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.
None, at least so far, are comparable to the harsh moves two decades ago.
The iron-handed Premier Zhu Rongji shut thousands of small state firms and laid off millions of workers in the late 1990s. By the time the State-owned Assets Supervision and Administration Commission (Sasac) was set up in 2003, the number of central- government-owned firms had fallen to 196, mainly concentrating in a few sectors like finance, telecommunications, defence, energy, materials and automotive equipment.
The halt of management buyouts amid the controversy of state asset losses turned around the reform process in 2005. Instead, those giants saw new business expansion amid the country's national champion strategy.
Their expansion, fed by cheap bank credit and easy access to new markets, has squeezed the development room of private firms and, in the meantime, generated huge debt.
"The problems of SOEs come out as the economy slows down and they may worsen as the tide of liquidity fades," said Zhang Jun, chief economist of Huaxin Securities, the mainland joint venture of Morgan Stanley.
The current reforms were slower than market expectations and could not be completed in one or two years, he said.
The merger between state companies has not yet been translated into high profitability, while the trial of mixed ownership reform, a kind of privatisation, has also stalled.
"There will be no meaningful reforms before the Party National Congress later this year," said Liu Shengjun, deputy director of CEIBS Lujiazui Institute of International Finance, a Shanghai-based think tank, citing the leftist ideological trend.
"SOE reform is more a political than economic issue in China," he said.
The order of Chinese President Xi Jinping to enhance the party leadership last July is a reminder of the fact that SOEs are defined as the foundation of Communist Party rule and their importance can't be weakened.
Li Jin, chief analyst of the China Enterprise Research Institute, said that the situation of "lots of talk but few actions", indicating huge opposition from vested interest groups.
"In 2017, China will continue to split non-core business, force the bankruptcy of continuously loss-making subsidiaries and save some of them through debt-to-equity programmes," he said.
Other developments could include efforts to reduce the bureaucracy in line with Xi's party discipline campaign.
Wang Yixin, the vice governor of Shanxi, complained this week that a local coal mine had between 1,000 and 2,000 director-level officials.
Last May, Beijing ordered state firms to trim their management to three or four layers and cut subsidiaries by a fifth in three years.