Why China Should Move State-Owned Enterprises Out of Beijing

  Oct 19, 2015 Gordon Orr/ Non Executive Board Member: Lenovo, Swire Pacific We have heard lots of SOE reform announcements recently, but we have seen much less action. I recognize that many of the proposed changes are hard, they require changes in skills and behaviors and face lots of day to day resistance. I would like to propose an additional "big bang" move for Chinese government consideration, one that I believe could be achieved through top-down direction and which would have real economic impact across the country:  Move the headquarters of national level State-Owned Enterprises out of Beijing. Spread them out around the country across second and third tier cities. Give each city one or two SOEs. Don't just move the mailing address; move the top executives and all the extended workforce that work in their headquarters.  I recognize some may choose not to move, but that's a benefit too. Let them go and don't replace them. And track where top executives spend their time; at least 250 days a year should be spent in the new headquarters city. This would be a win for the receiving city, a win for Beijing, a win for the company, and for central government. Here is why:

Receiving City The first thing leadership of the SOE will do is to construct an appropriately large new headquarters for itself. These national level SOEs have access to capital so no constraints there. Building the new headquarters will give a nice boost to the local economy.  Moreover, moving so many well paid staff into the city that need somewhere to live will stimulate the local property market. Passenger flow through the local airport will be boosted (many are way underused today). And depending on how taxes on the SOE are allocated, local government could receive a fiscal boost. If the receiving city has a university, having a national level SOE headquarters nearby should increase the chance of keeping students in the city once they graduate. On an ongoing basis, local government might expect 2-3 jobs to be generated for every SOE headquarters role moved to their city.

Beijing Less pressure on roads and public transport, less pressure on housing, opening up significant areas of commercial real estate to private sector users who might actually pay market rents. This would be an opportunity to radically remake Beijing into a city less car dependent than it is today.  Could parts of the city be made more pedestrian friendly, more personal in scale? Certainly, there would be a period of adjustment as current headquarters buildings empty out, but the end result would be worth it. The space opened up could be filled by current and future entrepreneurs. Many likely would be graduates of Beijing's universities. If some of the talent in the HQ of SOEs chooses not to move, then likely they will move into the private sector in service industries, giving this sector a further boost.  

The State-Owned Enterprise Top management would find they have much more time to focus on leading the business as they could not be pulled into meetings at the Ministry at short notice as they are today. Indeed, they might find themselves much closer to the actual operational parts of their businesses – factories, mines, call centers and the like. Not all their staff would move, the SOE could let them leave graciously and so reduce part of their overstaffing. To the extent they do need to rehire they will be able to find younger and much less costly graduates in their new HQ city.  

Central Government Many SOEs have their headquarters in Beijing as a result of history. They were spun out of their Ministry to become corporations many years ago. Everyone was already in Beijing and communications were pretty poor, so it made sense to just stay close, and we see the result on Changan Avenue today. Creating a physical distance between regulator and operator would push regulators to be more medium term and metric focused in their oversight, rather than engage in the daily tactical interventions that take place today. The government would be seen to be doing something very beneficial for the regions and second tier cities, giving them a major economic boost at a time when they need it.  * * * I am sure versions of this suggestion are circulating in the corridors of government in Beijing. It would be great to see something like it happen.