Australia-China Chamber of Commerce and Industry of New South Wales
19 October 2000
ACCCI ELECTRONIC NEWSLETTER NO. 24
The focus for this Newsletter is Reform of State-Owned Enterprises. We
mentioned in previous E-Letters that the problems associated with lagging
state-owned enterprises are “being addressed” and that an early solution
would release fiscal resources of provincial and municipal governments in
China for other development activities.
We collected information during the past few months
to indicate that substantial progress has been made in restructuring
state-owned enterprises (SOEs). Not
surprisingly, some difficulties remain but they differ from those that were
encountered in the early 1990s.
When China made its transition from a centrally
planned economy to a market-directed economy in the 1980s, the central
government elected to proceed in a gradual, step-by-step manner. The process therefore differed
substantially from the “shock therapy” associated with economic reform in
Russia in the early 1990s.
China’s strategy was of course dependent upon a
number of factors, including the desire to achieve their objective with
“Chinese characteristics”. It was
most likely influenced also by a number of social welfare considerations:
The gradual lifting of
price controls avoided a hyper-inflated economy that would have eroded the
savings of most, if not all, ordinary Chinese.
The relatively slow rate of
retrenchment of SOE employees kept the level of unemployment to a more
socially acceptable level.
The slow expansion of the
legal framework, and the accompanying removal of discriminatory regulations,
allowed time for SOEs to adjust to a different set of rules for commercial
The Chinese strategy nevertheless carried a number
of anxiety-creating features:
Corruption by party cadres
at various times threatened to undermine public confidence in the overall
Many SOEs retained
connections with owning authorities and continued to operate on a privileged
basis, thus remaining protected from the full exposure to market
The lack of clearly defined
rules appeared to encourage undisciplined behaviour.
About the same time as Western experts were “deeply
and swiftly engaging themselves in the process of transforming the political
and economic orders of the former Soviet republics” attention was directed to
the substantial operating losses of most SOEs in China. The task of keeping the SOEs afloat was
beginning to strain China’s banking system.
Early in 1998, at the peak of the East Asian
financial crisis, Premier Zhu Rongi initiated a three-year program that would
allow the “vast majority" of China’s large and medium-size SOEs to
achieve “their goal of exchanging losses for profits” by the end of this
year. Assessing progress at this time
therefore seems appropriate.
Zhu Rongi’s objective was re-phrased as the “three
majority” goal and included the following:
owned by the government and firms whose stocks are controlled by the
government in the majority of regions must turn a profit: At the end of July, this goal was
realised. Out of the 30 regions or
provinces, excluding Tibet, 25 have broken even or have made a profit.
2. The majority of industries must turn losses into
profits. All 14 industry groupings
except for the coal and military industries made profits.
3. The majority of companies must make up for their
financial losses and begin making a profit: 55 percent of the 6,599
medium-to-large companies in the red in 1997 have already reversed their
In the first seven months of this year, SOEs
generally showed more impressive gains than other industrial
enterprises. SOE profits increased by
190 per cent to RMB 113.21 billion, compared to a smaller gain of 110 per
cent for all industrial enterprises, though the level of profits for the
latter was larger at RMB 202.24 billion.
From January to July, Chinese industrial enterprises
paid RMB 272.21 billion in taxes, up 17.3 percent from the same period last
year. Taxes paid by SOEs increased similarly, rising by 16.3 percent to RMB
194.15 billion during the same period.
In the January-July period, the country’s
money-losing enterprises suffered losses of RMB 78.53 billion, which is 10
percentage points less than during the same period last year. SOEs did slightly better in monetary terms
with losses of RMB 52.01 billion, which is 9 percentage points less than last
China’s 516 key SOEs experienced a 93.4 percent
increase in profits to RMB 100.04 billion in the first seven months of this
year. They also paid 20.6 percent, or RMB 129.42 billion, more in taxes.
The better-than-expected performance of SOEs is
broadly consistent with that of the Chinese economy as a whole. In August of this year, exports rose by 27
per cent, and a whopping 55 per cent rise in imports indicated a more active
domestic economy. Government
investment in fixed capital rose by 13 per cent and retail sales, which had
been lagging for several years, increased by 9 per cent in August.
Revenue from major taxes such as value-added tax,
stamp duty and income tax increased sharply in the first nine months of this
year, producing a budget surplus of RMB 10.8 billion. This contrasts with small-to-moderate
budget deficits over the past several years.
Chinese authorities place much of the credit for the
faster moving economy on an active fiscal policy that began in 1998. It undoubtedly contributed, but the most
important factor in lifting economic activity was the return to normal
trading conditions in the crisis-affected East Asian nations.
Since most of the relevant SOEs are under the
control of provincial and municipal governments, restructuring methods differ
somewhat, but a few patterns can be noted.
Privatisation. In the
early 1990s, Qingdao (Shandong Province) had a poorly reformed industrial structure
with a large percentage of state ownership.
Most of these enterprises had a relatively high proportion of
The municipal authorities began to reform the asset
structure of its SOEs in 1994, and during the past six years, 253 enterprises
were completely privatised or abandoned (163 were sold, 15 declared
bankruptcy and 75 had their registration cancelled). Although these 253 companies comprise only
15 per cent of all state enterprises under the municipal government,
state-owned assets in Qingdao now constitute less than half of all industrial
capital in the municipality.
Shareholder restructuring. A
combination of mergers and transfers of ownership to holding companies that
exert financial control of SOEs is being used widely as an alternative to
full privatisation. For example, the
Municipal Government of Beijing recently reallocated 12 previously city-owned
companies (in motor vehicles, machinery and pharmaceutical sectors) into five
shareholding companies and four group corporations.
The official transfer of ownership not only cuts the
ties with former administrative and regulatory branches of the municipal
government, it also allows wider scope to dispose of state assets,
rationalise land-use rights and reallocate capital.
Many more small and medium sized SOEs in Beijing are
likely to be partially privatised within the next several years. This will result in part-ownership by the
state, with a majority of shares held by the private sector. The main methods of achieving ownership
reform include forming joint-stock companies, which are expected to encourage
employees to become investors and shareholders.
Removing the welfare burden. The
number of industrial workers employed by SOEs in Dalian (Liaoning Province)
was more than 300,000 several years ago.
That figure now stands at about 170,000. In addition, SOE-affiliated schools and hospitals in the city
(employing more than 500,000) were either taken over by the municipal
government or have become independent.
Re-employment service centres have been established
to provide free technical training, job information and consulting services
for SOE employees who were made redundant.
A one-time payment of RMB 10,000 is available to laid-off workers who
choose to start a business of them own, or seek employment in non-state-owned
enterprises. This is equivalent to
about two years of normal unemployment benefits in the municipality.
Other contributions to SOE balance sheets. We
mentioned in a previous E-Letter that debt-equity swaps are being
facilitated, thus enabling debt-ridden SOEs to acquire sufficient funds to
re-equipment their factories.
Although a breakdown of data is not available, a number of Chinese
officials indicated that foreign participation in these swaps was
particularly successful, with cross-border mergers and acquisitions becoming
a major form of foreign direct investment in China.
A number of SOEs alleviated their financial
difficulties by co-operating with foreign enterprises or by moving to new
locations. In Dalian alone, 97 SOEs
sold their land-use rights in the inner city and relocated in the suburbs.
Turnaround in lagging industries.
China is the world’s largest producer and exporter of clothing and
textiles, with SOEs contributing approximately 25 per cent of total output
and a slightly smaller percentage of industrial value added. Since the early 1990s, however, the
international competitiveness of the industry in China (especially in
clothing) has been eroded, mainly due to the improved export performance of
India and Pakistan.
SOEs in the industry felt the competitive pressure
more severely, with less than 10 per cent showing a profit during the past
several years. The industry as a
whole operated in the red for 6 years.
In 1998, the State Council, through its Office for
Reconstruction of Economic Systems (SCORES), decided to use the industry as a
“test case” for restructuring.
Loss-making SOEs were supported while mergers were arranged to reduce
the size of the workforce and rationalise equipment. The resulting cutbacks increased
unemployment in a number of areas and put the textile machinery industry in
The restructuring was basically completed at the end
of last year, and profitability of the industry began to improve. Total profits are expected to exceed RMB
20 billion this year, while contributions from SOEs in the industry are
likely to be more than RMB 5 billion.
Sales of textile machinery increased sharply and are expected to reach
RMB12 billion by the end of this year.
Significant, but less dramatic, turnarounds occurred
with the motor vehicle and pharmaceuticals industries.
Thus, while the percentage of SOEs that “turned the
corner” could be questioned, the substantial improvements for a large number
of loss-making enterprises seem clear.
The trend is far more favourable now than it was during most of the
One of the biggest problems facing the restructuring
authorities is achieving a more balanced and consistent set of reforms across
provinces and industries. Most of the
current progress is concentrated in cities such as Shanghai, Beijing, Dalian
and Qingdao. Hopefully these
successes can be used as “pattern setters”, but they have nevertheless
depended largely on the resources available to the municipal authorities and
this cannot be easily replicated by other cities in China.
According to figures provided by the State Development Planning
Commission, from 1994 to the end of 1999, 2,016 of the 2,473 SOEs selected
for reform had converted to a limited company system as defined by the
Corporate Law. This comprises less
than half of all SOEs, and those that were not selected for reform will most
probably be more difficult to convert.
Even partial privatisation of SOEs requires a
considerable effort on the part of management to value assets and to produce
a financial statement that will enable potential non-state investors to form a
reasonable and reliable opinion of the appropriate share price.
Recent regulations to protect shareholders make this
task even more costly. According to a
new regulation issued by the China Securities Regulatory Commission, a
company planning to go public must appoint an intermediary institution
possessing a securities business engagement certificate to undertake a
verification of investment risks, an asset appraisal and an audit for the
period since the company was founded.
According the SCORES, at the end of 1997 there were
1,007 companies listed on China’s share markets, with a total of 284.6
billion shares. Of these, 192.7
billion shares, or 67.8 per cent of the total, were state and corporate
shares. It was recommended that state
and corporate holdings be reduced to 30 per cent in order to produce a more
vigorous market in share trading.
Such a quantity of shares cannot be released within a short period of
time and would, in any case, create difficulties for share offerings by newly
This suggests that recent progress in restructuring
SOE shareholding is a relatively small part of what is needed to complete the
Alternative welfare systems.
Efforts to replace the “iron rice bowl” responsibilities of SOEs with
alternative welfare systems have resulted in a mixed and highly variable set
of arrangements. For example, former
SOE employees who retired from the workforce receive pensions from banks,
post offices and/or social organisations.
Although some cities have pension, unemployment and health insurance
schemes, there is little uniformity in the way they are funded or managed.
Coverage of benefits is far from complete. Among the 7 million workers who were laid
off by the end of June, 220,000 are not covered by government unemployment
subsidies. In addition, among the
6.77 million registered with re-employment service centres, 170,000 have
received no unemployment allowances and 330,000 have not been given the full amount
of basic living allowances due them.
At the present time, there are about 19,000
elementary and secondary schools run by SOEs, making up one-third of all such
schools nationwide. There are 7,287
SOE-operated hospitals, accounting for nearly 40 percent of all hospitals in
Progress made by the major cities in separating
these community service obligations from SOEs demonstrates that a separation
is possible, but that in itself does not assist the less wealthy cities in
China's State Council recently established boards of supervisors to
conduct inspections on the acquisition and maintenance of state assets in key
state-owned enterprises. Members of
the boards will inspect the financial operations of the enterprises,
including management and business activities of enterprise leaders, but will
not participate in or interfere with the day-to-day decision-making of the
The first group of 27chairpersons to these boards of
supervisors were appointed for 67 enterprises. Nine others will be sent to 33 enterprises after completing
professional training. The boards are
instructed to report to the State Council with an appraisal of managerial
skills within the respective enterprises.
This would seem to be the first step in identifying SOE training
needs. That is, of course, and
important step, but is likely to pale in comparison with the task of meeting
A large percentage of SOEs is likely to remain under
government ownership and control for some time. This does not necessarily imply, however, that majority
ownership by the state is being retained for ideological reasons. Rather, it more likely reflects the desire
of the central government to avoid a concentration of ownership in the hands
of a few, thus preventing (or at least limiting) the emergence of mainland
Since economic reform began in 1979, Beijing
authorities sought to increase national wealth and also to reallocate it in a
way that was broadly consistent with a socialist view. Growing disparities in income,
particularly among regions, suggests that less attention was given to
distributional aspects, but those aspects were never taken off the agenda.
Recent statistics show that in the last four years
(which were not particularly good years), real income in rural and urban
areas increased by an annual average of 5.4 percent and 5.6 percent,
respectively. Disposable income per
capita in urban areas reached RMB 5,854.
Per capita net income for farmers was RMB 2,210. This, together with information about
consumer expenditure and the proportion of home ownership in major urban
areas (now about 59 per cent), is evidence of a growing middle class in
China, and that growth is likely to be nurtured at all three levels of
SOE reform is likely to follow that nurturing. Central government revenue from reformed
SOEs (by way of company taxes) is already greater than the income previously
derived from sole ownership of those enterprises. As long as this continues a greater amount of ownership will be
passed to the private sector, with sufficient regulatory controls put into
place to ensure a satisfactory dispersion of that ownership.
It is likely that progress in such an objective will
be relatively slow, but it is also more likely to produce a China-preferred
References to Russia:
Stephen F. Cohen, Failed Crusade: America and the Tragedy
of Post-Communist Russia, W. W.
Norton & Co., 2000.
People’s Daily: http://www.peopledaily.com.cn
China Daily (including Business Weekly): http://ww.chinadaily.com.cn
Some similarity exists in the articles reported by
the three sources mentioned above.
Selected articles are listed as follows:
Ministry of Finance to boost enterprises’ financial,
asset management, 13.10.00.
New regulation governs companies planning to go
public prior to issuing stock, 5/10/00.
Beijing spins off more SOEs into private sector,
Qingdao to unload 35 SOEs through property-rights
exchange market, 28/9/00.
China set to achieve “three majority” goal as SOEs
reap profits, 13/9/00.
US$26.6b of state-owned shares to become negotiable,
China lays off almost 2 million SOE workers in 1H,
100 SOEs under strengthened supervision, 12/10/00.
SOE reform may introduce cross-border “M&A”,
State Council sends chairpersons to boards of
supervisors in 100 SOEs, 18/8/00.
Overseas listing pushes China's SOEs reform,
SOEs reform goal within reach, but deeper issues
remain unsolved, 1/8/00.
China’s SOEs embrace modern enterprise system,
Laid-off workers of SOEs find new jobs, 1/10/00.
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