We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2017, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

By clicking Proceed I confirm I have read the important information and agree to the terms of use.


The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

China SOE reform

Transfering state wealth to savers

Home / Perspectives / china-soe-reform-transfers-state-wealth-to-savers

Kunjal Gala, Co-Portfolio Manager, Wholesale Products
22 January 2016
ArchivedEmerging Markets

China’s much-anticipated reform of social security and state-owned enterprises marks an important step in the shift to more sustainable growth, further improving the long-term outlook for Chinese consumption and domestically exposed industries despite the current market volatility.

As we have previously noted (1), China’s state-owned enterprises (SOEs) and social security system have been in the sights of the authorities for some time, who understand that reforming them will help smooth the trajectory of the Chinese economy. However, progress has proved to be painfully slow, as bureaucracy and political infighting have caused friction.

In the second half of 2015, the Chinese government finally began taking meaningful steps. In September, it announced the division of SOEs into two pools: those seeking profit and those focused on public welfare. Two months later, it advocated handing the governance and supervision of commercial SOEs to a “Temasek-style” investment company, or an assortment of such companies, which will have responsibility for restructuring and increasing the value of these SOEs. (1)

There are 150,000 SOEs in China, with over 100tn RMB ($15.7tn) in assets. Since the global financial crisis they have exhibited worrying levels of operational inefficiency, recording a 4.6% return on assets in 2014 versus a private-sector average of 9.1% (2). Improving these inefficiencies should contribute to the ongoing transformation of the Chinese economy, even amid the current volatility.

Capital to the people
The government’s holding company would manage the equity of profit-seeking SOEs, monitor their management teams and improve operations, as they attempt to produce better returns on state capital. They would do this by better incentivising management, overseeing capital allocations and providing industrial support. In its guidelines, the State Council indicated that these companies would also be expected to dispose of inefficient assets, with a focus on breaking up “zombie” SOEs and those with excess capacity.

Capital released by the disposal of the most unproductive SOEs, alongside savings from reduced investment in others, would be reinvested in major infrastructure projects, newer industries, the industrial supply chain and firms with “strong competitiveness,” according to the State Council (3). However, some of the capital released by the restructuring will be distributed into social security funds, which currently have a significant shortfall in assets – particularly pension funds for people without access to retirement savings vehicles, or those who cannot afford to contribute to one.

Greater social security means more consumption
Chinese social security reserves have been under strain for some time. China’s state pension programme was launched in 1997, but was only expanded to a broad proportion of its citizens through reforms in 2009, 2011 and 2014. These reforms put the programme’s capital shortfall in the spotlight, with a reported unfunded liability of $5bn (¥31.9bn) in 2014 (4), which has grown as the ratio of active to retired workers continues to shrink. The transfer of state assets should help to plug this gap.

Part of our investment case for China is the growth of domestic consumption, which in the short term is partially offsetting declining Western demand for exported Chinese goods, and should be a force for sustainable growth in the long term. While consumption is growing, it has been limited by the lack of social security available in certain parts of the country. In urban areas, where social security is more widely available, consumption growth has been steady; in rural areas with looser social security nets, it has been lower. The additional funding for social security provided by the SOE reforms should help redress this balance, improving the outlook for companies exposed to domestic consumers.

Easing the pension burden for companies
A broader benefit of this transfer of capital is a reduction in corporate pension burdens. At present, China’s 20% basic pension contribution rate, funded through a combination of payments from employees and employers, ranks in the top 10 among all nations. When this is combined with other benefits, companies pay out 44% of wages in the form of social security contributions. With the proposed capital transfer, the basic pension contribution rate could be reduced by as much as a quarter to 15%.

Governance groundswell
The reforms should also have a ripple effect on corporate culture and competitiveness. As a controlling owner of state assets, the proposed investment company would likely encourage better corporate governance as it works to improve SOEs. Meanwhile, as the new holder of substantial SOE equity, the National Social Security Fund would also support stronger governance standards by focusing on return on capital and taking a hands-off approach to management, which would be a clear departure from the current situation.

13m hukou for the migrant workforce
These reforms are only one aspect of ongoing social change in China. A month after announcing the boost to pensions for those without contributions, the Chinese state announced that it would allow residency permits, known as hukou, for about 13m unregistered workers in cities (5). This will allow these predominantly rural migrants to access state benefits, such as education and healthcare, in the areas in which they reside and work, rather than those in which they were born. As such, this change will help improve productivity, as workers are more likely to settle in urban areas and establish fuller lives with their families, further increasing consumption and demand for services.

China’s economic and political reforms are increasingly important as it seeks new ways to compete beyond cheap manufacturing. With a broader distribution of wealth through stronger social security, and more efficient and competitive industrial companies resulting from corporate reform, the prospects for the long-term sustainable growth of the Chinese economy continue to improve.

This information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

1. “Opinions on the Reform and Improvement of State-owned Assets Management System,” published by the State Council on 4 November 2015.
2. “China’s state-owned enterprise reform plans face compromise,” published by The Financial Times on 14 September 2015.
3. “Opinions on the Reform and Improvement of State-owned Assets Management System,” published by the State Council in November 2015.
4. “Expert urges pension reform over earlier-than-expected deficit,” published by China News Service ( on 19 November 2015.
5. “China wants hukous for its 13m unregistered citizens,” by Shannon Tiezzi. Published by The Diplomat on December 10, 2015.

The views and opinions contained herein are those of Hermes Emerging Markets, and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products. The information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. The information herein is believed to be reliable but Hermes Fund Managers does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion.

Share this post:
Kunjal Gala Co-Portfolio Manager, Wholesale Products Kunjal Gala joined Hermes in 2012 as part of the Emerging Markets team, focused on Asia ex Japan. He joined from Her Majesty's Government, where he worked from October 2008 as an assistant director in The Shareholder Executive, the in-house portfolio management and corporate finance arm of the UK Government. Prior to this he was a senior financial analyst at Morgan Stanley Investment Banking from December 2004, responsible for both business development and execution of M&A and strategy mandates within the consumer products coverage banking team. Previously he worked for Thomas Cook (India) in the management information systems division (September 2003), and PricewaterhouseCoopers in the Assurance and Business Advisory Service (August 2001). Kunjal has a Bachelor of Commerce from Mumbai University and is a qualified Chartered Accountant from the Institute of Chartered Accountants in India.
Read all articles by Kunjal Gala

Find posts by author

  • Alex Knox, ACA
  • Amy Wilson
  • Andrew Jackson
  • Andrew Parry
  • Andrey Kuznetsov, CFA
  • Audra Stundziaite
  • Claire Gavini
  • Dr Michael Viehs
  • Elena Tedesco
  • Emeric Chenebaux
  • Eoin Murray
  • Gary Greenberg
  • Geir Lode
  • Geoffrey Wan, CFA
  • Hamish Galpin
  • Harriet Steel
  • Ilana Elbim
  • Ingrid Holmes
  • Jonathan Pines, CFA
  • Joseph Buckley
  • Kimberley Lewis
  • Louise Dudley
  • Mark Sherlock, CFA
  • Martin Todd
  • Maxime Le Floch, CFA
  • Michael Russell, CFA
  • Michael Vaughan
  • Mitch Reznick, CFA
  • Neil Williams
  • Nick Spooner
  • Nina Röhrbein
  • Patrick Marshall
  • Peter Hofbauer
  • Philip Nell
  • Saker Nusseibeh
  • Silvia Dall’Angelo
  • Tatiana Bosteels
  • Tim Crockford
  • Tim Goodman
  • Tommaso Mancuso
  • Yasmin Chowdhury

Find posts by category

  • archived
  • emerging markets