How China wants to overhaul its $16 trillion corporate monster?

How do you dismantle a $16 trillion government behemoth that controls everything from nuclear power plants to tourism kiosks?

That’s the task facing Chinese President Xi Jinping as part of the biggest shake-up of state-run companies since the late 1990s, when millions lost their jobs as unprofitable units were sold or shuttered and bigger companies listed their best parts on the stock market.

This time, instead of using the shock therapy of mass privatizations championed by Britain in the 1980s, China is trying to improve state industries without putting thousands out of work during an economic slowdown. Policymakers are proposing to strip government holdings from the State-owned Assets Supervision and Administration Commission, or Sasac, the agency that also regulates the more than 100 non-financial companies, people familiar with the plans said last month.

“When China today talks about SOE reform they do not have in mind anything like what we saw in Eastern Europe in the 1990s or other emerging markets or the U.K. in the Thatcher era,” said Andrew Batson, director of China research at GaveKal Dragonomics in Beijing. “The main goal of the reforms is not to dramatically reduce the state sector. It is to have a better-performing state sector.”

The proposed overhaul would bundle companies by industry and hand their control to state asset-management firms, the people familiar with the plans said last month, asking not to be identified because the talks are private. The changes would reduce Sasac’s role to that of regulator.

Salt to Spacecraft

Sasac was created in 2003 under the State Council, China’s cabinet, to oversee government conglomerates. The commission supervises non-financial companies that build weapons and spacecraft, fly planes, forge steel, mine coal, distribute salt, trade silk and buy art, among much else. Many of its units have stakes in joint ventures with private firms, spreading their tentacles throughout the economy.

“Sasac is a gigantic failure,” said Nicholas Lardy, who’s studied China for more than three decades and is a senior fellow at the Peterson Institute for International Economics. The return on assets is going down at state-owned firms under Sasac’s watch and that’s translating into a “big drag on economic growth,” he said in an interview in Beijing.

Any attempt to redistribute the government’s control of industry will be a tightrope walk for President Xi, who is pushing for the reform at the same time as carrying out a nationwide corruption purge and grappling with economic growth that is predicted to slow this year to the weakest since 1990.

State Ownership

“China remains committed to state ownership as a foundation of the economy,” said Paul Hubbard of the Australian National University. “Exposing Chinese SOEs to more market competition, and tolerating the failure of less efficient SOEs could be the best recipe for ongoing growth.”

Xi appointed Zhang Yi, a party disciplinarian with no business experience, as Sasac chairman in late 2013. His challenge: to root out corruption and make SOEs more efficient.

Zhang, 64, born in Heilongjiang province near the Russian border, studied forestry management before rising through provincial supervision and investigation roles to be deputy chief of the central disciplinary watchdog, a department now led by Wang Qishan, who spearheads Xi’s anti-corruption drive.

As Sasac chairman, Zhang oversees companies with 53.7 trillion yuan ($8.7 trillion) in assets, according to data from the finance ministry. Another 48.4 trillion yuan of provincial-level state firms answer to him indirectly through regional authorities. The total is equivalent to almost the entire U.S. gross domestic product last year.

Managing Theaters

Untangling Sasac will require working out which industries should be opened up to competition and which should remain under government control — no easy task when even within one company you can have a variety of businesses. China Poly Group Corp., the state owned conglomerate started by the military, spans everything from real estate and explosives to running China’s largest auction house and managing theaters.

“The Chinese are trying to categorize,” said Francis Cheung, head of China and Hong Kong strategy for CLSA Asia-Pacific Markets. “They are trying to figure out which SOEs should be fully competitive and have no protection and which are a public service and need protection.”

Sinopec Sale

Since the Communist Party first announced its latest plans to reform the SOEs in late 2013, some progress has been made. Asia’s biggest refiner China Petroleum & Chemical Corp., known as Sinopec, in 2014 agreed to sell a 29.99 percent stake in its fuel retail business to a group of 25 investors including Fosun International Ltd., run by billionaire Guo Guangchang.

The biggest changes, though, have come through the parallel effort by Xi to crack down on government corruption. Xi turned up the heat in January, when he urged Wang’s office to strengthen supervision of senior executives. In February, Wang identified 26 of the biggest companies and inspections have begun. Among those caught up in the anti-graft drive: Jiang Jiemin, Zhang’s predecessor at Sasac, who is charged with taking bribes and abusing power while he served in the country’s oil and gas industry.

Pushing through the planned SOE reforms won’t be easy in the face of vested interests and political opposition. The government will need to strike a balance between slimming down big state backed companies and cutting jobs without stirring social or political unrest.

Iron Lady

Margaret Thatcher, the former U.K. prime minister known as the “Iron Lady” for her uncompromising style, clashed with miners and trade unions as she sold off state-owned companies in the 1980s. U.K. unemployment soared, peaking at more than 3 million in the middle of the decade.

Xi is attempting a gentler revolution, keeping control in the hands of the central government, while streamlining bureaucracy and allowing limited gains in competition.

“China’s leaders still want to have very big, very strong, state-owned companies that dominate core areas of strategic sectors,” said Andrew Gilholm, head of China analysis at Control Risks Group in Shanghai. They want to reform them “to have enough anti-corruption safeguards and expose some bits of their businesses to just enough competition to make them more competitive and strong.”