China's SOE watchdog pushes for value creation mindset

<?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />China's large state-owned companies with high sales and substantial assets may no longer be deemed "successful" under new government performance measurements. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Huang Shuhe, vice chairman of the State-owned Assets Supervision and Administration Commission (SASAC), has announced the SASAC this year will use the economic value added (EVA) measure to assess the performance of the 129 state-owned enterprises affiliated to the central government.

Developed by the U.S.- based consultancy firm Stern Stewart & Co., the measurement tool has been applied widely among top-tier transnational firms, including Coca-Cola, Temasek, Pemex and others.

EVA refers to the residual income of firms after subtracting costs on all capital employed in the business, debt and equity, from their net operating profit after tax (NOPAT), Erik Stern, Stern Stewart president international, told Xinhua in an exclusive interview.

"It considers not only the actual cost of capital, but also its opportunity cost, in other words the expected returns that could have been achieved with the capital if it had been invested in a similar investment," said Stern.

If a company's NOPAT is 5 million yuan with 100 million yuan capital employed, the profitability is 5 percent. But if the average industry cost of capital ratio is 6 percent, that translates into a negative EVA of 1 million yuan, meaning the firm failed to deliver optimum value for shareholders.