Tightening grip over SOEs? China orders state-run companies to make profits

China has taken the unusual step of ordering its biggest state-owned enterprises to earn profits this year as the government increases its scrutiny of bloated businesses, according to people familiar with the matter.

The State-owned Assets Supervision and Administration Commission told senior executives on Jan. 15 about the edict, which will apply to all of the nation’s 98 central SOEs, according to the people, who asked not to be named because they weren’t authorised to discuss the matter with the media. It was the first time in recent memory that the government made it mandatory for SOEs to make profits, they said.

It wasn’t immediately clear what the repercussions would be for noncompliance. Though individual breakdowns aren’t available, combined profits in 2017 at central SOEs, some of which rank among the world’s biggest companies, rose 15 percent -- their fastest pace in five years -- to a combined 1.4 trillion yuan, ($219 billion), according to Sasac, which oversees the nation’s SOEs.

The move represents the latest sign that the Communist Party is tightening its grip over the country’s $24 trillion SOE sector as President Xi Jinping calls for them to become "stronger, better and larger" in the next five years. The government has been seeking to overhaul SOEs for years to bolster the economy as state enterprises command about 40 percent of China’s industrial assets and create nearly 20 percent of urban employment.

Sasac didn’t immediately reply to a faxed query seeking comment. According to the regulator’s website, Sasac urged executives during last week’s gathering to uphold their allegiances to the party and transform their companies into globally competitive giants. The rule on making profits wasn’t mentioned.

Central SOEs are the ones managed by the central government. Including those managed by lower-tier municipalities, there are more than a hundred thousand SOEs across China.