China state-owned enterprises (SOEs) from an ESG perspective

China state-owned enterprises (SOEs) from an ESG perspective

The global phenomenon of Environmental, Social and Governance (ESG) investing has made waves across Asia, gaining recognition from Chinese investors. Increasing awareness among communities and governments has led to a demand for bonds that fund social projects and initiatives. We see state-owned enterprises (SOE) as a sector facing unique risks and opportunities in ESG investing. The prevalence of SOEs in China and regulatory developments have created needs and challenges reflecting the characteristics and rising trends related to SOEs and their ESG performance. Here, we explore the impact of ESG on the SOE sector from various perspectives and the opportunities of this growing investment trend.

The ESG perspectives to analyzing SOEs are:


Clean energy agenda: China's development in renewable energy over the past two decades is largely a result of long-term policy planning and strong incentives. While China has the highest proportion of coal in its energy supply mix among major nations, its clean energy agenda and step-up in its climate goals will continue to drive the sector’s growth in the next few years. Chinese President Xi Jinping announced the government’s new target for carbon dioxide emissions per unit of GDP to decline more than 65% in 2030E compared to that of 2005. Non-fossil energy will account for about 25% of China’s primary energy consumption, up from 15.3% in 2019 (see Figure 1). We expect renewable energy including hydrogen to feature prominently in next year's 14th Five-Year Plan (FYP), with investment in innovative technology and domestic supply chains. 

Figure 1: China’s primary energy mix from renewables

Most Chinese large power companies are state-owned and many of them have set ambitious renewable capacity expansion plans on the back of the above government policy direction. These plans include: i) contracts to build 39GW new renewable energy projects have been signed by them; ii) five large SOE power generating groups including Huaneng (HUANEAN), SPIC (POWINV), China General Nuclear Power Corporation (CHGDNU) and China Three Gorges (YANTZE) have previously drawn up a total of 220GW new energy projects in their "14th Five-Year" plans1; and iii) SPIC has signed to develop 21GW+ new energy projects planning to achieve its “carbon peak” in China ahead of schedule by 2023E.2 Most of the SOE power companies are coal-fired and scale oriented, so they are all eager to add new renewable capacity funded by ample lending from major domestic state banks. In light of these developments, the environmental scores of the SOE power generating companies will likely gradually improve from a lower base.


Social responsibilities: As compared to a privately-owned enterprises (POE), some SOEs — mainly local government financing vehicles (LGFVs) — carry out public policy projects which are typically not meant to generate meaningful economic returns because of the public policy mandate of the investment. Typical public policy projects undertaken by SOE/LGFVs include urban infrastructure, primary land development, shantytown renovation projects, affordable or resettlement housing, and various civic and utility services (such as mass transportation infrastructure and services, water, sewer, navigation infrastructure, public education, culture and sports, and health-care facilities). However, maintaining infrastructure and delivering public services are part of the governments’ responsibilities and should reflect positively on the social scores of these SOEs/LGFVs.

The majority of China's 31 provincial-level governments published updated lists of state-led projects in March 2020 (see Appendix I), including new spending on public health projects. These have a combined total cost of almost RMB42trn, including RMB6.4trn for 2020 (equivalent to 6.5% of national GDP), according to Moody’s calculations3. Infrastructure related SOEs, LGFVs, and private-public partnerships (PPP) will continue to play an important role in financing regional and local governments’ infrastructure spending.


Board representation vs government oversight: The most common governance concern related to SOEs include a lack of majority on the board qualifying as independent and CEO equity pay incentive policies. Nevertheless, we believe the key mitigant of a controlled/ less independent board is strict oversight from the government or State-owned Assets Supervision and Administration Commission of the State Council (SASAC). The Chinese government plans to balance the state goals and commercial goals of SOEs. Since SOE reforms have been carried out (see Appendix II), SASAC has set annual targets (like deleveraging as measured by total assets/ total liabilities) and performance measurements (including top line and bottom line) for SOEs. The targets and measurements for SOEs vary subject to different industries and/or whether the SOEs are “commercial- oriented”/ “public-oriented”. Regarding financial policy, deleveraging of SOEs is likely to slow down temporarily as authorities emphasize growth over deleveraging to counter the economic impact of the pandemic. We also continue to monitor the progress of the reforms and changes in the regulatory environment.

Another evidence of SASAC oversight would be related to anti-corruption practices. Management or board reshuffles happen often among SOEs. One of the reasons for shuffling the boardroom deck is to prevent any individual from developing entrenched patronage bases, which the Chinese government believes contributes to corruption. Anti-corruption campaign has been a defining initiative of President Xi’s term to improve governance at the party and local levels. The anti-corruption campaign has investigated and removed from office many SOE senior officials/board members of those strategic sectors. However, the institutional mass of the SOEs did not appear to be significantly affected4. We expect improved sentiment as the anti-corruption and governance campaigns continue, although coming from a low base and led from the top.

Assessing governance risks of SOEs include considerations of both the private sector and public sector, given that SOEs carry out some government mandates. The governance considerations differ materially between the public and private sectors (see Appendix III using Moody’s approach), primarily given the much broader role of governments, differences in the stakeholders involved, and contrasting organizational structures5. The governmental attributes of SOEs also vary between commercialized SOEs’ governance considerations are more similar to private sector issuers, while the “public-oriented” ones (mainly LGFVs) in general, have a heavier weight in public sector’s governance considerations. We can assign two initial scores to both a SOE (based on its private sector attributes) and the owner government which provides government support to the company (e.g. Central SASAC - based on its public sector attributes). We can then take the weighted average of the two scores to derive the final governance score of the SOE.

Government governance driving the SOE score: Governmental bodies that have demonstrated a track record of strong oversight and defined administrative tiers (see Appendix IV) can be an important factor to determining their governance performance , which in turn drive the governance scores of their SOEs. Historically, governance and monitoring efforts of regional and local governments have been led from the top. The central government or municipals in the more advanced regions have demonstrated a more solid track record of oversight and governance as compared to other regional and local governments. Historical events like inflating fiscal data, official corruption/ misconduct and inconsistent policy enforcement can be indicators of poor governance of certain local governments. On the other hand, transparency is, in general, weaker for lower-tier regional and local governments as the disclosures at those levels are more limited than at the provincial level6. Hidden debt is also mostly concentrated among lower-tier local governments. That said, the trend is improving. The People's Bank of China (PBOC) published its 2018 financial stability report, which shows that “hidden debt” in an unnamed province was 80% higher than its explicit debt. After that, the Ministry of Finance continued to put in place measures to increase fiscal, debt and economic data transparency and quality of regional and local governments. Overall speaking, the measures taken in 2019 are a significant step forward to improving the local governments’ governance practices (see Appendix V and VI). Recently, the Ministry of Finance announced “Opinions of the Ministry of Finance on Further Improving Issuance of Local-government Bonds” in November 2020 – one of the objectives is to improve the information disclosure of local government bonds7. The information disclosures that provincial governments need to make when issuing bonds will likely increase fiscal transparency at their respective level of government. The budget reports have an increasing number of notes to explain fluctuations in fiscal data, although the degree of details varies across provinces. The finance ministry also publishes monthly and annual local and regional government debt information, by sector and province respectively8.

Different weights to the government governance factor can be determined by the relationship between the owner government and a SOE, and/or role of the SOE. In general, the percentage of government ownership in a SOE reflects how close of a linkage between the SOE and its owner governments, or whether any market participant is involved in the management and supervision. On the other hand, whether a SOE is “commercial-oriented”/ “public-oriented” is crucial as more commercial-oriented SOEs are more market driven, requiring less public sector considerations. We believe governance scores of LGFVs should be mainly driven by their owner government’s governance performance.

Issues related to Belt & Road Initiative (BRI)

The BRI is led by Chinese state banks and SOEs and now covers 139 countries. It has helped reduce the infrastructure funding gap for emerging and frontier markets globally, and foster trade and connectivity across participating states, with China overseeing more than $700bn in reported overseas contracts and investments in BRI countries since 2014. However, most BRI investment activities are financed with external debt, and many of the principal sovereign beneficiaries are mainly emerging markets with some having allegedly poor human rights practices. As a result, for SOEs that have actively participated in the BRI, the ESG impact is mixed and many of them will continue to be at the center of controversy. Environmenta- The BRI is becoming increasingly green. Renewables accounted for roughly 58% of new BRI contract values in the first half of 2020, up from 18.5% in 2014 (see Figure 2). This trend will likely continue as BRI countries start to place a greater emphasis on low-carbon and climate-resilient infrastructure. Social – The BRI related investments could help lower social inequality and contribute to social well-beings of the countries which fail to provide basic public services. The Chinese government will continue to promote the “Health Silk Road,” a term the authorities coined in 2017 with respect to the potential for greater medical aid, equipment and services across the BRI countries. On the other hand, SOEs which operate in the higher-risk, conflict-affected countries might be seen as complicit in human rights violations committed by the governments or rebel forces because of operating in these conflict-affected countries and generating revenues used to fuel the conflicts9Governance – These SOEs are also facing higher risks associated with corruption issues in some emerging markets in Asia, Middle East and Africa. Regulatory institution and framework are weaker in some of these markets which could led to more corruption scandals for the companies.

Figure 2: BRI is becoming increasingly green Chinese-led new contracts and direct investments in BRI energy projects, % share

How ESG will impact the future of SOEs 

The Chinese government has demonstrated its commitment to climate change, social responsibility and other ESG causes, creating a wide set of opportunities for the SOE sector. Chinese SOEs play key roles in leading different initiatives from the government and are important actors to achieve national targets. In the last five years, SOE reforms in China have developed the sector to continuously improve governance and practices, paving the way towards meeting its societal, economic, and financial goals.


Appendix I

Summary of planned investment spending by province (RMB billion)


Appendix II

SOE reforms in China

The General Office of the CPC Central Committee and the General Office of the State Council issued “Guiding Opinions on Building a Modern Environmental Governance System” in March 2020 — it highlighted that the government targets to establish and improve the leadership responsibility system, the enterprise responsibility system, the national action system, the supervision system, the market system, the credit system, and the system of laws, regulations and policies for environmental governance by 2025.10 During the 19th party Congress in 2017, Chinese President Xi Jinping pledged further SOE reforms and aimed to foster world-class competitive enterprises.

SOE reform campaign (2018-2020):


1 Citi Research. PRC Wind and Solar Sector (13 December 2020)
2 Reuters. China's SPIC aims to cap domestic carbon emissions by 2023 (10 December 2020
3 Moody’s Investors Service. Plans to accelerate infrastructure spending will lead to higher debt burdens and financial risks (27 March 2020)
4 MSCI. China through an ESG lens (September 2019) 
5 Moody’s Investors Service. Governance considerations are a key determinant of credit quality for all issuers (19 September 2019)
6 Moody’s Investors Service. Measures to increase transparency will improve governance and support RLG bond
market development (29 January 2019)
7 The State Council website. 关于进一步做好地方政府债券发行工作的意见_财政_中国政府网 (
8 Standard & Poor’s Financial Services LLC. Public Finance System Overview: Chinese Provincial Governments (21 January 2021)
9 Sustainalytics. Controversy Report - China National Offshore Oil Corp (30 December 2020) 
10 The State Council of China website.