The reform of China's SOEs has been a key part of the country's economic restructuring. As China will experience a leadership transition later this year, the course of the reform has become a concern for both top decision-makers and the public.

A healthy economy requires three aspects: clarity of ownership, equal status of market players, and a complete legal system. They all combine to ensure equal competition in the market.

Although SOEs are, in theory, owned collectively by the Chinese people, the profits have been captured by some local governments or certain interest groups. This is a severe impediment to the reform process.

Meanwhile, many private enterprises and foreign companies don't enjoy equal opportunities with SOEs to compete in the market. In other words, both clarity of ownership and the equal status of market players are lacked.

The incomplete legal system also poses a challenge to the proper running of SOEs. For example, SOEs are rarely included in the application of the anti-monopoly law, which took effect in 2008.

All of these problems have led to unequal market competition, which may result in flaws in the market or even social instability. 

China has some previous experience in boosting the reform of SOEs. In the 1980s, China's SOEs comprised 80 percent of the whole economy. But by 2004, the figure had declined to 30 percent after decades of reform and opening-up.

Nonetheless, reforms still need to be carried out.

First, restrictions on the number of SOEs, the various industries involved, and on private interests are necessary steps for the reform of SOEs.

In fields where the market economy cannot function, we should allow SOEs to play a role. But in highly competitive industries such as services and commodity-trading, we should let market rules regulate their development. 

For instance, some service organizations associated with SOEs, such as sanatoriums and training centers, can be opened up to the market, which would help with using these assets better.

Most facilities at such sites can only be enjoyed by senior management staff or officials, making these areas the breeding ground of corruption.

Moreover, the personnel appointment system in SOEs should be improved. Some senior management staff always come from an official background. This may breed underground exchanges of money and political power. Reforms should seek to have SOEs adhere to the modern company governance structure and make them independently governed.

Last but not least, SOEs should break up their ownership. The State only needs to have a certain share of any enterprise, not to completely control it. This would help reduce not only the burden of the country's SOE management cost, but also the subsidies granted to SOEs.

Experts have been calling for the integration of private assets into the State-owned monopoly industries but little has been done.

SOEs have been facing the problems of structural imbalance and market deficiency. One third of SOEs are losing money, and a quarter of them are at the edge of bankruptcy.

China's market economy status under the WTO will be assessed in 2016. By then, China is supposed to have transformed into a complete market economy.

The proportion of SOEs has become a concern of the global market. If we don't tackle the problem, we will always face anti-dumping, countervailing, and protectionism actions from other countries.

The challenge for China's new leadership is to explicitly point out the direction of the reform for SOEs. In China's next five-year plan, only a reform that makes fundamental changes to the system can sustain China's economic development.

The article was compiled by Global Times reporter Wang Wenwen based on an interview with Liu Baocheng, associate professor at the Business School of the University of International Business and Economics. wangwenwen@globaltimes.com.cn