Massive loss by China’s Sinopec unit raises tough questions on state owned enterprise reform

Massive loss by China’s Sinopec unit raises tough questions on state owned enterprise reform
Massive loss by China’s Sinopec unit raises tough questions on state owned enterprise reform

China's state owned enterprise (SOE) reform is facing fresh questioning as a state controlled company is almost certain to post the greatest financial loss among the country's nearly 2,800 A-share listed firms in 2016.

Sinopec Oilfield Service Corp, a Shanghai-listed unit of state-owned Sinopec, the top Asian crude refiner, is now the forerunner with an estimated loss of 16 billion yuan (US$2.3 billion). The preliminary result, released in its exchange filing on January 20, is very close to the record high 16.3 billion yuan loss registered by Chalco, the listed unit of China's second largest aluminium producer Chinalco, in 2014.

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The Sinopec background of its major executives, a workforce of more than 78,000 and heavy reliance on orders from the parent company indicates its inheritance of a typical SOE bureaucracy, where there is less motivation and capacity to adjust to a fast chang­ing business environment than at private firms or foreign peers.

Although a severe fall in oil prices has also been a key factor in the losses, the turn of events has greatly exposed the weakness of China's "national champions", including rigid management, high debt ratios, redundancy and making social responsibility a higher priority than profitability.

The fact that all the biggest losers in the past decade were large state firms, including Wuhan Iron & Steel Co in 2015, shipper COSCO in 2011 -2012 and China Eastern Airlines in 2008, is an awkward matter for top leaders and presents a pessimistic outlook for the country's reform drive.

China has launched a series of reforms since 2014, including experiments with mixed ownership, state asset investment holding groups, salary controls and merging SOEs in similar industries.

CNBC

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