Structure and Principles of SOE Governance

1. Structure and Principles of SOE Governance Peng Huagang, Deputy Secretary General, SASAC Nov 18,2016

2. Part 1: Reform Process Part 2: Current Framework and Functions Part 3: Reform Since 2015 Part 4: Principles

3. Part 1: Reform Process 1. Sectored model (prior to 1998) SOEs were supervised and administered by various ministries respectively. For instance, Shanghai Bao Steel Group Corporation of China (BAOSTEEL) was supervised by the former Ministry of Metallurgical Industry.

4. Part 1: Reform Process 2.Mutiple management (1998-2003) One SOE was supervised by various authorities. Taking BAOSTEEL for instance, its senior executives were appointed by Central SOE Work Committee, while its assets were supervised by Ministry of Finance, its investment and reform issues were administered by former State Planning Commission and State Economic and Trade Commission.

5. Part 1: Reform Process 3.Centralized (since 2003) SASAC, established by the central government in 2003 as a specially established authority to supervise and administer state-owned assets, performs the responsibility of investor of state-owned assets on behalf of corresponding level governments. At the central level, SOEs in industrial and commercial sectors are supervised and administered by SASAC. “Company Law” “Enterprise State-owned Assets Law”

6. Part 1: Reform Process 4.Further improved (since 2015) Change from “enterprise management” to “capital management” , establish or reorganize state-owned capital investment and operating companies, reform authorized operation mechanism for state-owned capital.

7. Three Changes Government do not administer SOEs directly, leaving them in a better place to perform social and public managementfunctions, so as to create a level playing field for players of various ownership. Change of government functions Sectored or multiple management models have been changed to centralized model by SASAC, in which unified optimal allocation of state-owned assets is more likely to be achieved. Change of authority Former administrative orders have been replaced by a way based on shareholders’ right, giving SOEs more autonomy to compete in the market on a commercial basis Change of management method 7

8. Part 2: Current Framework and Functions State Council ↓ Provincial Government Authorize ↓ Municipal Government ↓ Authorize SASAC Authorize Provincial SASAC ↓ ↓ Municipal SASAC ↓ Central SOEs Provincial SOEs Municipal SOEs

9. Part 2: Current Framework and Functions Responsibility as investor 3 rights of shareholder SASAC Supervision and administration of state-owned assets Unifying policies, guiding and supervising state-owned assets security, making overall plans

10. Part 2: Current Framework and Functions Main functions of SASAC 1. Approve articles of association for enterprises invested by the state; 2. Examine plan of development for enterprises invested by the state; 3. Recruit and select senior executives for enterprises invested by the state; 4. Manage issues of significance for enterprises invested by the state according to authorization; 5. Set up a mechanism for incentives and restraints through performance assessment; 10

11. Part 2: Current Framework and Functions Main functions of SASAC (continued) 6. Regulate the transaction of state property right/equity 7.Improve corporate governance 8. Enhance financial auditing and the role of supervisory panels 9.Establish a state capital budget system 10.Strengthen institutions via laws and regulations on state- owned assets 11

12. Part 3:Reform since 2015 Enhance supervision on state-owned assets by capital management • Promoting the function transformation of supervising authority of state-owned assets with capital management at the core. Clarifying the responsibility of investor, focus on a proper layout of state capital, standardized capital operation, higher capital return, and to ensure capital security. • Reforming the authorized operation mechanism for state-owned capital with capital management at the core. Reorganizing and establishing state-owned capital investment and operation enterprises, authorizing them to fulfill the responsibility of shareholders. • Encourage proper flows of and optimize the allocation of state-owned capital with capital management at the core. SOEs as market-oriented entities could enjoy inflows and outflows of state-owned capital, do certain things and refrain from doing other things. Optimize the layout of state-owned capital, establish and improve “survival the fittest” market exit mechanism. 12

13. Part 4: Principles 1.Separate SOEs from the general government, which means that the general government are no longer manage SOEs directly; 2.Separate ownership functions from social management function; 3.Separate ownership from business operations, strengthen state-owned assets oversight with capital management at the core. 4.Establish one organization which performs investors’ responsibility to achieve centralized supervision. 5.Follow the rule of the market, and make SOEs be independent market players.

14. Thank you!