent of China's GDP.

While SOEs have historically and notoriously been less efficient than private businesses in returns on assets, leadership has been consistent in calling for SOEs to become "bigger, better, stronger" – for both economic and political reasons, such as strengthening their competitiveness in global markets.

As foundational pillars of China's economy, SOEs can execute government policy more swiftly, enabling leadership greater control of the economy, both to accelerate industrial transformation and to mitigate potential risks. At last count, there were 98 SOE behemoths controlled by the central government.

"Two unwavering principles" are stressed in the report to the 20th CPC National Congress: Improve the core competitiveness of state-owned enterprises, and optimize the development environment for private enterprises.

Specific policies call for rectifying arbitrary fees, fines, and assessments, and for solving the problem of SOE accounts payable in arrears – as SOEs, owned by the state, seem to feel less of an obligation to pay their bills and service their debts owed to the state, a common practice leadership is determined to change.

Reform of SOEs specify diverse measures: board responsibility, including private investors in mixed-ownership models, and encouraging enterprises to dare to venture, dare to invest, dare to take risks, and actively to create markets.

Earlier SOE reforms, in process since reforms began in the late 1970s, included managerial methods, corporate and control systems, and oversight and supervision of state-owned assets.

More recent reforms included mixed-ownership and state-owned capital investment companies. Current reforms stress core functions of SOEs, such as focusing on key technologies and expertise, internal and external digitalization, strengthening corporate governance, providing employee incentives, prioritizing profitability and cash flow, and designing new valuation systems –all to enhance SOE market competitiveness.

Preference is now given to innovation SOEs with specialized, sophisticated technologies and novel, practical products.

A challenge to the strategy of using SOEs to develop, upgrade and spearhead leading-edge technology, high-end manufacturing and the digital economy is the experience of advanced industrial economies, such as the U.S., where breakthrough technologies and transformative products more likely come from small and medium-sized entrepreneurial enterprises.

On the 2022 Fortune Global 500 Rankings, China had the most firms, beating those of the U.S., 136 to 124, China with more firms on the list than those of Japan, Germany, France, and United Kingdom combined.

Chinese firms had the largest combined assets but the lowest profitability in terms of profit margins and returns on assets. It is worth noting that 71 percent of the Chinese firms in the Fortune Rankings are state-owned, representing 78 percent of total revenue and 84 percent of total assets.

A good way to assess and to forecast China's economic performance, is to track SOE reform and profitability.

I'm keeping watch. I'm Robert Lawrence Kuhn.

Script: Robert Lawrence Kuhn

Editors: Xiao Qiong, Hao Xinxin

Designer: Qi Haiming

Producer: Wang Ying

Chief Editor: Wei Wei

Supervisors: Xiao Jian, Adam Zhu

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