China's SOE regulatory body signed a contract with the presidents of 30 central State-owned enterprises yesterday, linking the salaries and bonuses of those presidents with the profitability of their enterprises.

According to the State-owned Assets Supervision and Administration Commission (SASAC), the watchdog that acts as the State owner of central SOEs, the performance assessment scheme follows an effort to improve the incentive systems of these enterprises.

"SOE leaders will have to make concrete commitments to the public on the efficient management and application of State-owned assets," Li Yizhong, vice-minister of SASAC, told a SOE work conference in Beijing yesterday.

The 30 enterprises, such as China National Offshore Oil Corp, State Development & Investment Corp and China National Cereals, Oil & Foodstuffs Corp, involve a variety of industries.

"In line with the contract, the total profit of those enterprises in 2005 is expected to hit 82.4 billion yuan (US$9.9 billion), an increase of 75.6 percent compared with the performance goal of 2004," Li said.

The general aim of these enterprises from 2004 to 2006 is to achieve a 10.48 percent appreciation of the value of the State assets they manage. And average growth of their core business is likely to top 8.4 percent.

Most of the leaders of central SOEs that have not signed the performance contracts with SASAC are expected to sign the contract before the Chinese Lunar New Year. For the first time, SASAC will also give an overall performance assessment of SOE presidents during their tenure.

"Compared with the performance assessment scheme last year, the new one introduced more indices," Li said.

Firstly, SASAC will focus on the sustainable development ability of these SOEs, making them achieve a balance between short-term profit and long-term development. To avoid SOEs pursuing the maximization of short-term profit, the appreciation rate of State assets will be one of the major indices.

Secondly, more emphasis will be put on SOEs' core business performance. To sharpen SOEs' core competitiveness with limited capital, SASAC has set a three-year average rate of increase on the income of SOEs' core businesses.

Thirdly, SASAC is paying more attention to the assessment of SOEs' weak points, especially on intensive energy consuming industries.

To help some of the 186 SOEs under the central government invest overseas and compete with international business giants, Vice-Premier Huang Ju stressed the importance of research and development (R&D).

"Compared with foreign giants, our companies' investment in R&D is poor," Huang said.

On average, overseas multinationals will invest 5 percent of their operational income in R&D. But the rate for China's major SOEs stands at 1 percent and about 75 percent of such SOEs spend less than 1 percent of their operational income in this field.

The comparatively low investment in R&D will put SOEs in an unfavorable position when competing with their foreign counterparts.

Currently, China has achieved initial success in implementing its "go-out" strategy to push the growth of an export-oriented economy and investment overseas.

Earlier reports said the government had already mapped out a plan to help set up hundreds of multinational enterprises of various scales. By 2015, the aim is to have 50 Chinese enterprises among the top-500 in the world.

As for management buy-out (MBO), Huang reiterated that big SOEs are not allowed to execute MBOs.

MBOs, to some extent, do improve the vitality of enterprises. However, accompanied are such irregularities as self-interested dealing and insider trading.

Some individuals try to transfer the risks of the transaction to the buy-out target or financial institutions by using State equities and assets as guarantees for financing. Some practices also harm the rights of investors and employees.

(China Daily December 16, 2004)