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Unirule Institute of Economics
国有企业的性质、表现与改革
The Nature, Performance and Reform
Of State-owned Enterprises
by the Unirule Institute of Economics
天则经济研究所课题组
2011 年 6 月 16 日
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Abstract
The state-owned and state-holding industrial enterprises made a total profit of 5846.2 billion yuan
from 2001 to 2009, with the total book profit of 2009 increased by 3.89 times over that of 2001. The
total net profit amounted to 4051.7 billion yuan, with the total book net profit of 2009 increased by
4.37 times over that of 2001.
The total profit of central enterprises reached 1341.5 billion yuan in 2010, accounting for 67.5% of
the total profit of state-owned enterprises. The profits of ten enterprises occupied 70% of all net
profits made by central enterprises in 2009, namely, China National Petroleum Corporation, China
Mobile Limited, China Telecommunications Corporation, China United Network Communications
Group Co., Ltd., China Petroleum & Chemical Corporation. Hereinto, China National Petroleum
Corporation and China Mobile Limited made a profit of 128.56 billion yuan and 148.47 billion yuan
respectively, the total of which exceeds one third of the total profit made by central enterprises. It
can be seen that profits of central enterprises were mainly realized by monopoly enterprises.
From 2001 to 2009, the average return on equity of state-owned and state-holding industrial
enterprises was 8.16%, while that of industrial enterprises above designated size was 12.9%. 2009，
that of the former is 8.18%, while that of the latter is 15.59%. Therefore, the nominal performance
of state-owned and state-holding enterprises was not high enough.
Even the performance of state-owned enterprises is not their real performance, but one after
enjoying various preferential policies and under such a management environment which is unfair to
non-stated-owned enterprises. The unfairness is mainly embodied in fiscal subsidy by the
government, financing cost, and land and resource rent, and so on.
If we compute the industrial land rent at 3% of the price of the industrial land, state-owned and
state-holding industrial enterprises should pay a total rent of 3931.2 billion yuan from 2001 to 2009,
accounting for 67.2% of the total nominal profits made by state-owned and state-holding enterprises.
Only in 2008, the state-owned enterprises should pay 1210.4 billion yuan rent for the land if we add
the land for commercial and service use into the whole amount.
The real interest rate for state-owned and state-holding enterprises is 1.6%, while that market
interest rate is 4.68%. If we recount the interests which should paid by state-owned and
state-holding industrial enterprises with the market interest rate, the total interest difference will be
2296.7 billion yuan from 2001 to 2008, accounting for 47% of the total nominal profits made by
state-owned and state-holding enterprises.
The resource tax of oil is average only 26 yuan per ton. The resource compensation fee is merely
1% of sales revenue. Therefore, the real royalty of oil in China is less than 2% of its price, far below
the ratio of 12.5% which is imposed on the capital venture in China. Even collection proportion for
special oil gain levy below 40 dollars is too low to fully realize interests of resource owners. From
2001 to 2009, the state-owned and state-holding industrial enterprises lack to pay 243.7 billion yuan
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of the oil royalty. Together with those of coal and natural gas, the state-owned and state-holding
industrial enterprises lack to pay 497.7 billion yuan of royalty of resources.
From 1994 to 2006, the state fiscal subsidy for the losses of state-owned enterprises accumulated to
365.3 billion yuan. According to incomplete data, from 2007 to 2009, the state-owned and
state-holding industrial enterprises received fiscal subsidy is about 194.3 billion yuan.
The real performance of state-owned enterprises can be estimated through deducting those costs
without paid but should be paid and governmental subsidies, together achieving about 7491.4 billion
yuan, from nominal profit of the state-owned enterprises. According to our estimation, the average
real return on equity of state-owned and state-holding enterprises from 2001 to 2009 is -6.29%.
In 2008, the average staff wage of state-owned enterprises was 17. % higher than that of other
organizations, their average labor income is 63% higher than that of private enterprises and 36%
higher than that of non-state-owned enterprises. There is a big difference between the industries.
2008, the average income per year of employees in monopolistic industries reached 128.5 thousand
yuan, which is about 7 times as that of the employees in the whole country. The ratio of the
state-owned enterprises in 5 industries with highest income is highest, while that in 5 industries with
lowest income is lowest.
According to regulations of existing housing provident fund system, the housing provident fund
deposit ratio paid and deposited by staff themselves as well as that paid and deposited by units
should be no less than 5% of the staff’s average monthly salary of the previous year, and no more
than 12% in principle. A large number of state-owned enterprises and institutions of monopolized
industries, however, raise this ratio to 20%. China Netcom Operations Limited once accrued 4.142
billion yuan at total amount as lump-sum cash housing allowance. State-owned enterprises also
conduct residential building construction with raised funds on gratis land from free allocation by the
state. In addition, some enterprises purchase commercial residential buildings and sell them to their
own staff and workers at low price.
From 2007 to 2009, the average tax burden of 992 state-owned enterprises was 10%, while that of
private enterprises was as high as 24%.
State-owned enterprises did not turn over any profits from 1994 to 2007. In 2009, only 6% of
state-owned enterprises’ profits were turned over, and the rest was all distributed within enterprises.
In 2010, it decreases to 2.2%. Moreover, dividend turnover by central enterprises mainly transfers
within the central enterprise system. Their significance in benefiting the common people has not
been embodied yet.
Structural “Guo Jin Min Tui” phenomenon currently exists in our country. In terms of capital, the
proportion of state-owned enterprises in electric power, steam, and hot water production and supply
industries rose from 85.8% in 2005 to 88.2% in 2008. In terms of gross industrial output value, the
proportion of state-owned enterprises in electric power, steam, and hot water production and supply
industries increased from 90.5% in 2005 to 98.9% in 2008.
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The quantitive analysis with the term, market power, on the monopolistic levels of industries shows
that colored metal smelting and pressing industry, tobacco industry, oil processing industry, coking
industry, nuclear fuel industry, and electric machinery industry, and so on, the monopolistic level in
2007 is higher than that in 2002. These industries are overlapped very much with those with higher
ratio of the state-owned enterprises.
A resume survey of officials of ministries and commissions under the State Council shows that
among 183 officials above vice ministerial level of 19 ministries and commissions, 56 people have
working experiences in state-owned enterprises, the proportion for which is as high as 30.6%. In
addition, a resume survey of senior executives of 123 central enterprises shows that 115 senior
administrators of 47 enterprises with information disclosure have government working background,
that is, each enterprise has an average of 2.45 people with such background. Therefore, identity
exchange exists between management staff of state-owned enterprises and government officials.
Enterprise senior executives enter the government for policies and resources, while governmental
officials enter enterprises to materialize their economic profits earned while in the position.
Administrative departments have rights to formulate regulations on the implementation of laws,
instruction opinions, and departmental regulations, i.e. In other words, administrative legislation
exists. Enterprise management needs to lobby the administrative departments instead of the
legislature. In other words, there are “lobbying within the house.”
State-owned enterprises should have a rather clear boundary that they are suitable for production of
public goods and quasi public goods in which market mechanism could not be brought into full play.
Products which are purchased solely by governments or which should be stringently controlled
during production progress should be supplied by state-owned enterprises, while other products
should be supplied by private economy. The condition for existence of state-owned enterprises is
when they supply public goods and the financing stage and can not be separated from the production
stage.
The state-owned enterprise is a public organization different from ordinary governments or
enterprises, whose aim is to realize public good of society rather than to make profits.
The nature of China’s current state-owned enterprise reform is capitalization of state-owned assets,
that is, making profits through management of state-owned assets. Therefore, the government
gradually turns into personalized or institutionalized capital when state-owned assets constantly
show the attributes of capital.
As the main content of China’s market-oriented reform, the reform orientation choice of
state-owned assets capitalization had both logical inevitability and historical progressiveness
especially at the primary stage of China’s economic transition. However, with the establishment of
market economy in our country, the historical mission of state-owned enterprise reform
characterized by state-owned assets capitalization is about to come to an end.
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We should design the short-term reform plan for state-owned enterprises based on two major
objectives, namely, breaking the administrative monopoly by state-owned enterprises, and
regulating state-owned enterprises’ conducts. The significance lies in that this will promote different
economic main bodies to carry out adequate and fair economic competition, thus better realizing
social justice and improving economic efficiency.
State-owned enterprise reform has two ultimate goals. The first goal is to change state-owned
enterprises into non-profit public law enterprises, and the second one is to build up the constitutional
governance framework for state-owned assets.
To realize the ultimate goal of reform, state-owned enterprises have to gradually retreat from the
profit-making fields (rather than merely the competitive fields).
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Table of Contents
Preface
Chapter 1 Theory and process of state-owned enterprises reform
1. Reform of state-owned enterprises: “decentralizing powers and giving up profits” as
the main feature;
2. Reform of state-owned enterprises: “separating control from ownership” as the
main feature;
3. Reform of state-owned enterprises: “establishing modern enterprise system” as the
main feature;
4. Policies’ impulse in process of the reform of state-owned enterprises
5. Summary.
Chapter 2 Classification of state-owned assets and state-owned enterprises
1. Classified by the nature of assets;
2. Classified by the management division.
Chapter 3 Current performance of state-owned enterprises (1): Efficiency
1. Review of the research on the efficiency of state-owned enterprises;
2. The basic approach of this report on efficiency;
3. The nominal performance of state-owned and state-holding industrial enterprises;
4. Being real: unpaid costs that should have been paid and subsidies;
5. Discussion on the “enterprise as society” and “the burden of retired workers”;
6. The real performance of the state-owned and state holding industrial enterprises;
7. Summary.
Chapter 4 Current performance of state-owned enterprises (2): Distribution
1. The influence of subsidies and costs payable but were paid on distribution from the
perspective of national income;
2. The monetary and non-monetary incomes of the employees of state-owned
enterprises;
3. Comparison of income of senior managers between state-owned enterprises and other
types of enterprises;
4. Comparison of the tax payment between state-owned enterprises and other types of
enterprises;
5. The profits payment and dividend distribution of state-owned enterprises;
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6. Summary.
Chapter 5 “Guo Jin Min Tui” and its impact on market competition: The nature
of “Guo Jin Min Tui” and relevant case studies
1. Characters of “Guo Jin” of state-owned enterprises in recent years;
2. Typical cases about “Guo Jin”;
3. Analysis of the phenomenon “Guo Jin”
Chapter 6 The impact of state-owned enterprises on macro economy
1. The integration of state assets and “economic fragility”;
2. The impact of current performance of state-owned enterprises: real estate market;
3. The impact of current performance of state-owned enterprises: finance market and
take securities market as an example;
4. The impact of current performance of state-owned enterprises: bulk stock;
5. Summary.
Chapter 7 The analysis of political economy on the performance of state-owned
enterprises
1. The historical starting point of current issues of state-owned enterprises;
2. The institutional background of state-owned enterprises in early 1990s;
3. The interest groups of management under the distorted institutional background of
state-owned enterprises;
4. The identity exchange of state-owned enterprise managers and government officials;
5. The “lobbying within the house” of management in state-owned enterprises;
6. The constitutional defects of China’s government: “department legislation”.
Chapter 8 The nature of state-owned enterprises: the perspective of economics
1. The nature of enterprises;
2. The nature of state;
3. The nature of state-owned enterprises;
4. The boundary of state-owned enterprises;
5. The constitutional relationship between state-owned enterprises and government.
Chapter 9 The nature of state-owned enterprises: the perspective of law science
1. The state-owned enterprises as a special public institution;
2. The normative significance of the state-owned enterprises as a special public
institution;
3. The strategic significance of reaffirming the public nature of state-owned
enterprises for China’s state-owned enterprises reform;
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4. Epilogue.
Chapter 10 Deepening the reform of state-owned enterprises
1. The reflection and comments on the reform of state-owned enterprise;
2. The short-term plans of state-owned enterprises reform;
3. The ultimate goals of state-owned enterprises reform.
References
Appendix
Sub report 1: Comments on the mission of state-owned enterprises
Sub report 2: The authority and role conflict of the State-owned Assets
Supervision and Administration Commission of the State Council (SASAC)
Sub report 3: The rent loss of China’s industrial land and commercial land
Sub report 4: The evolution of policies towards state-owned enterprises by
governmant
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List of figures
Main report
Fig. 2.1 Net value of state-owned assets of administrative institutions 1998～2008
Fig. 2.2 State-owned enterprises classified by the management division
Fig. 2.3 Ratios of Overall Incomes of Various Industries of Central Enterprises
Fig. 2.4 Ratios of Profits of Various Industries of Central Enterprises
Fig. 3.1 Comparison of nominal ROEs between state-owned enterprises and other enterprises
2001~2009
Fig. 3.2 Comparison of pre-tax gasoline prices between China and some other countries
Fig 3.3 Comparison between the real rates of return on net assets and the nominal rates of return
on net assets of state-owned and state-holding enterprises
Fig. 3.4 China’s GDP growth rates 2001~2009
Fig 4.1 Distribution structure of the nominal VAI of state-owned and state-holding industrial
enterprises (2001~2009)
Fig 4.2 Adjusted distribution structure of the nominal VAI of state-owned and state-holding
industrial enterprises (2001~2009)
Fig 4.3 Analysis of the components of VAI of state-owned and state-holding industrial enterprises
(2001~2009)
Fig 4.4 2001～2009 Comparison of average wages between enterprises of different types
Fig 4.5 Proportion of the per capita income of state-owned enterprises to that of private enterprises
Fig 4.6 Proportion of the per capita income of state-owned enterprises to that of non-state-owned
enterprises
Fig 4.7 Comparison between average annual remuneration and average position-related
consumption of listed state-owned companies
Fig 4.8 Comparison of the tax burden structures in VAI between state-owned enterprises and
non-state-owned enterprises
Fig 4.9 Profits realized by state-owned enterprises
Fig 4.10 Profits turned over by state-owned enterprises
Fig 4.11 The structure of operating budget expenditures of state-owned capitals 2008~2011
Fig 5.1 Proportion of the gross industrial output values of state-owned and state-holding
enterprises to all the enterprises in respective industries
Fig 5.2 Proportions of the funds of state-owned and state-holding enterprises to all the enterprises
in respective industries
Fig 5.3 Nine industries with the biggest market powers and relatively rapid growth rates
Fig 6.1 Comparison of the differences in economic fragility between China and the US
Fig 6.2 Volatility in Shanghai Composite Index March – September 2009
List of tables
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Main report
Table 2.1 Operation of state-owned assets of central enterprises in 2009
Table 3.1 Land rents that should be paid by Sinopec 2004～2009
Table 3.2 Land rents payable by state-owned and state-holding industrial enterprises 2001～2009
Table 3.3 Oil resource rents paid by state-owned and state-holding enterprises 2001～2009
Table 3.4 Oil rents payable but not paid by state-owned petroleum enterprises 2001～2009
Table 3.5 Resource rents for natural gas paid by state-owned and state-holding enterprises
2001~2009
Table 3.6 Natural gas rents that were payable but not paid by state-owned and state-holding
enterprises 2001～2009
Table 3.7 Coal resource rents paid by state-owned and state-holding enterprises 2001～2009
Table 3.8 Coal resource rents that were payable but not paid by state-owned and state-holding
enterprises 2001～2009
Table 3.9 Comparison between annual interest rates (interest payment/debt) of enterprises of
different ownerships
Table 3.10 Comparison between annual interest rates (financing cost/debt) of enterprises of different
ownerships
Table 3.11 Relevant indexes of enterprise financing (2000～2007)
Table 3.12 RMB benchmark lending rates of financial institutions published by the People’s Bank
of China
Table 3.13 Interests paid by state-owned enterprises 2001～2009
Table 3.14 Interests payable but not paid by state-owned enterprises according to market interest
rates 2001～2009
Table 3.15 Fiscal subsidies received by state-owned enterprises 2001～2009
Table 3.16 Comparison of pre-tax retail diesel prices between China and some other countries
Table 3.17 Comparison of pre-tax gasoline prices between China and some other countries
Table 3.18 Comparison of oil prices 2006～2009
Table 3.19 Retail volumes of refined oil products of PetroChina and Sinopec (2006~2009)
Table 3.20 General subsidies for state-owned enterprises
Table 3.21 Welfare losses caused by monopoly in some of the administrative monopoly industries
in 2007
Table 3.22 Comparison between nominal profits and real profits
Table 3.23 Real performances of state-owned and state-holding enterprises 2001~2009
Attached table 1 Nominal performances of state-owned and state-holding enterprises 2001～2009
Attached table 2 Nominal performances of industrial enterprises above designated size 2001~2009
Attached table 3 Nominal performances of non-state-owned industrial enterprises above
designated size 2001~2009
Attached table 4 Collection ratio of special oil gain levy
Attached table 5 Subsidies received by PetroChina and Sinopec
Attached table 6 Changes in the average retail prices of gasoline and diesel
Table 4.1 5 industrial sectors with the highest incomes in 2008 and the proportions of state-owned
enterprises
Table 4.2 5 industrial sectors with the lowest incomes in 2008 and the proportions of state-owned
enterprises
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Table 4.3 Employees’ wages and welfare spending of PetroChina Company Limited (2009)
Table 4.4 Dividend rates of main Chinese state-owned enterprises listed in the US (ADRs)
Table 4.5 The structure of operating budget expenditures of state-owned capitals
2008~20112008~2011
Table 5.1 Proportion of the gross industrial output value of state-owned and state-holding
enterprises
Table 5.2 Proportion of industrial funds occupied by state-owned and state-holding enterprises
Table 5.3 Proportions of relevant values of state-owned and state-holding enterprises to those of
all the enterprises within respective industries
Table 5.4 Marke force indicators in relevant industries in 2002 and 2007
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The Nature, Performance and Reform of State-owned
Enterprises
Task Group of the Unirule Institute of Economics *
Foreword
In recent years, cases in which the state advances as the private sector retreats (“Guo Jin Min
Tui”) have aroused wide public concern. Here are two typical cases. In the first case, Shanxi
Province has rectified small coal mines mainly on the grounds of the safety production of coal,
which has forced large amounts of private capitals out of the local coal industry. In the second case,
Shandong Iron and Steel Group, a state-owned deficit company acquired Rizhao Iron and Steel Co.,
Ltd. under the facilitation of the governmental departments of Shandong Province. If we look at
these two specific cases, it is no exaggeration to define them as cases in which the state advances as
the private sector retreats dominated by local governmental departments. Associating them with the
previous cases in which private capitals were forced to withdraw from oil refining and sales
businesses in the petrochemical industry, the public have the reason to express concerns about
whether or not such cases have developed into a certain trend.
It should be said that the above cases have their own policy backgrounds. Behind “seizing the
big and freeing the small” and “strategic reorganization of state-owned capitals”, there has formed a
policy orientation of “further promoting state-owned capital to concentrate on major industries and
key fields relating to national security and national economic lifelines (hereinafter referred to major
industries and key fields)” in an effort to achieve the goal of “strengthening the controlling power of
state-owned economy and playing a leading role”. “Important industries and sectors mainly include:
industries that are related to national security, major infrastructures and important mineral resources,
industries that supply major products and services for the public, and pillar industries and the major
backbone enterprises in high and new technology sectors”.
*
Leader of the Task Group: Sheng Hong, Executive Leader: Zhao Nong. Authors: Sheng Hong, Zhao Nong, Yang
Junfeng, Qian Pu, Guan Jianqiang and Yang Xiaojing.
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Compared with the policy choices (e.g. government’s capital injection into commercial banks)
of the major western developed countries after the international financial crisis broke out, the
rationality of the meaning and orientation of such a policy seems to be further corroborated.
Furthermore, people have also educed the comparative advantages in economic system enjoyed by
the dominant or controlling position of state-owned economy in China through the economic growth
rates of China and other countries and the differences in the scale of crisis.
However, the general public is still quite discontented at the administrative monopoly conducts
and unfair distributions of state-owned enterprises. Faced with the public’s blames, the relevant
departments have publicized the performances, contributions to employment and social
responsibilities of state-owned enterprises with book data. Economists have not responded to it in a
positive way, for data have clearly indicated that the state-owned enterprises have enjoyed relatively
fast profit growths and outstanding performances in recent years, and this stands in stark contrast
with the research findings ten years ago. Or rather, isn’t it a reflection of the achievements of
enterprise reforms?
It is a logic accepted by all that reform is needed only when there is a problem. Supported by
some “data” and “facts”, many scholars have also been gradually convinced that the reform of
state-owned enterprises in China has achieved a great success, and the reform has largely completed
its historical mission. Thus, no one now cares about the deepening of the reform of state-owned
enterprises.
Faced with nebulous judgements on the reality, the Unirule Institute of Economics ought to
assume relevant social responsibilities. The task group tries to answer the following three major
issues: (1) What is the current performance of state-owned enterprises on earth? (2) From a
normative point of view, what kinds of institutions should state-owned enterprises become? (3) How
should the reform of state-owned enterprises be carried out? After one year of careful research, we
have finally formed the research report entitled “the Nature, Performance and Reform of
State-owned Enterprises”.
The empirical study conducted in this report indicates that: (1) In recent years, there has been
structural “Guo Jin Min Tui” phenomenon in our country. (2) Unfair distribution in varying degrees
can be found in state-owned enterprises. Their remuneration and non money income are generally
higher than the social average, and such phenomena are especially prominent in state-owned
monopoly enterprises. (3) Their book profits contain a great deal of cost reductions such as land
rents, resource rents and financing preferential treatments that should be listed as costs and the
excess profits as a result of administrative monopoly. Upon cost recovery and monopoly profit
deduction, their real performances are far lower than the average social level, and many of them are
even at a loss. (4) The existence and operation of state-owned enterprises has constituted certain
damages to the stability of the operation of China’s macro economy and economic growth and has
disturbed the healthy development of the real estates and capital markets. Through a political
economic analysis on the current performances of state-owned enterprises, we have found that some
officials and managers of state-owned enterprises with reversed roles or transferred posts are
forming interest groups that seek private gains with public authority through “lobbying”, “sectoral
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legislations”, etc.
An economic normative analysis indicates that state-owned enterprises should be confined by
tangible boundaries. The production of the public and quasi-public goods suitable for places where
the market mechanism cannot be brought into full play should be done by state-owned enterprises,
especially when the government becomes the sole buyer or the production process requires strict
control, while the rest products should be provided by private economy. A legal research indicates
that state-owned enterprises should become public institutions different from governmental organs.
Instead of making profits, they should have public interests as their objectives, and be subject to
public laws but not private laws.
Based on the above studies, this report proposes the strategy of repositioning the deepening of
reforms on state-owned enterprises. This report believes that the existing state-owned-enterprise
reform is focused on the capitalization of state-owned assets – how to effectively turn original
productive state-owned assets into operating state-owned assets. Therefore, state-owned enterprises
should be turned into legal persons under independent management with the aim of making profits,
and the government should become an investor. Although this reform has facilitated the
marketization in China, it is generating a crony capitalism characterized by the phenomena that a lot
of social resources are under the control of interest groups. The deepening of reforms should be
targeted at turning state-owned enterprises into nonprofit enterprises abiding by public law and
establishing the constitutional governance structure of state-owned assets. Based on this, this report
puts forward specific measures on deepening the reform of state-owned enterprises.
This report is composed of a main report and several sub reports. Chapters 1 and 2 of the main
report introduce the theories and practices of state-owned enterprise reforms and the classification of
state-owned enterprises respectively and provide the basis for the analysis below; Chapters 3, 4, 5
and 6 made empirical studies on the current performances of state-owned enterprises in terms of
efficiency, distribution, the “Guo Jin Min Tui” phenomenon and its impacts on the macro economy
respectively; Chapter 7 made a political economic analysis on the current performances; Chapters 8
and 9 discuss the normative nature of state-owned enterprises from economic and legal perspectives
respectively; and Chapter 10 puts forward the strategy for deepening the reform of state-owned
enterprises. The sub reports serve as the supplements and expansions of the main report.
During the research of the task and the formation process of this report, the task group also
held two expert workshops. We would like to express our heartfelt thanks to Zhang Shuguang, Zhou
Fangsheng, Yang Fan, Han Zhaohua, Liu Xiaoxuan, Hua Sheng, Guan Weili, Wang Jian, Qiu Feng,
Wang Xiaoye and other scholars for their constructive opinions!
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Chapter 1 Theory and process of state-owned enterprises reform
The traditional state-owned enterprises in China were mainly established in the mid 1950s
through “the Three Great Socialist Reforms”, “Elimination of Private Property Rights” and the
subsequent “National Industrialization”. Before reform and opening up, these traditional
state-owned enterprises existed in the forms of the branches or affiliates of governmental
departments under highly centralized planned management, and the daily operation of these
enterprises largely depended on the facilitation of administrative orders. Under such a mode of
“socialized big plants”, the managers of enterprises were merely the specific executors of the
decisions of governments at a higher level and the competent departments, and their operating
decisions must obey the leadership of party committees, the enterprises almost enjoyed no
decision-making powers in human resources, financial, production, material and income distribution
matters, the managers and employees did not have to be responsible for the outcomes of operations,
and their own interests were not so much affected by the operating results. The traditional
operational system of state-owned enterprises has led to egalitarian practices among enterprises and
employees. The enterprises had excessively low efficiencies and the financial deficit of the country
increased year after year. By around 1977, the traditional operational system of state-owned
enterprises had developed to a stage where reform was a must.
After the Third Plenary Session of the 11th Central Committee of the CPC, China began its
economic restructuring. Based on the understanding of “One of the serious defects in the economic
management system in our country is the excessively concentrated power, and we should be brave
enough to delegate the powers to lower levels in a guided manner so that local and industrial and
agricultural enterprises may enjoy more decision-making powers in operation and management
under the unified planned guidance of the State” of the Gazette of the Third Plenary Session of the
11th Central Committee of the CPC, the state-owned enterprises experienced different reform stages
from “decentralizing powers and giving up profits” to “separation of powers” and the establishment
and improvement of the “modern enterprise system”. As for the contents involved in the entire
reforming process, the formerly all-in-one ownership by the entire people and collective ownership
have been replaced by the pattern in which each ownership has its own share; in terms of modes of
operation, the highly centralized planned economic system has given way to the market economic
system. After 30 years of reform, the number of state-owned enterprises has been greatly reduced,
the property relations are largely clear, the government-enterprise relationships have become
relatively simple, the transfer towards the modern enterprise system has been largely realized in the
management system, and the states of operation of state-owned enterprises have also improved. The
current development of state-owned enterprises seems to indicate that the principal part of reform
has been mostly completed, and what we still have to do now is simply to constantly consolidate
and improve the existing achievements.
However, this is not the case, and the reform of state-owned enterprises is far from over. In
terms of ownership relations, the manner in which the state-owned assets administration and
supervision commissions at various levels act as the owners of state-owned assets on behalf of the
State and the entire people has not solved the problem in the absence of owners of state-owned
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enterprises in a real sense. More than that, this mode may also very easily cause concessions to the
management boards of state-owned enterprises due to the lack of supervision and restriction from
the state-owned assets administration and supervision commissions themselves, so that the
enterprises may misappropriate state-owned assets and the added values. In terms of operating
performances, it is still quite controversial on the question of how much of the current operating
performances of state-owned enterprises come from the rise in efficiencies. However, it is obvious
that state-owned enterprises have benefited a lot while the prices of global resource elements are
quickly rising and the market demands are constantly expanding through the occupation of land and
other resources for free or at excessively low expenses. In terms of the fairness of competition, since
state-owned enterprises have all along monopolized some key industries and sectors and constantly
squeezed out and swallowed up the rest players in the market with their administrative monopoly
powers, they have greatly damaged the market rules and have become the most important factor
hindering the healthy development of the national economy.
This chapter tries to explore the motives of state-owned enterprises reform in different stages
and the internal logic of the development of state-owned enterprises reform through examining the
processes of the reform of state-owned enterprises.
1. Reform of state-owned enterprises: “decentralizing powers and giving up
profits” as the main feature (1978~1986)
(1) Review on reform with “decentralizing powers and giving up profits” as the main
feature
The period from 1978 to 1986 is the period in which a variety of forms of reform were
explored. The reform during this period was carried out without breaking the original framework of
planned economy. The main feature of the reform in this period was “decentralizing powers and
giving up profits”. That is, granting operational rights and the right to earnings to enterprises to
mobilize the working enthusiasms of operators and employees and improve the enterprises’ outputs
so as to realize the purpose in ensuring growth in fiscal revenue. This reform mainly included a
variety of forms such as “expanding enterprises’ decision-making powers”, “replacing profits with
taxes” and “the leasehold system”.
a. The process of reform in “expanding enterprises’ decision-making powers”
In October 1978, Sichuan Province selected Ningjiang Machine Tool Plant and five other
enterprises to pilot the reform in “expanding enterprises’ decision-making powers”. It was
determined that the enterprises may, when the revenues increase, retain certain profits and the
employees may receive some bonuses. In May 1979, State Economic and Trade Commission and
five other departments selected Capital Iron and Steel Company, Tianjin Bicycle Factory, Shanghai
Diesel Engine Factory and five other enterprises in Beijing, Tianjin and Shanghai to pilot the reform
in “expanding enterprises’ decision-making powers”. Later in September 1979, the State Council
issued five documents concerning expanding enterprises’ decision-making powers and required
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local governments to carry out pilots. Within just one year from the end of 1979 when the
nationwide promotion of the reform in “expanding enterprises’ decision-making powers” began,
16% of the enterprises with the national budget carried out the pilots, and these enterprises
accounted for 60% of the total output value of all enterprises and 70% of the total profits of all
enterprises.
The reform in “expanding enterprises’ decision-making powers” initially changed the situation
of excessive control over state-owned enterprises by the government. Stimulated by bonuses and
incomes, the employees began to pay attention to and try to improve the enterprises’ economic
benefits. The reform in this respect mobilized the enterprises’ enthusiasms and initially invigorated
the economy. However, because of the lack of a clear definition of the boundaries of the rights of the
enterprises, the enterprises’ rights received no restrictions upon the granting of powers. Combined
with the changes in the macro environment and other impacts, the initial reform in “expanding
enterprises’ decision-making powers” failed to realize the objective in improving the national fiscal
status, and huge fiscal deficits appeared in 1979 and 1980 in succession (Huang Sujian, 2008). In
order to implement the tasks in turning in fiscal turnovers, the local governments began to test the
system of complete responsibility for profits among industrial enterprises in 1981 based on the
initial reform in “expanding enterprises’ decision-making powers”, and adopted three types of
distribution: “profit retention”, “complete responsibility for profits and losses” and “replacing profit
delivery by taxation and assuming sole responsibility for profits or losses”.
The system of complete responsibility for profits received a certain effects at the very start, and
some enterprises realized the objectives in increasing outputs and revenues within short terms.
However, the economic effectiveness of most of the enterprises remained largely the same as before.
Since the planned targets of enterprises were determined based on the completion of the targets of
the previous year, the system of complete responsibility for profits left the room for bargaining
between the enterprises and the government from the very start. Thus, it was inevitable to result in
such phenomena as “whipping the fast ox” and “uneven distribution of pain and pleasure”. By early
1983, the implementation of the system of complete responsibility for profits in a broader range
caused confused execution, price hike and other serious results. Therefore, the Central Government
decided to suspend the all-round implementation of complete responsibility for profits and adopted
the system of “replacing profits with taxes” (Huang Sujian, 2008).
b. The process of reform in “replacing profits with taxes”
The phenomena of “whipping the fast ox” and “uneven distribution of pain and pleasure”
occurred during the reform in “expanding enterprises’ decision-making powers” gave rise to the
thoughts on “replacing profits with taxes”. Through replacing profits with taxes, the policy
designers wished to be able to standardize and stabilize the fiscal revenues turned over to the
government by enterprises, strengthen enterprises’ economic responsibilities and even up the
competition conditions among enterprises through taxation measures so that they may proceed from
the same starting line. In1983, the State Council approved and transmitted the Trial Measures of the
Ministry of Finance on Replacing Profits with Taxes among State-owned Enterprises which
proposed to implement replacing profits with taxes in two steps: step 1, levy income taxes of fixed
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proportions from state-owned enterprises then determine the proportions of after-tax profits to be
turned over through negotiations; step 2, adopt a single tax system, turn income tax from
proportional tax into progressive tax, abolish the measures on the turning over of profits, and levy
resource tax, asset tax and regulatory tax, etc. (Du Haiyan, Zhang Yongshan, 1992).
The implementation of the first step in replacing profits with taxes began on June 1, 1983.
Income taxes were levied from the profits realized by large and medium-sized enterprises at a
unified rate of 55%. The after-tax profits of enterprises were left with the enterprises according to
proportions approved by the State and the rest were turned over to the State. The implementation of
the first step in replacing profits with taxes basically realized the objectives in stabilizing and
increasing fiscal revenues. The implementation of the second step in replacing profits with taxes
began in October 1984. However, the ultimate operation plan deviated from the original intention of
the reform. Since the product tax designed in the second step in replacing profits with taxes was too
heavy, many enterprises became unable to pay the fund tax that was irrelevant to profits but linked
with the possession of funds after paying the product tax. Therefore, the fund tax was abandoned in
the end and the turning over of profits was “replaced” by the adjustment tax with different rates for
different enterprises from large and medium-sized enterprises with more profits (Huasheng, 1987).
Replacing profits with taxes failed to relieve enterprises from excessive taxes in the end, and
bargains remained between enterprises and the government. Because of the nonstandard taxes that
replaced the turning over of profits, the conditions for external competition were not evened up, and
the problems of “whipping the fast ox” and “uneven distribution of pain and pleasure” became even
more serious.
c. The process of reform in “the leasehold system”
Starting from the pilot in Shenyang Automobile Industrial Company in 1984, many small
industrial enterprises embarked on the road of reform in the leasehold system. The leasehold system
was adopted among some small enterprises with small profits or at a loss at first, and the main
purpose was to solve the problems in losses. In actual operation processes, the competent
department set a rent of a certain amount and then leased the enterprise to an individual. Upon
expiry of the leasehold, the competent department received the rents agreed upon in the beginning
and the lessee received the remaining incomes. With the form of the reform in the leasehold system
constantly changing, lessees gradually developed from individuals to groups or entire members of
enterprises, and fixed rents also became rents with floating ratios. Finally, the leasehold system
became more and more similar to the contract system among small industrial enterprises. When the
contractual management responsibility system was widely popularized in 1987, the number of small
industrial enterprises adopting the form of leasehold continued to rise. According to a survey
conducted among 43,935 small state-owned industrial enterprises, by the end of 1988, 24,660
enterprises had already adopted leasehold or other modes of operation, accounting for 56.1% of the
total number (Huang Sujian, 2008). During the process of the reform in the leasing system, there
were also such forms of reform as “the system of director assuming responsibilities” and “the
system under which the factory director is held responsible for the attainment of certain objectives
during his or her tenure”. Judging from the operating practices and various features displayed, these
two forms of reform were early forms of the contract system.
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(2) Theoretical ideas during the process of reform in “decentralizing powers and giving up
profits”
Traditional theories on public ownership met with serious problems on incentive in reality. The
prevalent thoughts on “relying on the life secured job provided by the State and getting an equal
share from the enterprise regardless of the work done” have caused the low operating efficiencies of
state-owned enterprises and the gradual shrinkage of the State’s fiscal revenues. The aim of the
reform in “decentralizing powers and giving up profits” was to try to solve the problem in
insufficient incentives under the traditional framework of public ownership. The idea was to
mobilize the initiatives of operators and employees through granting some of the profits so as to
increase the enterprises’ outputs and ease the financial difficulties faced with by the State.
a. The difficulties faced by traditional theoretical thinking on public ownership
Public ownership was traditionally defined as: the form of ownership in which the properties
are in the common possession of a group of people in an aggregate manner, and all the members
enjoy equal rights and exercise the ownership right by taking collection actions (Liu Shijin, 1990).
The conductal pattern of public ownership characterized by collective actions results in the
excessively low correlations between individual conducts and conductal consequences. Thus, the
group members tend to reduce their own efforts as much as possible while obtaining the same
profits which may be called “free-riding” conducts. Extensive “free-riding” conducts result in
insufficient overall efforts which are embodied in specific organizations through prevalent laziness,
shirking responsibilities, overstaffing and low efficiencies. The normal operation of public
ownership requires the introduction of relevant institutions or individuals as agencies or agents.
However, since the agencies or agents have their own interest appeals which may cause such
problems as incentive incompatibility and opportunistic conducts, incentive and supervision systems
appear along with agencies and agents.
Corresponding to the traditional public ownership, there was the management system under
comprehensive planned economy. Under planned economy, state-owned enterprises served as the
subordinates of the governmental departments at various levels and shouldered different
responsibilities in ensuring social stability, sufficient employment and economic development. The
competent governmental departments at various levels realized respective functions and interests
through state-owned enterprises, an organizational form of public ownership of properties, while
state-owned enterprises themselves did not enjoy relevant operating autonomy as subjects in micro
economy. The result of such an economic system was the lack of necessary links between the efforts
made by managers and employees in operation and the profits received by them. That is, “you get
the same profits whether you work hard or not, and whether you do your job or not”. Therefore, as
the agents of state-owned enterprises, the managers and the employees concealed their productive
potentials with informational advantage and reduce their own efforts and resulted in the egalitarian
practices among enterprises and employees. The public sector of the economy where properties
were owned by all delivered poor operations with no one being held responsible, and the State was
finally forced to consider reforms on state-owned enterprises under the pressures from serious fiscal
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deficits.
b. Theoretical exploration and practice evaluation concerning the reform in “decentralizing powers
and giving up profits”
“Decentralizing powers and giving up profits” is a reform measure which, while maintaining
the original enterprise system unchanged, mobilizes the enthusiasms of the managers and employees
of enterprises and ensures the completion of the planned tasks of state-owned enterprises through
improving business assessment indexes and strengthening supervision and incentives. While
learning from the experiences of Eastern Europe in reform of state-owned enterprises, theorists put
forward various ideas on reform. Jiang Yiwei’s three theories –the theory of an enterprise-based
economy, the theory of staff and workers as main body of enterprise and the theory of economic
democracy were among the most famous theories at that time. According to the three theories, “the
economic restructuring in our country should proceed from the reality that enterprises lack
autonomy and enable enterprises to become independent basic socialist economic entities that
operate and develop on their own” (Dai Yuanchen, Xu Yaping, 1993). During the stage of the reform
in “decentralizing powers and giving up profits”, the idea of turning state-owned enterprises into
production main bodies of commodity economy with unified responsibilities, rights and interests
had become a common understanding among theorists.
Although the reform in “decentralizing powers and giving up profits” neither touched on the
property relations of state-owned enterprises nor changed the dependency relations between
enterprises and competent departments, it made a dramatic breakthrough in the interest distribution
pattern. The reform in “decentralizing powers and giving up profits” altered the situation in the past
when the government’s too rigid control over state-owned enterprises through increasing the
proportion of profits retained by enterprises and the incentives in increasing bonuses. The managers
and the employees began to be concerned about and try to improve enterprises’ economic benefits,
and the state-owned economy began to show signs of invigoration. However, after all, the reform in
“decentralizing powers and giving up profits” was only a measure in decentralizing powers under
the State’s unified plan, and the government still enjoyed an active position in
government-enterprise relations. The government might decide to continue with the decentralizing
of powers or to recover the rights based on the requirements of economic situation and politics.
Therefore, for the government and enterprises, all forms of reform in “decentralizing powers and
giving up profits” were short-term conducts.
The reform in “decentralizing powers and giving up profits” had a relatively big influence on
the conductal patterns of the managers and employees of state-owned enterprises and further
triggered adjustments in the macroeconomic policy. Before the restriction mechanism was
established, so long as the policy on profit distribution was loosened, the managers and the
employees were able to and have the enthusiasms to have the enterprises’ outputs deviated towards
themselves through various means. Under soft budget constraints, the state-owned enterprises
unlimitedly expanded economic scales, bargain with the competent departments and raised the
levels of bonuses. All these ultimately damaged the government’s revenue base and worsened the
State’s financial difficulties. Therefore, although the simple reform in “decentralizing powers and
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giving up profits” mobilized employees’ enthusiasms and increased outputs of enterprises within a
short term, it also planted the seeds for the retaking of power by governmental departments. When
both consumption and investment expanded together and the macroeconomic situation got worsened,
it was natural for the governmental departments to retake the power through retrenchment policies.
However, the state-owned enterprises did not cut down on the payment of salaries when both
investments and outputs reduced, and this caused the economic situation to further deteriorate. Thus,
the endless circle of decentralizing power – retaking power began.
The reform in “decentralizing powers and giving up profits” did not solve the problems in
egalitarian practices among enterprises and employees in a fundamental way. On the contrary, the
bargaining between enterprises and competent departments caused new inequalities and pricked up
the “uneven distribution of pain and pleasure”. Since the competent departments only loosened
restrictions in profit distribution and did not delegate power to enterprises in a real sense, the
problem in efficiency of the enterprises still could not be solved. When the national financial
revenue and expenditure got worse and the State was unable to give up any more profits to
enterprises, this reform came to an end and new ideas on reforming were incubated.
2. Reform of state-owned enterprises: “separating control from ownership” as the
main feature (1987~1992)
(1) Review on the process of the reform in “separating control from ownership”
The evolution from the reform in “decentralizing powers and giving up profits” to the reform in
“separating control from ownership” was a major in the reform on state-owned enterprises. While
the reform in “decentralizing powers and giving up profits” only wandered within the framework of
the planned economy, the reform in “separating control from ownership” gradually touched upon
the main part of the economic restructuring. Practices proved that the reform in “separating control
from ownership” played a very important role in ending the traditional planned economy.
Meanwhile, however, it could not complete the mission of reform on state-owned enterprises due to
various internal defects. The reform stage characterized by “separating control from ownership”
mainly included the “contract system” adopted among large and medium-sized industrial enterprises,
the later stage of the “leasehold system” adopted among small and medium-sized enterprises, the
“assets operation responsibility system” and the pilot reform on the “joint stock system” adopted
among some enterprises. This section only examines the reforming processes of the “contract
system” and the “assets operation responsibility system”, and the rest forms of reform are dealt with
in details in other parts of this article.
(2) The process of the reform of the “contract system”
The rudiment of the reform of the contract system came into being in the stage of the reform in
“decentralizing powers and giving up profits” in 1979 in the form of the contract system of profits
and taxes paid. Since the State Council began the comprehensive promotion of replacing profits
with taxes in 1983, most of the enterprises across China suspended the pilots and explorations in the
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contract system, and the reform of the contract system appeared on the historical stage once again in
1987. With the promulgation of the Interim Regulations on the Contract System of Managerial
Responsibility of Industrial Enterprises by the Whole People by the State Council in February 1988,
the contract system gradually replaced the rest forms of reform and became the mainstream of urban
economic reform. From 1988 to 1990, over 90% of the industrial enterprises across the whole
country within the budget completed the first round of contracting and then began the second round.
The reform of the contract system included several specific forms such as “fixed quota for
profits and taxes paid”, “fixed contract for low-profit and low-loss enterprises”, “incremental quota
for profits and taxes paid”, “targeted contract for profits and taxes paid” and “quota for losses or
descending quota for losses”. The core of the reform was to cover the base of profit payment,
stabilize the distribution relations between the State and enterprises and increase the total interests of
all parties through mobilizing the contractors’ initiatives. Since the reform of the contract system
was simple and easily implemented and there was a good chance to increase incomes without
spending more, the enterprises were able to obtain tangible profits through increased outputs and
incomes. Thus, the reform was widely welcomed by various parties. In the first year of the first
round of contracting, things went along smoothly, and the enterprises were able to have remarkable
profits retained while paying the profits and taxes. However, with the changes in the external
economic situation, the irrationality of the enterprises’ internal operating mechanisms and the
variability of policies became more and more prominent, and the space for benefits generated by the
contract system decreased each year. By the time when the new round of contracting began in
1991-1992, the enterprises were generally afraid of the difficulties and were unwilling or dared not
to sign contracts. Therefore, this round of contracting barely survived under loosened contracting
conditions and the competent departments’ ideological work.
During the reform of the contract system, short-term earnings and long-term losses was a very
popular phenomenon. The contract system realized the separation of ownership and control within a
certain period of time through contracts and other legal forms, and this created the conditions for the
independent operation of enterprises and thus enlivened the enterprises. However, the contract
system itself did not change the traditional enterprise system dependent on administrative measures
(Du Haiyan, 1992). Governmental intervention in enterprise operation was a common phenomenon.
In particular, when an enterprise performed poorly or the problem of salary’s erosion into profits
became serious, the government tended to retake the managerial authority of the enterprise; when
the external economy and the policy environment got worse and an enterprise was unable to
accomplish the contracting task, abandoning the managerial authority and returning to the old
system were often the preferred choice. However, the government had to delegate powers once
again when enterprises lacked energy due to excessively stringent control and the state fiscal
revenue fell. Therefore, the reform of the contract system could only continue to stagger forward in
the circle of “delegating power and then retaking it”.
(3) The process of the reform of the “assets operation responsibility system”
While learning from the experiences and lessons of reform in other forms, the reform of the
“assets operation responsibility system” put forward the idea of restructuring the microeconomic
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foundation. This idea included contents in two respects. One was the diversification of ownership
forms and economic sectors. That is, private capitalist economy should be allowed within a certain
scope. The other was that ownership and managerial authority should be separated once again so as
to enable state-owned enterprises to be freed from the administrative reporting system and become
real producers and operators of goods (Hua Sheng, 1987). The reform of assets operation
responsibility system had the solving of problems in the managerial authority of enterprises as the
core content of the reform in the first stage which was divided into three steps. First, the competent
department of an enterprise should invite experts to form an assessment committee, have the
existing assets of the enterprise as the object and select the operator through bid invitation. Second,
the chosen operator should become the legal person of the enterprise, sign the contract on operation
responsibilities and reach agreement on the assets, personnel disposal, decisions on production and
other matters during his term of office with the competent department. The operator should enjoy
the right of cancellation and merger of the enterprise and the right of internal distribution of the
enterprise. Finally, upon termination of the term of office, the competent department should
organize a bid invitation to select the new operator, and reward or punish the previous operator
based on the results of asset assessment (Hua Sheng, 1987). The introduction of the reform of the
“assets operation responsibility system” raised great concerns in the society and made some
achievements in the pilots. However, due to the smaller concession range of the reform of the
“assets operation responsibility system” was smaller than those of other forms of reform, the strong
control over operators and the high requirement in the operational skills and qualities of the
responsible persons of competent departments, it was not applied in on a large scale when
enterprises were free to choose the forms of reform.
(4) Theoretical thoughts during the process of the reform in “separating control from
ownership”
As the form of reform during the transition towards the modern enterprise system, the reform
in “separating control from ownership” exerted significant impacts in both theoretical exploration
and practices. It not only made huge achievements, but also revealed a number of problems. To a
considerable extent, the reform in “separating control from ownership” clarified the interest
distribution relations between the State and enterprises, laid the foundation for the management
philosophy on developing enterprises that operate independently and assume sole responsibility for
their own profits and losses, and cultivated the thoughts on properties for the enterprises. Besides, it
also cultivated a group of entrepreneurs with the senses of marketing sense and management in
practice and reserved human resources for the establishment of the modern enterprise system.
(5) Theoretical exploration into the reform in “separating control from ownership”
The idea of “separating control from ownership” intends to assign the economic responsibility
in the management of an enterprise to its operator without changing the original form of property
relations of the enterprise, improve its economic benefits through strengthening stimulation and turn
the enterprise into a producer and operator of goods which operates independently and assumes sole
responsibility for their profits or losses. If “decentralizing powers and giving up profits” only
mobilized enterprise employees’ initiatives through interest stimulation, then “separating control
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from ownership” highlighted operators’ positions and realized enterprises’ business objectives
through “managerial revolution”. The enterprises and the competent departments signed assignment
contracts and specified both parties’ rights and obligations through one-on-one negotiations, and this
turned the competent departments’ daily intervention in enterprises into regular interventions so that
the operators received more autonomy in management. In terms of the interest distribution
mechanism, the owners obtained their shares of revenues of assets at the expense of a certain
proportions of control within a certain periods; while enterprises received definite shares of
revenues through increasing profits from outputs. “Separating control from ownership” ultimately
formed a distribution relationship characterized by shared risks and interests (Dai Yuanchen, Li
Hanming, 1988).
The “assets operation responsibility system” put forward by Hua Sheng and other scholars was
a typical thought on ownership reform generated in the reform in “separating control from
ownership”. Proceeding from the property relations, the theory of the “assets operation
responsibility system” put forward the fundamental micro thought of restructuring the economy.
Hua Sheng et al held that it would be difficult for the reform of state-owned enterprises to continue
without breaking the original property right system (Hua Sheng, 1987). Due to various reasons, Hua
Sheng et al failed to conduct further theoretical exploration in this respect.
As the most important human capital among enterprise organizations, entrepreneurship enjoyed
a certain degree of attention and development during the reform in “separating control from
ownership”. Through the selection of operators and the elevation in operators’ rights and statuses,
the managers of state-owned enterprises who used to act as the executors of the government’s
management decisions gradually became professional managers. Although the operators of
state-owned enterprises and government officials still switched their roles frequently under an
environment without a clear line between the functions of the government and enterprises, it created
the conditions the training of a team of entrepreneurs who operate independently and have the
courage to take risks in the future, after all.
(6) Comments on the reform practices in “separating control from ownership”
All the problems generated in the reform practices in “separating control from ownership”
stemmed from the arrangement of the property right system of publicly-owned enterprises which
was embodied through such outer forms as the bargaining mechanism due to the lack of a clear line
between the functions of the government and enterprises, insider control, soft budget constraint and
the short-termism in enterprise conducts. “Separating control from ownership” was only limited to
the separation of the State’s ownership from enterprises’ managerial authority, and state-owned
enterprises could not operate independently or assume sole responsibility for their profits or losses
under such an environment.
As the leaders of enterprises at a higher level, competent governmental departments enjoy the
right to appoint, remove and appraise the owners of enterprises. In the reform practices in
“separating control from ownership”, the bargaining mechanism became the conductal pattern in
defining rights and duties between enterprises and competent departments and between competent
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departments and other governmental departments. For the sake of their own economic benefits,
enterprises always tried every means to lower the operating targets as much as possible. In order to
accomplish tasks, the competent departments sets targets as high as possible for enterprises and, at
the same time, joined hands with enterprises to try to get operating targets as low as possible from
finance, taxation and other departments. In additional to normal business dealings, the rest
governmental departments apportion a variety of financial obligations to enterprises. Moreover, the
bargains often had the completion of targets in the previous year as the bases, and new targets were
formed by raising the quotas. In most bargaining mechanisms, the performance of an enterprise was
largely dependent on the factors other than management efforts. Therefore, such phenomena as
“uneven distribution of pain and pleasure” and “whipping the fast ox” have all along existed among
enterprises.
As independent stakeholders, state-owned enterprises always have the initiative to increase
their own shares in profit distribution by making use of informational advantages. Since alliances
are easily formed between operators and employees, the profits were seriously eroded by wages due
to wage comparisons and insider control. Even if the reform in “changing allocation of funds into
loans” was implemented, the problem of soft budget constraint was still serious, and the enterprises
were only responsible for profits. Trying their best to expand investment scales, the enterprises
obtained additional outputs and profits through extensively adding factors of production and did not
have to worry about investment losses. The excessive expansion of the “thirst for investment” and
the phenomena of wages erode profits caused dual expansion of investment and consumption which
ultimately resulted in the out of control of the macro economy and the government’s new
intervention.
The reform in “separating control from ownership” only granted enterprises with a part of
managerial authority. Therefore, the state-owned enterprises did not become real subjects of
property rights and thus could not change their status as subsidiary bodies of competent departments.
The competent departments were able to change the interventions in enterprises according to their
own needs or to influence the enterprises’ management through appointing or removing the
operators. When the future was full of uncertainties, the operators of enterprises were only
concerned about the operating conditions within their own terms of office. As a result, they tend to
choose enterprise development modes yielding quick returns with relatively low investment and
were not much concerned about technical innovation and future development. In the end, although
the state-owned enterprises enjoyed relatively fast development in terms of asset scales, their
profitability was not accordingly improved, and they lost all the competitive advantages when faced
with the challenges from new private economy and foreign-funded enterprises.
3. Reform of state-owned enterprises: “establishing the modern enterprise system”
as the main feature (1993 to the present)
(1) Review of the reform process in “establishing the modern enterprise system”
From “decentralizing powers and giving up profits” to “separating control from ownership”
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and then to “establishing the modern enterprise system”, the reform of state-owned enterprises
gradually changed from passive reform into active reform and then entered the core area – the
reform of property rights. The reform in “separating control from ownership” provided a number of
important conditions for the launch of the new stage of state-owned enterprises reform: forms of
non-public economy has appeared in China’s economy, the entrepreneurial class has initially taken
shape, the awareness of property rights has been initially developed, and the planned economic
system is quickly transforming towards market economy. The reform process with “establishing the
modern enterprise system” as the main feature includes the following stages: “reform of the
joint-stock system”, “strategic reorganization of state-owned enterprises”, and “establishing the
state-owned assets management system”.
a. Exploration into early pilots in the “joint-stock system”
The earliest exploration in the reform of the joint-stock system began in the form of employee
shares. The establishment of Beijing Tianqiao Department Co., Ltd. and Shanghai Feilo Acoustics
Co., Ltd.’s issuance of shares to the society in 1984 marked the official start of pilots in the
joint-stock system. After the State began to adopt a tight monetary policy in the latter half of 1985,
pilots in raising funds through share issuance began across the whole country with a view to solve
the problem of insufficient working capitals of enterprises (Zhang Xiaoming, 1988). Although the
reform of the "joint-stock system" was already a popular concept from 1985 to 1986 and pilots were
conducted in different places, people were largely in a wait-and-see state, and new pilots were not
carried out until October 1987 when the 13th Party Congress was convened. The main effects of
early reform of the “joint-stock system” were the establishment of new channels for financing. Since
the holders of the shares issued by most of the companies were able to repayment of principals and
interests at maturity and terminal dividends, these shares had the features of both stocks and bonds.
Such a fake joint-stock system actually became a way for enterprises to increase the incomes of
their employees. Moreover, the financial market then lacked necessary conditions, the early reform
of the “joint-stock system” became a mere formality in the end.
b. Process of the reform of the “joint-stock system”
The establishment of Shanghai Stock Exchange in 1990 and the establishment of Shenzhen
Stock Exchange in 1991 marked the beginning of a new stage of development of the reform of the
“joint-stock system”. In his remarks made during the inspection tour of South China in early 1992,
Deng Xiaoping gave a positive comment on the experiments in the reform of the “joint-stock
system” and this parted the curtain of property rights and joint-stock reform of state-owned
enterprise. In May in the same year, State Commission for Restructuring the Economic System
joined hands with other governmental departments to promulgate the Pilot Measures for Joint-stock
Enterprises and began to promote the pilot reform of the “joint-stock system” in a more positive
attitude. By the end of 1992, there were already over 3,700 pilot joint-stock enterprises across the
whole country, and 92 of them have been listed in stock exchanges. The promulgation of the
Company Law in 1993 indicated that the joint-stock reform of state owned enterprises has embarked
on the path of legalized and standardized development
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In 1993, the 3rd Plenary Session of the 11th CPC Central Committee adopted the Decision on
Several Issues concerning the Establishment of Socialist Market Economy and set the establishment
of a modern enterprise system characterized by clearly established ownership, well defined power
and responsibility, separation of enterprise from administration, and scientific management as the
direction for the reform of state-owned enterprises. In 1994, the State Council selected 100 large and
medium-sized state-owned enterprises to carry out pilots on the establishment of the modern
enterprise system, and pilots were also conducted in over 2,000 enterprises by various local
governments and departments. Although the joint-stock reform was a great step forward towards the
modern enterprise system in form, it failed to solve such fundamental problems as mixed functions
of the government and enterprises and absence of owners or establish an effective corporate
governance structure. The competitions in the market coming from private and foreign-funded
economies fully revealed the institutional weak points of state-owned enterprises and resulted in the
pervasive bad performances and losses of state-owned enterprises. With the losses of state-owned
enterprises continued to expand and the State’s financial burden constantly became heavier, the
Central Government put forward thoughts on the strategic reorganization of state-owned enterprises
so as to solve the various difficulties faced with by state-owned enterprises.
c. Process of the reform of the "strategic reorganization of state-owned enterprises"
From 1995 on, the reform of state-owned enterprises changed from individual pilots by
enterprises into the reform of the entire state-owned economy, and “individual enlivenment” was
gradually replaced by “overall enlivenment”. In September 1995, the 5th Plenary Session of the 14th
CPC Central Committee put forward the ideas of “strategic reorganization of state-owned
enterprises” and “focus on the restructuring of major enterprises and leave minor ones to fend for
themselves”. The 4th Plenary Session of the 15th CPC Central Committee decided to “strategically
adjust the layout of state-owned enterprises and reorganize state-owned enterprises”. When the
overall enlivenment of state-owned enterprises was put forward, the problems accumulated over a
long time remain unsolved, and the entire state-owned enterprise system was already in a plight
where 1/3 of the enterprises had explicit losses while 1/3 were had hidden losses. Most of the
state-owned enterprises were faced with such problems as insufficient funds for development,
redundant employees and excessive social burdens. Therefore, some of them adopted the reform
approaches such as division reformation and seeking financing by listing on the stock market. In
1997, the Central Government required to solve the problems in the overall difficulty relief of
state-owned enterprises within around three years, focus on the restructuring of major enterprises
and leave minor ones to fend for themselves and resort to strategic reorganization so as to accelerate
the reform process. In terms of the overall layout of state-owned enterprises, the State gradually
narrowed down the key areas as: backbone enterprises in industries relating to national safety,
natural monopoly industries, industries providing public products and services, pillar industries and
high and new technology industries. After SASAC was established in 2003, the State mainly
confined state-owned enterprises within such industries as petroleum and petrochemical, power,
national defense, telecommunications, transportation, mining, metallurgy and machinery.
d. Process of the reform in “establishing a state-owned assets management system”
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In November 2002, the 16th Party Congress put forward the idea of establishing a state-owned
assets management system, and the central government and the local governments at provincial and
municipal levels set up state-owned assets administration institutions respectively to perform the
duty of investor on behalf of the State. In March 2003, the State-owned Assets Supervision and
Administration Commission of the State Council (SASAC) was officially established to perform the
duty of investor on behalf of the State, and brought the large-scale state-owned enterprises,
infrastructures and important natural resources relating to the lifeline of the national economy and
national safety into its jurisdiction. In October 2003, the 3rd Plenary Session of the 16th CPC Central
Committee required the function of the government in public administration to be separated from
the function of the investor of national assets and urged enterprises to preserve and increase the
values of state-owned assets, prevent the loss of state-owned assets, and set up the budget system for
state capitals and the evaluation system for the business performances of enterprises. In June 2004,
state-owned assets supervision and administration institutions corresponding to SASAC were
established in different provinces across the country. By the end of 2007, the organization of
state-owned assets supervision and administration institutions and organizational systems at
prefecture and city levels across the whole country was largely completed. Based on the Interim
Regulations on the Supervision and Administration of State-owned Assets of Enterprises SASAC
has by far formulated 16 rules and over 40 normative documents concerning enterprise restructuring,
transfer of property rights, asset appraisal, performance assessment and financial supervision and
administration, and the state-owned assets supervision and administration institutions across the
country have formulated over 1,000 local laws, rules and regulations in succession. The legal system
on the supervision and administration of state-owned assets has been largely formed.
e. Temporary fiscal measures supporting the reform
In December 1993, the State Council stipulated in the Decision of the State Council on
Implementing the Tax Division Management System that: “As a transitional measure, most of the
old wholly state-owned enterprises registered before 1993 may withhold their after-tax profits
according to specific circumstances. Meanwhile, the income taxes paid by low-profit enterprises
will not be withdrawn from the treasury. ”
(2) Theoretical thoughts during the process of the reform in “establishing a modern enterprise
system”
Until the reform stage in “establishing a modern enterprise system”, the practices of
state-owned enterprises reform have already completed transformed from “passive” reform into
“active” reform, and the biggest feature during this stage is that the tools of the modern “enterprise
theory” have been consciously adopted by the theorists as the guidance of the reform. According to
Qian Yingyi’s view, the “enterprise theory” is mostly focused on the contents in the following four
aspects: nature and limits of enterprises, the organizational structures inside enterprises, the capital
structures of enterprises and the separation of ownership from the control of enterprises (Qian
Yingyi, 1993). Zhang Weiying held that an entire “enterprise theory” should deal with three
correlated issues at least: why does an enterprise exist, how to assign the power of attorney, and
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what is the best contract for a consigner to bring the proxy under control (Zhang Weiying, 1995).
With respect to the reform of state-owned enterprises in this stage, the theoretical disputes are
mainly focused on whether it is necessary and how to solve the problem in the low efficiencies of
state-owned enterprises and prevent losses of state-owned assets through the reform of property
rights.
a. Disputes on the theoretical thoughts on “establishing a modern enterprise system”
Lin Yifu et al explained the importance of sufficient information and the market competition
system through analyzing the logics in the forming and addressing of consignment and proxy issues
among modern enterprises. Due to the information asymmetry between owners and operators and
the asymmetric responsibilities on the enterprise’ business results of the two parties, the problem of
asymmetrical information should be addressed through institutional arrangement so as to prevent
possible opportunistic conducts of the prox. As far as state-owned enterprises are concerned,
subsequent supervision may be conducted from without through having the average profit obtained
under a competitive market environment as the reference for assessment, and prior supervision may
be conducted from within through the designing of the enterprise’s governance structure (Lin Yifu et
al, 1997). Lin Yifu et al advocated solving the problems in the supervision and incentive of the
managers of state-owned enterprises through the designing of internal and external corporate
governance mechanisms. Their focus was not on the reform of the property right system.
Zhang Weiying held that state-owned enterprises should solve the problems in the selection and
incentive mechanism of operators, especially the selection of operators. Since a modern enterprise is
a production organization made up by a team, there are invisible information problems between
team members, and these problems may result in laziness or the operator’s position is held by an
incompetent person. The solving of this problem first requires the rights of residue claim and residue
control to be matched up; the right of residue claim should be conferred to those that are the most
important, the most difficult to supervise and enjoying information advantages; and the operators
should be selected by the asset owners who assume risks in a real sense. As state-owned enterprises
do not have real ultimate owners, the State may occupy state-owned assets by transferring
state-owned property rights into state debts so as to realize the aim of “ensure stable yields despite
drought or excessive rain” (Zhang Weiying, 1996). From Zhang Weiying’s view point we may find
that the matching up of the right of residual claim and the right of residual control actually requires
clearly established property right and the implementation of control, and the operators’ right to
choose should in the hands of the real owners of property rights. The idea of converting state-owned
property rights into state debts was not generated because state debt is the best choice. It was the
second-best choice as a result of the absence of a real property right owner under the public
ownership system.
b. Comment on the theoretical practices in “establishing a modern enterprise system”
The government’s financial difficulty is often the main reason for reform. The earliest reform
of state-owned enterprises took place in a period of successive years of deficits, the main purpose of
the reform of the “joint-stock system” was to raise funds for the development of enterprises, and the
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strategic reorganization of state-owned enterprises was also launched because the central
government was unable to continue to shoulder the losses of state-owned enterprises. However, as
the “most active” reform, the reform in “establishing a state-owned assets management system” has
deviated from the original course.
The joint-stock reform of state-owned enterprises hoped to promote enterprises to changing the
management mechanism and improve the management efficiency through establishing corporate
property rights and corporate governance structures of enterprises (Guo Kesha, 1995). With respect
to the form, through the joint-stock reform, state-owned enterprises were able solve the problems of
separation of government and capital and the consequent absence of a clear line between the
functions of the government and enterprises, and avoid governmental departments’ direct
intervention in enterprises and guarantee the independent management of enterprises. However, as
the controlling shareholders of state-owned enterprises, the governmental departments’ status of
owners must be embodied through various forms. Therefore, government-body-turned companies
could not solve the problem in independent management of enterprises, and state-owned enterprises
could not withstand the challenges from private economy and foreign-funded enterprises. Although
the joint-stock reform failed to enable state-owned enterprises to get rid of insider control and low
management efficiencies, it straightened out the property rights relations of state-owned enterprises
after all and laid the foundation for the strategic reorganization of state-owned enterprises in the
next step.
The strategic reorganization of state-owned enterprises vowed to “focus on the restructuring of
major enterprises and leave minor ones to fend for themselves”, and its real purpose was to “cast off
burdens” and “narrow down the business fronts of state-owned enterprises”. The real purpose of
“leaving minor enterprises to fend for themselves” was to have small state-owned enterprises
privatized so as to reduce the financial pressures on the government. It was an imitation of the
“Shandong Zhucheng Model” in early 1990s on a larger scale. The operators taking these
enterprises were often the managers of core technicians of the original enterprises who were very
familiar with the enterprises and the relevant markets. Therefore, the performances of these
enterprises improved soon after privatization. If we do not look at “leaving minor enterprises to fend
for themselves” from the perspective of the loss of state-owned assets, this reform form was actually
a Pareto improvement. That is, the competent departments cast off the burdens, while the original
operators and employees all benefited from the improvement in the enterprises’ profits. While
“focusing on the restructuring of major enterprises”, the business fronts of state-owned enterprises
were narrowed down to monopoly industries with profit potentials and the sector of scarce resources
with strategic significance. Although the enterprises’ efficiencies were not immediately improved
due to “the focus on the restructuring of major enterprises”, the enterprises were able to survive due
to their monopoly positions. However, with the fast development of the non-public sector of the
economy, state-owned enterprises are still faced with austere survival pressures on the whole. Thus,
the central government put forward the target of “three-year turnaround”. The main measures of
“three-year turnaround” were division reformation and listing in packages. The high quality assets
within a state-owned enterprise would be packed either alone or with the assets of another enterprise
to form a highly profitable company and this company would be listed, while the original excess
personnel or non-performing assets would be left in the parent company. Division reformation was
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only a re-splitting and combination of original assets and did not substantially change the operation
capacity of the enterprises. However, since it has opened up the channels for raising funds and
peeled off a part of social burdens, it has laid the foundation for future expansions.
If the reform in the strategic reorganization of state-owned enterprises continued, the scale of
private economy would have become bigger and bigger, the remaining state-owned enterprises
would have gradually pulled back into public economic sectors, and China’s market-oriented reform
would have been closer to perfection. However, with the establishment and development of the
state-owned assets management system, the situation has been reversed and the economic strengths
of the state-owned enterprises have begun to grow. When the vast members the public sector have
commissioned their rights to a few agents, the originally weak control power has actually been
strengthened, and the agents have almost become actual owners (Liu Shijin, 1990). The competent
departments under the state-owned assets management system – SASAC or local state-assets
supervision and administration bureaus– solely enjoy the ownerships over enterprises without any
administrative interventions from the rest governmental departments. Thus, the real property rights
of state-owned enterprises have been strengthened. In other words, when there are only two agents
left– SASAC and operator of the enterprise– they will become the actual owners of the enterprise.
Moreover, state-owned enterprises have also acquired the administrative monopolies. Therefore,
when the interests of the competent departments and the state-owned enterprises gradually come to
an agreement, the managerial problems of state-owned enterprises seem to be solved under a system
without requirements on the turning over of profits.
4. Summary
The economic restructuring in China has been implemented based on the constant reflection on
the old system. Since most of the stakeholders have benefited from this process, this reform has both
progressive and incremental natures at the same time. As far as state-owned enterprises are
concerned, progressive reform develops from adjustment within the system into reform on the
system itself, while incremental reform is embodied in the improvement in the efficiency of the
entire national economy and the overall extrication of state-owned enterprises upon strategic
retrenchment. The reform of state-owned enterprises has not only has not only obtained tremendous
achievements in economic performances, but also made unprecedented breakthroughs in reform
theories. However, although the problem in the ill-matched residual claim and residual control of
state-owned enterprises in the public ownership has been mitigated to a certain extent through the
“conspiracy” between SASAC and state-owned enterprises, such a “conspiracy” not only is unable
to solve the problem in a fundamental sense, but also will bring lethal damage to the rules of market
economy.
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Chapter 2 Classification of state-owned assets and state-owned
enterprises
In terms of the economic sectors to which the enterprises belong, state-owned enterprises were
traditionally classified into state-owned industrial enterprises, building installation enterprises,
traffic, post and telecommunications enterprises, commercial service enterprises and financial
enterprises. With the development and reforms in the economic structure, there have been various
changes in institutions and the asset natures. We now generally classify them by the nature of assets
or by the management division.
1. Classified by the nature of assets
In terms of the nature of assets, state-owned assets may be classified into productive assets,
assets of administrative institutions, resources assets and other equity assets, and other equity assets
include creditor’s rights, intangible creditor’s rights and inventions of national proprietary
technologies, etc.
“Productive state-owned assets” refers to the capitals and their equities in enterprises owned by
the state as an investor according to law, including state-owned assets of enterprises; non-productive
assets owned and used by administrative institutions that are converted into productive assets in
various forms in order to gain profits; and the part of state-owned resources that have been put into
the production and operation processes. According to the natures of operational activities of the
assets of enterprises, productive state-owned assets may be further classified into three categories:
state-owned assets of non-financial enterprises, state-owned assets of financial enterprises and
productive state-owned assets of public institutions.
Financial state-owned assets include the assets of banking, securities, insurance, fund and other
financial institutions, and non-financial state-owned assets main refer to the assets of state-owned
industrial and commercial enterprises. By 2009, among all non-financial state-owned enterprises,
the net assets of central and local enterprises were 10,266.7 billion yuan and 6,166.9 billion yuan
respectively. By the end of 2007, the total amount of state-owned capitals of central financial
enterprises was 1.2 trillion yuan, accounting for over 80% of all paid-in capitals, and the total
amount of assets under management exceeded 40 trillion yuan.
“Assets of administrative institutions” refers to the non-productive assets formed through the
appropriation of funds to administrative institutions by the state, including the state-owned
properties owned by governmental institutions, the army and cultural, educational, health, scientific
research, news, justice, social welfare and other administrative units or public institutions.
According to the data of the Ministry of Finance, by December 31 2008, the total assets of
administrative institutions across the whole country amounted to 9.04 trillion yuan, the total net
assets without liabilities was 6.10 trillion yuan, and the net assets of administrative institutions
accounted for some 1/3 of all state-owned net assets.
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Resources assets may be divided into two parts: land owned by the state and the mineral
resources and other natural assets whether proven or not.
Fig. 2.1 Net value of state-owned assets of administrative institutions 1998～2008
Source: Management of state-owned assets of administrative institutions, website of the Ministry of
Finance.
2. Classified by the management division
State-owned assets are relatively clearly defined in terms of assets. However, these assets are
ultimately subject to the operation of different enterprises and the management of different
departments. According to the difference in management division, state-owned assets may be
classified into: (1) central enterprises under the supervision and administration of State-owned
Assets Supervision and Administration Commission of the State Council; (2) local state-owned
enterprises under the supervision and administration of local state-owned assets supervision and
management commissions; and (3) three types of enterprises under the supervision and
administration of the Ministry of Finance: enterprises affiliated to central administrative institutions,
financial enterprises and state-owned enterprises the financial relations of which are separately
listed the planning of the Ministry of Finance.
Fig. 2.2 State-owned enterprises classified by the management division
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SASAC
the
Council
under
State
Central
enterprises
Local
state-owned
assets
supervision and
administration
commissions
Industrial enterprises
Utility enterprises
City investment companies
Other types of state-owned assets
Local
state-owned
enterprises
Local financial enterprises
Other
institutions
机构
China Arts & Entertainment Group
China Publishing Group
China National Tobacco Corporation
China Post Group
State-owned
Separatel
y listed
enterprises
企业
Ministry
of
Assets
of
administrative
institutions
funded
by
central
administrative
Affiliated enterprises funded by central public institutions and
central cultural enterprises
Finance
China
Investment
Corporation &
China
Huijin
Investment Ltd.
Affiliated enterprises
institutions
Central
enterprises
financial
1. State-owned enterprises under the supervision and administration of State-owned Assets
Supervision and Administration Commission of the State Council
Enterprises under the administration of SASAC include the state owned enterprises under the
supervision and administration of SASAC under the State Council (central enterprises) and the
state-owned enterprises under the supervision and administration of local state-owned assets
supervision and administration commissions (local state-owned enterprises). At the end of 2009,
129 central enterprises owned 6,293.09 billion yuan of state-owned assets and equities, and the total
asset amount reached 21,058.08 billion yuan. In 2010, the number of enterprises with SASAC under
the State Council acting as the investor (central enterprises) further dropped to 123.
The central enterprises are mainly engaged in defense, oil and petrochemical, steel, power,
machinery and equipment manufacturing, telecommunications, air transportation, water
transportation, building and construction and investment industries. There are also central
enterprises that are business enterprises and science and technology enterprises. Among them,
science and technology enterprises form a special group among central enterprises. All of such
enterprises are products of the restructuring at the end of 1990s from original scientific research
institutes affiliated to ministries or commissions. When SASAC was just established in 2003, 29
such enterprises were subject to its administration, and these enterprises were classified as science
and technology enterprises engaged in production and operation. After several rounds of mergers
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and acquisitions, there are currently 10 science and technology central enterprises in relatively
larger sizes, and their total assets, total profits and other indexes account for less than 1% of those of
all the central enterprises under the supervision and administration of SASAC.
Table 2.1 Operation of state-owned assets of central enterprises in 2009
Total
asset
Total
operating
income
Total
profit
Net profit in the
possession of the
parent company
Total
amount
of taxes
actually
paid
Total
amount
of state
owned
assets
Total amount
210,580.8
126,271.6
8,151.2
3,989.6
11,474.8
62,931.7
Oil
and
petrochemicals
40,286.4
28,198.1
2,626.5
1,343.1
4,895.5
19,420.4
Steel
8,034.8
4,576.6
197.4
127.5
323.2
3,226.2
Power
47,789.6
22,510.1
419.0
66.3
1,739.5
10,437.5
Communications
21,169.1
8,920.8
1,655.8
797.1
952.7
10,586.2
Air
transportation
3,024.1
1,513.9
68.2
35.6
116.6
260.1
Water
transportation
5,504.5
2,380.3
37.8
36.2
79.2
2,014.3
others
84,772.3
58,171.8
3,146.5
1,583.8
3,368.1
16,987.0
Source: Bureau of Financial Supervision and Evaluation of SASAC, 2010A.
Source: Bureau of Financial Supervision and Evaluation of SASAC, 2010B.
In terms of industries, the enterprises under the supervision and administration of SASAC are
mainly industrial enterprises. However, if we look at the nature of assets, we may find that SASAC
is also the supervisor and manager of some financial assets. The reason is that, along with the
diversified and multi-leveled ownership structures as a result of the mutual shareholding of
enterprises and the mixed operation of enterprises, many industrial enterprises have also begun to
invest and operate heavily in the financial sector. In the past two years, PetroChina, Sinopec,
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CNOOC, Air China and other central enterprises have invested huge sums of money in the financial
sector, and the state-owned shares of Generali Insurance, Aegon and other joint venture insurance
companies have all been considered as being owned by SASAC. SASAC’s pure role as the investor
of “nonfinancial state-owned assets” is becoming more and more obscure.
2. State-owned enterprises under the supervision and administration of local state-owned
assets supervision and administration commissions
At local levels, the institutions responsible for the administration of state-owned enterprises are
not vertically linked with SASAC, and more extensive state-owned assets are subject to the
administration of local state-owned assets supervision and administration commissions. The Several
Opinions on Further Strengthening the Supervision of Local State-owned Assets promulgated by
SASAC under the State Council in August 2009 stipulates for the first time that local state-owned
assets supervision and administration commissions may, according to the authorization of the
people’s governments at respective levels, gradually bring the state-owned assets of local financial
enterprises, the productive state-owned assets formed with investments of public institutions and the
productive state-owned assets that used to be non-productive ones under the scope of supervision
and administration. Currently, the state-owned assets supervision and administration commissions in
different regions have different regulatory scopes. For example, the regulatory scope of the
State-owned Assets Supervision and Administration Commission of Beijing Municipality has
covered over 95% of the local state-owned assets. On January 11, 2011, Guangzhou Municipal
Government brings the productive state-owned assets across the whole city under the unified
regulation of state-owned assets regulation and administration institutions through the Working Plan
on Handing the State-owned Assets under the Supervision and Administration of the Municipal
Financial Bureau over to the Administration of the Municipal State-owned Assets Supervision and
Administration Commission. In addition, a number of provinces and municipalities such as
Shanghai and Chongqing have also brought financial state-owned assets under the regulatory scopes
of municipal state-owned assets supervision and administration commissions.
The Law of the People’s Republic of China on the State-Owned Assets of Enterprises
prescribes that “The state-owned assets supervision and administration body under the State Council
and the state-owned assets supervision and administration bodies established by the local people’s
governments according to the provisions of the State Council shall perform the investor’s functions
for state-invested enterprises on behalf of and upon the authorization of the corresponding people’s
government.” However, the Article also adds that “The State Council and the local people’s
governments may, when necessary, authorize other departments or bodies to perform the investor’s
functions for state-invested enterprises on behalf of the corresponding people’s government.”
Therefore, in terms of the administration of the state-owned assets of local financial enterprises,
there are two other forms of administration in addition to local state-owned assets supervision and
administration commissions’ exercising of investors’ rights on behalf of the government: exercising
investors’ rights through local finance offices; and exercising investors’ rights through enterprises
controlled by the government.
The bodies and departments that perform the investor’s functions on behalf of the
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corresponding people’s government shall be together referred to as the “bodies performing the
investor’s functions” hereinafter.
3. State-owned enterprises under the supervision and administration of the Ministry of
Finance
The enterprises under the supervision and administration of the Ministry of Finance may be
divided into three main categories:
The first type includes enterprises affiliated to ministries, that is, the enterprises affiliated to
central administrative institutions. There are over 6,000 such enterprises affiliated to 82 departments.
The state-owned assets of the enterprises affiliated to central administrative institutions (including
the enterprises affiliated to the People’s Bank of China, China Banking Regulatory Commission,
China Securities Regulatory Commission, China Insurance Regulatory Commission and National
Council for Social Security Fund and Civil Aviation Administration but with the exception of the
enterprises affiliated to State Administration for Science, Technology and Industry for National
Defense and other military industrial departments) are under the supervision and administration of
the Department of Administration and Politics and the Department of Education, Science, and
Culture of the Ministry of Finance respectively by the natures of the “investors” of enterprises. That
is, the affiliated enterprises funded by central administrative units (excluding cultural enterprises)
are under the administration of the Department of Administration and Politics; the affiliated
enterprises funded by central public institutions and central cultural enterprises are under the
administration of the Department of Education, Science and Culture; an enterprise funded by both a
central administrative unit and a central public institution is under the administration of the
Department of Administration and Politics or the Department of Education, Science, and Culture
with a higher proportion in contribution amount.
The data published by the Ministry of Finance indicate that, in the first 8 months of 2010,
central enterprises realized a total profit of 877.27 billion yuan, among which the profit of central
enterprises affiliated to ministries was 154.45 billion yuan. Since the State Council has cleared
prohibited central ministries and commissions to run enterprises, the existing central enterprises
affiliated to ministries are either run by the public institutions subordinate to central ministries or
commissions or established by the logistics and service centers of administrative units.
The second category includes financial enterprises. The state-owned assets of financial
enterprises refer to the equities formed with the contributions made to financial enterprises in
various forms by the people’s governments at various levels and their authorized investment
subjects. Before the joint stock reforms of the four major state-owned banks began, the Ministry of
Finance has all along performed the duty of the representative of the investors of wholly
state-owned financial institutions. After the joint stock reforms of Bank of China and China
Construction Bank started up on December 30 2003, China Huijin Investment Ltd. began to play the
role of the investors of the two banks. Currently, the majority of the state-owned financial assets are
held by the Ministry of Finance or China Huijin Investment Ltd. which is wholly owned by the
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Ministry of Finance through China Investment Corporation. However, the Ministry of Finance’s
position as the investor of state-owned financial assets has not been clearly authorized by law.
After 2006, the Ministry of Finance formulated and published a series of policies relating to the
assets appraisal, property rights registration, transfer and operational budgets of state-owned capitals
of state-owned financial enterprises to constantly strengthen its regulatory power over state-owned
financial assets. Among them, the Several Provisions on the Financial Management of Financial
Holding Companies (No. 89 [2009] of the Ministry of Finance) has specified the Ministry of
Finance’s role as the investor of China CITIC Group Corporation, China Everbright (Group)
Corporation and China Everbright Group Limited — The state-owned assets of financial holding
companies shall be held by the Ministry of Finance on behalf of the State. On March 17 2009, the
Ministry of Finance promulgated the Administrative Measures for the Transfer of State-owned
Assets of Financial Enterprises which endows with the financial departments at various levels the
examination and approval right over the transfer of state-owned financial assets. According to the
Measures, the regulatory scope of the Ministry of Finance over state-owned financial enterprises
shall include: state-owned and state-owned holding securities companies, fund management
companies, asset management companies, trust companies and insurance asset management
companies; enterprises affiliated to the Headquarters of the People’s Bank of China, China
Investment Corporation (including China Huijin Investment Ltd.), credit guarantee companies and
other financial enterprises. Meanwhile, the regulatory scope also covers financial asset management
companies, including China Huarong Asset Management Corporation, China Great Wall Asset
Management Corporation, China Orient Asset Management Corporation and China CINDA Asset
Management Corporation.
Being a wholly-owned subsidiary of China Investment Corporation, China Huijin Investment
Ltd. is a state-owned enterprise which, according to the authorization of the State Council, invests in
the equities of key state-owned financial enterprises and exercises investor’s rights and perform
investor’s obligations on key state-owned financial enterprises in proportion to the capital
contributions on behalf of the State according to law so as to preserve or increase the values of
state-owned financial assets. The four major state-owned commercial banks of Bank of China,
Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of
China are mainly controlled by China Huijin Investment Ltd. which also appoints directors to these
banks. In May 2009, the Administrative Measures for the Transfer of State-owned Property Rights
of Financial Enterprises promulgated by the Ministry of Finance officially took effect. It clearly
prescribes the Ministry of Finance’s examination and approval right over the transfer of state-owned
financial assets and authorizes China Huijin Investment Ltd. to perform the regulatory function as a
shareholder. China Huijin Investment Ltd. is the controlling shareholder or a shareholder of 12
financial enterprises in banking, insurance, securities and investment industries.
The third category refers to the state-owned enterprises the financial relations of which are
separately listed by the Ministry of Finance, including China Arts & Entertainment Group, China
Publishing Group and China National Tobacco Corporation, and the duties of the investor of China
Post Group is currently temporarily performed by the Ministry of Finance.
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The investor of China Arts & Entertainment Group, China Publishing Group and China
National Tobacco Corporation is the State Council, the Ministry of Finance has been authorized to
conduct supervision and administration of the productive state-owned assets of the groups, and the
Ministry of Culture, General Administration of Press and Publication and the Ministry of Industry
and Information Technology are the competent administrative departments of respective groups.
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Chapter 3
Current performance of state-owned enterprises (1):
Efficiency
In the analysis of this research, “state-owned enterprises” mainly refers to the state-owned
enterprises under the administration of SASAC under the State Council or the state-owned assets
supervision and administration commissions of local governments. In a broad sense, however, the
discussion does not exclude the state-owned enterprises of other types such as state-owned financial
enterprises. Due to the limitation in data, the data on the totals of “state-owned enterprises” mainly
come from the data on “state-owned and state holding industrial enterprises” of National Bureau of
Statistics of China.
1.Overview of the research on the efficiency of state-owned enterprises
The researches on the efficiency of state-owned enterprises are mainly focused on the
following sectors: performance changes and their influence factors during the evolution of
state-owned enterprises; comparison of efficiencies between enterprises with different proportions
of ownerships; differences in efficiency between different regions; and research on the productivity
of state-owned enterprises/industries. These researches are mainly empirical studies. Following are
some of the typical reference documents:
Measuring the factors influencing industrial efficiencies with data collected through nationwide
surveys, Liu Xiaoxuan (2000, 2004) found that the proportions of different ownership structures in
industries has a very important influence on industrial efficiencies. Using the data from various
provinces during the period from 1978 to 2003, Wang Zhigang et al (2006) measured, compared and
analyzed the production efficiencies between various regions with Stochastic frontier models,
finding that the eastern region enjoyed the highest efficiency which was followed by the middle and
the western regions in turn, and that the differences in the efficiencies between the regions remained
unchanged during the period. Xu Xiaonian (1997)’s study on the listed companies in China
indicated that the higher the proportion of state holding a company was, the worse its performance
would be; the higher the proportion of corporate shares was, the higher the company’s performance
would be; and that the proportion of individual shares was largely irrelevant to an enterprise’s
performance. Xu Xiaodong and Chen Xiaoyue (2003) found that if two listed companies in China
had different ownership structure natures in the biggest shareholders, they would have different
performances, equity structures and governance structures, and that the companies with their biggest
shareholders being non-state shareholders had higher corporate values and stronger profit abilities.
Yao Yang (1998) conducted empirical study on the internal and external efforts of non state-owned
economic contents on the technical efficiencies of Chinese industrial enterprises with the enterprise
data collected in the third survey, finding that non state-owned enterprises enjoyed higher
efficiencies than state-owned enterprises. Chen Xiao and Jiang Dong (2000) pointed out that non
state-owned enterprises only enjoy remarkably higher efficiencies in competitive industries.
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Next, we will focus on the analysis of several reference documents with two main indexes on
efficiency – financial indexes and productivity indexes.
(1) Efficiency research focusing on financial indexes
We will conduct an in-depth analysis on the research into the efficiencies of state-owned
enterprises by Liu Xiaoxuan and Li Liying (2005) and Hu Yifan et al （2006） through two
important reference documents.
Through analyzing, abstracting and summarizing the survey data of 451 sample enterprises
(1994 ~1999), Liu Xiaoxuan and Li Liying (2005) obtained the typical features of enterprise
restructuring. They conducted horizontal and vertical comparison between the efficiencies of
enterprises of different ownership types. Here are the conclusions: restructured enterprises indeed
enjoyed higher efficiencies than those that have not conducted restructuring, and the enterprises with
more individual equity capitals enjoyed higher efficiencies than those with more state-owned
capitals. What was worth mentioning is that the survey samples mainly came from four industries —
textile, machinery, electronics and the chemical industry. All of these industries were competitive
industries which had just undergone large-scale general restructuring practices and quite a
proportion of state-owned capital had not left them yet. As a result, they were able to represent the
features of the transition of most Chinese enterprises.
The calculation methods adopted by the article were C-D production function and the
econometric model of translog production function. The explanatory variables included equity and
capital structures, namely, national capital, collective capital, corporate capital, individual capital,
capital of Hong Kong, Macao and Taiwan and foreign capital; the shareholding structure, or the
proportions of shares held by different shareholding bodies (including governmental departments,
enterprise legal persons, foreign investors, enterprise operators, enterprise employees, external
natural persons, etc.); sponsors of restructuring; indexes of affiliations, including indexes at six
different levels: central, provincial, prefecture/city/, county/district and other levels; indexes on
industries, regions and years.
Conclusion: In the capital ownership structure of an enterprise, state-owned capitals have an
inverse relationship with the enterprise’s efficiency. Comparatively speaking, national capitals have
the lowest output efficiencies that are quite noticeable. Meanwhile, individual capital has a positive
correlation with efficiency and enjoys very stable and remarkable high output efficiency. The
capitals of Hong Kong, Macao and Taiwan, foreign capital and corporate capital also enjoy
remarkably satisfactory efficiencies. Compared with national capital, even collective capital enjoys
a higher efficiency.
Hu Yifan et al (2006) studied the performances of privatized state-owned enterprises. This
research was based on the World Bank’s survey materials on 299 Chinese manufacturing companies.
Among the 299 sample companies, 135 companies were solely state-owned companies, while the
rest 164 companies were formerly state-owned enterprises that had been restructured during the
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survey period, including 52 enterprises with over 50% of private shares.
Conclusion of the analysis on performances in the article: Yield: the three yield indexes all
remarkably increased after privation. Income and cost: the sharp increase in sales incomes and the
remarkable decline in the cost of unit sales income have significantly improved the companies’
profitability. Productivity: the productivity of the companies was significantly improved upon
privatization.
The article also compared the differences between the performances of total privatization and
partial privatization. Conclusion: the results of total privatization were better than those of partial
privatization: both the profitability and the production efficiency of the restructured private holding
companies were higher than those of state-holding companies.
(2) Efficiency research focusing on productivity and other indexes
The principal scholar studying enterprise productivity in China is Zheng Jinghai. Zheng Jinghai
et al (2002) were among the first to examine the impacts of various endogenous or exogenous
factors by making use of the data collected from 700 state-owned enterprises during the period from
1980 to 1994 and using the growth in productivity and the efficiency changes and technical
advances of its component parts as variables. Through flat panel data from 29 provinces in China
from 1979 to 2001, Zheng Jinghai et al (2004) found that China’s economic growth experienced a
high growth period of TFP (4.6%) during the period from 1978 to 1995, and a period of low growth
(0.6%) from 1996 to 2001.
In addition, Tu Zhengge and Xiao Geng (2005) studied the changes in TFP of 37 large and
medium-sized industrial enterprises in China from 1995 to 2002 with enterprise-level panel data and
by adopting the stochastic frontier production function model. They found that, during the period,
the average growth rate of TFP reached 6.8%, showing a rapid upward trend.
Liu Xiaoxuan et al (2009) analyzed the sources of enterprises’ productivity growth and then
analyzed enterprises’ efficiencies from another angle. In this article, Malmquist productivity indexes
are used as the indexes of enterprise productivity. M index may be divided into two parts: EC and
TC. The former reflects the relative gap between the enterprises under observation and the best
frontier and indicates the changes in the enterprise’s relative efficiency; while the latter reflects the
movements and changes in the best production front, indicating the enterprise’s ability in growth
effects. Having examined the efficiency growth rates of enterprises with different ownership
structures and their comparisons, the article reached the following conclusion: In terms of the
productivity growth (M index) of enterprises, state-owned and state-holding enterprises enjoyed the
biggest growth. The productivity growth of state-owned and state-holding enterprises mainly came
from the growth in EC. However, the growth in TC of state-owned enterprises was quite limited and
failed to surpass the TC growth of private enterprises.
China International Capital Corporation Limited (CICC) has recently measured and calculated
the efficiencies of different industries through TFP in its 111th edition of Macro Economy Weekly.
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The research result of the analysis on the TFP of various industries with panel data indicates that,
from 2002 to 2008, the average growth rate of TFP of various industries reached 7.4%, and the
average contribution rate to the growth of VAI reached 25.5%. As for specific industries, the average
TFP growth rates and contribution rates of the machinery manufacturing industry relevant to
industrial upgrading and export structure upgrading and steel, cement, instrumentation equipment,
automobile and beverage industries relevant to real estates, consumption and other domestic
demands ranked among the top. In contrast, the TFP growth rates of state-owned monopolized
industries (such as power and heat production and supply, oil processing and coking). The average
growth rate was merely 0.4%, and the contribution rate to VAI growth was only 2.8%, which were
far lower than the 8.2% and 35.4% non-state-owned monopolized industries respectively. This
indicates the low efficiency of state-owned monopolized industries. When the state retreats as the
private sector advances in the future, the efficiency will enjoy a huge room for potential
improvement (2010).
(3) On the comparison between the efficiency of state-owned enterprises and that of private
enterprises
Jefferson et al (2003) measured and compared the efficiencies of enterprises with different
ownerships using the data of 22,000 large and medium-sized Chinese industrial enterprises collected
during the period from 1994 to 1999. The research found an obvious negative correlation between
the proportion of state ownership and productivity which indicated the success of the reforms of
state-owned enterprises in the diversification of ownerships. Moreover, even if some state-owned
enterprises had relatively lower proportions of state-owned ownerships, their efficiencies were still
lower than the enterprises of any other ownership types.
Yao Yang (1998) conducted an empirical research into the internal and external effects of
non-state-owned economic elements on the TC of China’s industrial enterprises with the data on
enterprises collected in the third general survey, finding that the efficiencies of non-state-owned
enterprises were higher than those of state-owned enterprises.
Liu Xiaoxuan (2004) found after analyzing the data from the general survey on basic units that
state-owned enterprises had an apparent negative effect on efficiency, while private enterprises had
a positive effect on efficiency.
The abovementioned articles of Liu Xiaoxuan and Li Liying (2005) and Hu Yifan compared the
efficiencies between restructured state-owned enterprises and state-owned enterprises that had not
been restructured, and found that restructured enterprises enjoyed higher efficiencies. However, in
terms of the enterprises’ productivities, Liu Xiaoxuan (2009) reached an opposite conclusion.
2. The basic approach of this report on efficiency
To sum up, research on efficiency may largely take two approaches. The first one is the
research from a finance point of view using enterprises’ financial indexes such as the operating
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efficiency expressed through the profit margin of net assets; the second one is the research from the
perspective of economics or economic statistics, using indexes such as TC and TFP.
Among the researches into enterprise efficiency done by the aforementioned documents, the
most accurate one is to calculate from the perspective of TFP. However, when we analyze the
efficiencies of state-owned and private enterprises with TFP, it will be very difficult for us to reach
any convincing conclusions, especially if there is a great deal of data. The main reason for this is
that, in existing data, it is hard to differentiate state-owned enterprises from private enterprises. Even
if within the same industry, it is difficult to find data that may clearly define state-owned and private
enterprises. For example, an enterprise which appears to be a joint-stock company limited may
actually be a state-owned enterprise. Besides, due to the limitation in resources and data, it is more
difficult to research into TFP.
Due to the above reason, this report has taken an approach from the perspective of finance.
However, in this approach, horizontal comparison requires the financial systems and financial
entries of different enterprises to be corresponding to one another, or it will be impossible to
compare the profits. Friedman pointed out once that if an enterprise uses its own fund or has its own
land, its nominal profit will be different from that of another enterprise that borrows money and
rends the land (2011, P 310). In our country, since there are obvious differences between
state-owned enterprises and non-state-owned enterprises in terms of land occupation and use,
acquisition of funds and the acquisition and use of other natural resources, the existing financial data
will not be available for comparison unless they have been dealt with.
We hold that there is a margin between the nominal performance and the real
performance of a state-owned enterprise. Therefore, the key for research into the efficiency of
a state-owned enterprise is to restore its real cost from the book data and have government
subsidy and the excess profits caused by administrative monopoly deducted. Only in this way
may we measure and calculate the real performance of a state-owned enterprise.
3. The nominal performance of state-owned and state-holding industrial
enterprises
According to China Statistical Yearbook 2010, from 2001 to 2009, state-owned and
state-holding industrial enterprises obtained an accumulative total profit of 5,846.182 billion yuan,
and the total book profit of 2009 rose by 3.89 times over that of 2001. The Statistical Yearbook only
listed annual profits. This report assumes that, when state-owned enterprises, state-holding
enterprises and other types of enterprises have the same income tax rate, the state-owned enterprises
obtained an accumulative total net profit of about 4,051.714 billion yuan, and the book net profit in
2009 rose by 4.37 times over that in 2001.
Although the profitability of state-owned enterprises has enjoyed an obvious growth, it is still
lower than that of non-state-owned enterprises. In 2009, the rate on equity (ROE) of
non-state-owned industrial enterprises across the whole country was 15.59%, and that of
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state-owned enterprises was 8.18%. The former was almost twice as much as the latter (see the Fig.
below). From 2001 to 2009, the weighted average ROE of state-owned and state-holding industries
was 8.16%, and that of non-state-owned enterprises was 12.91%, 58.21% higher than the weighted
average ROE of state-owned enterprises. Thus it can be seen that the nominal performances of
state-owned and state-holding enterprises were not quite high as well.
Fig. 3.1 Comparison of nominal ROEs between state-owned enterprises and other
enterprises 2001~2009
Unit: %
Source: Calculated based on the data from China Statistical Yearbook 2010.
Nevertheless, the performances of state-owned enterprises were not real performances. Instead,
they were the results of various preferential policies and an operation environment unfavorable for
private enterprises. The inequality is mainly embodied in resource rents, financing costs and
governmental financial subsidies, etc.
4. Being real: unpaid costs that should have been paid and subsidies
(1) Payment of land rents
Before 2002, the state-owned land in our country was mainly provided through allocation and
agreed transfer. According to the data of National Bureau of Statistics of China, the area of land
transferred through allocation accounted for 87.2% of the total area of land transferred in 1995, and
the percentage in 1996 was 89.5%.
During the restructuring of state-owned enterprises, Article 4 of the Interim Provisions on the
Administration of the Right to Use the Land Transferred in Reforms of State-owned Enterprises
(1998) contained the following provisions on the state-owned enterprises that have obtained land
through free allocation: The State may fix a price for the use right of state-owned land of a certain
term and then authorize a state-holding company established upon the State Council’s approval, a
wholly state-owned company or group company as an investment institution authorized by the State
to be responsible for the operation and management of the land use right. The state-holding
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company authorized by the State or the wholly state-owned company or group company as an
investment institution authorized by the State may, with the letter of authorization, allocate the land
among the enterprises directly under it, enterprises with shares controlled by it and shareholding
enterprises through investing (buying shares) upon pricing or leasing.
Although the Provisions stress on the State’s earning right over land use rights, the State does
not charge relevant land rents. That is, the State’s earning right over land has not been completely
realized. According to the Notice of the State Administration of Taxation on Business Tax Issues
concerning Land Rent Received by China Petrochemical Corporation issued in 2004, the Ministry
of Land and Resources authorized China Petrochemical Corporation to be responsible for the
operation and management of 420 million m2 of former state-allocated land and lent the land to
Sinopec for use. China Petrochemical Corporation should declare and pay business taxes to the
competent taxation organ for its land use over the land rent incomes it obtains across the whole
country. That is, Sinopec pays rents to the Group, while the Group only has to pay business taxes
equivalent to 5% of the rent incomes (the State Administration of taxation, 2004). Although the
Notice is just an individual case, it represents a general principle. That is, relevant administrative
departments have given up the charging of rents from state-owned land. Through collecting business
taxes over the land rent incomes of state-owned enterprises, they have recognized that rents of
state-owned land are the legal incomes of state-owned enterprises. It should be said that this Notice
has gone beyond the scopes of authority of relevant administrative departments and is thus
inconsistent with the principles of the Constitution.
The 2004 Annual Report of Sinopec revealed that the price of the land it leased from the Group
was 12.38 yuan/m2. Based on it, we may work out that the Group received 5.2 billion yuan of profits
from land rents from the listed company. Assuming that the business tax is 5%, the Group paid 260
million yuan of business taxes to the State in that year. According to the price of industrial land
revealed by China Urban Land Price Dynamic Monitoring System, if Sinopec Group should pay
land rent according to 3% of the market price, it paid 38.521 billion yuan of rents less to the State
during the period from 2004 to 2009.
Table 3.1 Land rents that should be paid by Sinopec 2004～2009
2004
2005
2006
2007
2008
Land used by Sinopec (100 million
m2)
4.2
4.2
4.2
4.2
4.2
Price of industrial land (yuan/m2)
481
469
485
561
588
Land rents payable (100 million
yuan)
60.61
59.09
61.11
70.69
74.09
2009
4.2
597
75.22
Source of the price of industrial land: www.landvalue.com.cn: “China Urban Land Price Dynamic
Monitor”.
In 1996, the total area of state-owned industrial, mineral and construction land was 27,700km2,
and this number rose to 43,000km2 in 2010 (Shang Qianming, Wang Rengui, 2010), and the average
annual growth was around 3.19%. Based on this rate, we may infer that the total area of state-owned
industrial, mineral and construction land in 1989 across the whole country was about 22,230km2.
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Among various types of enterprises, state-owned industrial enterprises, some urban and rural
individual industrial enterprises and other types of industrial enterprises occupied state-owned
industrial, mineral and construction land in 1989. Since urban and rural individual industrial
enterprises includes both urban and rural individual industrial enterprises, this report assumes that
their industrial outputs account for 50% of the total output each. In 1989, the industrial gross output
of state-owned industrial enterprises accounted for 90.56% of the total of the gross outputs of
state-owned enterprises, urban individual and other types of industrial enterprises. Calculating
according to this percentage, state-owned industrial enterprises used an area of 20,130km2 of land in
1989.
After the land leasehold system was established in 1990 when land supply was changed from
free to paid acquisition, state-owned industrial enterprises mainly acquire land through allocation
and transfer upon agreement. The newly allocated land each year is acquired for free by state-owned
enterprises. Among the newly transferred land upon agreement each year, the area acquired by
state-owned industrial enterprises is determined according to the proportion of state-owned
industrial enterprises in urban industrial economy1.
When calculating the rents of land used by industrial enterprises, this report uses the data from
China Urban Land Price Dynamic Monitoring System as the market prices of land, and the
industrial land rents across the country are calculated according to 3% of the prices. The 3-year
deposit rate in our country after 2004 has remained above 3%. This percentage has been reasonable
from the perspective of the opportunity costs of funds. Since the data from China Urban Land Price
Dynamic Monitoring System were taken from 2000 to 2009, this report only calculates the land
rents within this period.
Table 3.2
Land rents payable by state-owned and state-holding industrial enterprises
2001～2009
1
2001
2002
2003
2004
2005
2006
2007
2008
2009
Land allocated to
state-owned industrial
enterprises (km2 )
25615
25746
25817
25860
25965
26023
26058
26091
26091
Land price (yuan/m2)
461
465
471
481
469
485
561
588
597
Rents for allocated
land that were payable
but not paid (100
million yuan)
3543
3592
3648
3732
3653
3786
4386
4602
4673
Land transferred to
state-owned industrial
enterprises
upon
agreement (km2)
2281
2629
3011
3293
3592
4041
4346
4350
4350
Difference
between
agreed land price and
331
335
357
362
339
368
415
433
467
See Table 1 attached to Sub report 3.
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market price (yuan/
km2)
Rents
for
land
transferred
upon
agreement that were
payable but not paid
(100 million yuan)
227
264
322
358
365
446
541
565
609
Total (100 million
yuan)
3769
3856
3970
4089
4019
4232
4927
5168
5282
Note: For details about the selection of the data source and the calculation process, please refer to
sub report 3. Since China Land and Resources Statistical Yearbooks only contained the prices for the
industrial land transferred upon agreement from 2003 to 2008, the weighted average value from
2003 to 2008 (150 yuan/m2) has been valued as the prices for land transferred upon agreement in
2001, 2002 and 2009.
In addition, during the reorganization and restructuring processes of state-owned enterprises,
we have witnessed a great deal of losses in state-owned land assets which are mainly characterized
by: evaluation of land, real estates and other fixed assets according to their original values without
taking their market appreciation into consideration; quite a part of enterprises even converted the
land allocated by the State into state shares and transferred them into their own corporate shares;
During the process of “suppressing the second industry and developing the third industry”,
enterprises directly obtained the huge profits from the price differences in industrial land’s
conversion into commercial and residential land. Besides, there has also been undervaluation of land
profits in the disposal of land assets due to illegal leaseholds. All these have resulted in a great deal
of losses in land profits when the administratively allocated land that used to be used for free is
converted into land for paid use. It is hard to estimate this part of lost profits due to the lack of data
support.
Furthermore, since this report only calculates and compares state-owned and state-holding
industrial enterprises which do not include financial enterprises and other non-industrial enterprises,
we have not taken the rents for state-owned land for commercial services into account. We know
that, however, even industrial enterprises alone have occupied a large amount of land for
commercial services. For conservative purposes, we have only made use of the data on the rents of
industrial land. When combined together, the rents for land for commercial services and the land
rents payable that were not paid by state-owned enterprises after 2008 have already amounted to
over 1000 billion yuan. For details, please refer to sub report 3.
(2) Payment of rents for mineral resources
The rents for mineral resources such as coal and oil have been underestimated. Due to the low
prices of resource elements, a part of the rents for resource elements have been converted into the
profits of monopolistic departments. According to some estimations, the total monopoly profit of
monopolized industries (coal, oil and natural gas, metal minerals mining and dressing, tobacco
products, telecom and medical industries) in 2004 was 212.5 billion yuan (Gao Yaoqing, 2007). In
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2009, the industries of coal, oil and natural gas and metal and non-metal minerals mining and
dressing industries alone obtained a total profit of over 500 billion yuan (Wang Xiaolu, 2010). Next,
we will have specific estimations on the rents for oil, natural gas and coal respectively.
a. Rents for oil
Currently, mineral resource rents in our country are mainly embodied through resource taxes
and resource compensation fees. The oil resource tax in our country is a unit tax, and the resource
tax rate before 2004 was 8~24 yuan/ton. After 2004, through several upward adjustments, the
current resource tax rate on oil is 14~30 yuan/ton. Although the absolute value of resource taxes
increased, with the rise in oil prices, the maximum proportion of resource taxes to oil prices has
dropped from around 1.75% in 2001 to 0.70% in 2008. In 2009, this proportion slightly rose to
1.11%. One of the purposes in charging compensation fees for mineral resources is to safeguard the
State’s property rights and interests over mineral resources. It also embodies the nature of resource
rents. The compensation fee for oil resources charged in our country is 1% of the sales revenue.
When put together, the total of the resource tax and resource compensation fee charged over oil is
around 2% of oil price.
Calculating according to the total resource taxes paid by PetroChina and Sinopec and their
outputs, the average oil resource tax before 2004 (including 2004) was around 17 yuan/ton; after
that, the resource tax was around 26 yuan/ton. Based on these figures, we may estimate that the total
of the resource taxes and resource compensation fees paid by state-owned and state-holding
enterprises from 2001 to 2009 was about 73.304 billion yuan.
Xinjiang began to implement the reforms on the taxes of oil and natural gas resources from
June 1, 2009. Oil and natural gas resource taxes were changed from unit taxes into price taxes, and
the tax rate now is 5%. This change is a major step forward compared with the previous payment
mechanism, but the taxes and fees are still relatively low. Overseas mining royalties are often
charged according to a certain percentages (generally 10% - 20%) of oil or natural gas production
value or output in kind.
In 2006, China began to collect special oil gain levies from oil resources when the price per
barrel exceeds USD 40. Since special oil gain levy is targeted at excess incomes, it may be regarded
as a differential ore rent. Theoretically speaking, the essential differences between special oil gain
levy and resource rent are as follows. First, it has mixed up the concept of rent and that of tax.
Special oil gain levy is the tax on an enterprise’s excess profits. It is usually called “windfall tax”.
However, the main problem with the current state-owned enterprises is the use of resources at low
expenses or even for free. There have been no rents - the cost of using resources. Rent should be
included in the cost as an embodiment of the price for the use of resource elements regardless of the
profits of enterprises. Currently, it is just because of the use of resource elements at low prices by
enterprises that the owner of the elements has not received sufficient rewards. Thus, rent has
become the profit of the monopolized departments. Second, special oil gain levy cannot fully realize
the rights and interests of the owner of resources. Being the special incomes collected from excess
incomes when the sales price of domestic crude oil exceeds a certain limit, special oil gain levy may
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be understood as the mining royalty collected from the part of prices above USD 40 which has the
nature of differential resource rent. The proportion of resource rent for prices below USD 40 is quite
low, and cannot fully realize the rights and interests of the owner of resources.
Table 3.3
Oil resource rents paid by state-owned and state-holding enterprises 2001～2009
Item
Oil price
(yuan/ton)
2001
achieved
2002
2003
2004
2005
2006
2007
2008
2009
1373
1317
1493
1872
2680
3416
3465
4307
2713
1.55
1.59
1.61
1.65
1.70
1.74
1.76
1.84
1.86
Estimated
resource
taxes
and
compensation
fees 47.40
paid (100 million
yuan)
47.61
51.18
59.35
93.76
105.21 104.91 130.46
Special gain levy paid
(100 million yuan)
-
-
-
-
413.65 627.07 1343.52 335.22
Oil
output
million tons)
(100
98.82
Note: The year-round oil prices achieved 2001~2005 had the prices of Sinopec’s price as the
benchmark, and the prices achieved 2006~2009 were the weighted average prices of PetroChina and
Sinopec.
In the Interim Provisions concerning the Payment of Royalties for Chinese-Foreign
Cooperative Exploitation of Petroleum Resources on Land of our country, the maximum mining
royalty is 12.5%. When the resource rent payable is calculated in this report, the rent payable is
calculated as 10% of the oil price when it is below USD 40. When the price is above USD 40, the
resource rent is calculated according to the Special oil gain levy of our country.
The resource rent paid is the sum of the oil resource tax, resource compensation fee and
special gain levy that have been paid.
The resource rent that was payable but not paid by a petroleum enterprise is the difference
between the rent collected from an oil price of less than USD 40 according to 10% of the price and
the resource tax and resource compensation fee that have been paid. Since the average oil prices
realized from 2001 to 2004 were largely below USD 40/barrel, the resource rents payable are
calculated at a rate of 10% only. The resource rents for oil when the prices were below USD 40 in
2005 are calculated at a rate of 10%, and the rents for oil when the prices were between the range of
USD 40 to USD 45 are calculated at a rate of 20%. Because the special gain levies after 2006 was
regarded as the differential rents for oil prices above USD 40, the resource rents payable from 2006
to 2009 were the total of special gain levies (differential resource rents) and resource rents collected
according to 10% of the prices below USD 40 (absolute resource rents).
Table 3.4
2009
Item
Oil rents payable but not paid by state-owned petroleum enterprises 2001～
Unit: 100 million yuan
2001
2002
2003
2004
2005
2006
2007
2008
2009
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Rents
payable
212.82
209.40
240.37
308.88
499.45
823.71
1022.78
Rents
paid
47.63
47.97
51.41
58.94
89.76
518.33
733.81
1470.61
434.04
165.19
161.43
188.96
249.94
409.69
305.38
288.97
250.84
416.33
Oil rents
payable
but
not
paid
1721.45
850.37
Note: The year-round oil prices achieved 2001~2005 had the prices of Sinopec’s price as the
benchmark, and the prices achieved 2006~2009 were the weighted average prices of PetroChina and
Sinopec.
b. Rents for natural gas
Before 2005, the standard on the resource tax of natural gas was 2~15 yuan/1000 m3. In July
2005, the standard was adjusted to 7~15 yuan/1000 m3. Adding the 1% of mineral resource
compensation fee, the resource tax was still less than 3% of the price.
When calculating the natural gas rents that have been paid by state-owned and state-holding
enterprises, we estimate the resource taxes during the period from 2001 to 2004 according to
8.5yuan/1000 m3 (原文为“立方米”？), the average value of the standard on resource taxes during
this period. Since the tax rate was adjusted in July 2005, the resource tax in 2005 is calculated at a
year-round average value of 9.75 yuan/1000 m3 (原文为“立方米”？). The average resource tax of
the period from 2006 to 2009 is calculated at 11 yuan/1000 m3. Based on the data from National
Bureau of Statistics of china, the total output of natural gas of state-owned and state-holding
enterprises is measured according to the proportion of the gross industrial output value of
state-owned and state-holding oil and natural gas production enterprises to the gross industrial
output value of the production enterprises in the same industry across the whole country. From 2001
to 2009, state-owned and state-holding enterprises paid around 7.698 billion yuan of resource rents
for natural gas.
Table 3.5 Resource rents for natural gas paid by state-owned and state-holding enterprises
2001~2009
Item
2001
Price of natural gas
realized
561
3
(yuan/1000 m )
2002
574
2003
591
2004
609
2005
673
2006
692
2007
706
2008
823
2009
826
Output of natural
gas
283.88 307.19 326.65 386.90 470.00 550.37 651.51 715.15 785.07
3
(100 million m )
Estimated natural
taxes
and 4.01
compensation fees
4.37
4.71
5.64
7.75
9.86
11.77
13.75
15.12
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Unirule Institute of Economics
paid (100 million
yuan)
Note: The year-round natural gas prices achieved 2001~2005 came from the annual reports of
Sinopec, and the prices achieved 2005~2009 were the weighted average prices of PetroChina and
Sinopec.
The rates of overseas mineral royalties are generally above 8%. Based on this percentage, this
report calculates the resource rents for natural gas payable by state-owned and state-holding
enterprises at a tax rate of 8%.
Table 3.6 Natural gas rents that were payable but not paid by state-owned and stateholding enterprises 2001～2009
Unit: 100 million yuan
Item
2001
2002
2003
2004
2005
2006
2007
2008
2009
Rents payable 12.74
14.11
15.44
18.85
25.30
30.47
36.80
47.09
51.88
Rents paid
4.01
4.37
4.71
5.64
7.75
9.86
11.77
13.75
15.12
Natural gas
rents
that
8.73
were payable
but not paid
9.74
10.73
13.21
17.55
20.61
25.03
33.34
36.76
c. Rents for coal
China’s standard on the resource taxes for coal resources is 0.3~5 yuan/ton. In 2002, China
collected a total of 1.3 billion yuan of coal resource taxes, or 0.94 yuan/ton. The total of coal
resource taxes collected during the period from 2000 to 2003 is estimated based on the data. From
2004 on, the State increased the coal resource taxes in 18 provinces successively to 2.3~3.6 yuan/ton.
Since the tax adjustment began from July 2004, the average rate of the resource taxes collected in
2004 was estimated at 1.95 yuan/ton. Arithmetic means were taken as the average tax rates of the
resource tax from 2005 to 2008, and the amount of rents paid by state-owned enterprises was
calculated at a unit of 2.95 yuan/ton. The rate of compensation fee for coal resources in China is 1%
of the sales amount. As a whole, the coal resource taxes in China are less than 2% of the coal prices.
The proportion of year-round gross industrial outputs of state-owned and state-holding coal
enterprises in the gross industrial outputs of the enterprises in the same industry across the whole
country is calculated according to the data of National Bureau of Statistics of China, and then the
coal outputs of state-owned and state-holding enterprises are calculated based on the results.
Table 3.7 Coal resource rents paid by state-owned and state-holding enterprises 2001～2009
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
Coal
price
(yuan/ton)
151
168
174
206
292
302
355
432
408
Coal output (100
million tons)
11.97
12.75
13.40
14.75
14.57
15.72
15.97
15.52
18.04
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Unirule Institute of Economics
Estimated
resource taxes
and
29.33
compensation
fees paid (100
million yuan)
33.41
35.91
59.15
85.53
93.85
103.81 112.83
126.82
Note: The coal prices during the period from 2001 to 2006 were the prices of raw coal of the key
coal mines across the whole country.
Source: Li Ke ao bo, “Impact of Rise in Coal Price in China and Relevant Predictions”, China Coal,
2007, 33(6); the coal prices in the period from 2007 to 2008 were the average prices of steam coal
of China Coal Energy Company Limited, and the data come from the annual reports of China Coal
Energy Company Limited.
Many countries collect high royalties on coal, and the average level is 8%~10% of coal prices.
For example, the standards on coal resource royalties in the US are: 8% of coal price for
underground mines, and 12.5% of coal price for open pits. Currently, the coal resource rent in China
is less than 2% of coal price, and its value has been obviously underestimated. This report calculates
estimates the coal resource taxes payable at a rate of 8% of the prices.
Table 3.8 Coal resource rents that were payable but not paid by state-owned and stat
e-holding enterprises 2001～2009
Unit: 100 million yuan
Year
2009
2001
2002
2003
2004
2005
2006
2007
2008
Rents
payable
144.60
171.36
186.53
243.08
340.36
379.80
453.55
536.37
Rents paid
29.33
33.41
35.91
59.15
85.53
93.85
103.81
112.83
126.82
137.95
150.62
183.93
254.83
285.95
349.74
423.54
462.01
Coal rents
that
were
115.27
payable but
not paid
588.83
d. Rents for other resources
The rates of royalty collected from ferrous, nonferrous and other mineral resources in other
countries range from 2% to 8%. For example, the US except for oil, natural gas and coal, the
royalties of most of the rest rentable minerals on federal land are 5%. The royalty rates of most of
the minerals in Western Australia are 5%. The royalty rate in Southern Australia is 2.5%. And the
royalty rate in Thailand is 5%. The scope of resource taxes in China covers mineral products in 7
taxable items: crude oil, natural gas, coal, other nonmetal ores, ferrous metal ores, nonferrous metal
ores and salt. However, compared with other countries, the resource rents in China are relatively low.
It is still hard to estimate the amount lost in the resource rents of nonferrous metals, ferrous metals
and other mineral products.
Besides, in the communications industry, state-owned enterprises are using communication
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Unirule Institute of Economics
channel resources for free. Nearly all the basic communication channels or licenses used by the
major communications companies in China such as 3G licenses, telephone and mobile channels and
broad band resources are free of charge. In western countries, however, these are all national
resources, and any companies wishing to use them have to obtain them from the government
through auctions.
(3) Comparison of the financing costs of state-owned enterprises
a. Comparison of financing costs between state-owned enterprises and other types of
enterprises
Another remarkable inequality in operating conditions between state-owned enterprises and
private enterprises, foreign-funded enterprises and enterprises of other ownerships is the difference
in financial costs. In the credit market in China, the dominant players remain to be the several major
state-owned commercial banks, and the economic conducts of both state-owned enterprises and
state-owned commercial banks have governmental backgrounds. With the supports from the
government, it is easier for state-owned enterprises to obtain loans. Besides, the differences in asset
sales and other factors have also made it hard for private enterprises to get loans, and their
borrowing costs are also higher than those of state-owned enterprises. The preferential measures in
providing loans to state-owned enterprises by banks include preferential interest rates and unsecured
loans, etc.
In terms of m&a loans, due to higher risks and governmental financial supports, state-owned
enterprises enjoy far better treatments than private enterprises: they may enjoy 10% of discount in
terms of the interest rates of relevant loans, while the interest rates of loans lent to private
enterprises may go up by 10%.
Compared with non-central enterprises whose main financing channel is bank loans, central
enterprises may also raise funds through bills or issuing corporate bonds, and their costs are lower
than those of bank loans. Based the average interest rate of bill financing in 2009, the average
interest rate of bill financing is generally around 1.8%. Compared with the interest rates of loans,
bill financing may save up to two thirds of financing costs. Nearly 80% of the corporate bonds in
China are issued by enterprises in traffic, transportation, power, water and other infrastructure
sectors, and most of them are issued by large-scale state-owned enterprises.
According to the analysis on and comparison between the official databases of 280,000
industrial enterprises across China conducted by Hong Kong Institute for Monetary Research (2009),
from 2001 to 2005, state-owned enterprises were able to obtain loans at an average interest rate of
2.55%, while the average interest rate of private enterprises was nearly two percents higher. That
means the overall financing cost of private enterprise was almost twice as much as that of a
state-owned enterprise (Table 3.9). Judging from the real interest rate (financing cost/liability), the
interest rates of private enterprises were 3.46 times higher than those of state-owned enterprises on
average (Table 3.10). If state-owned enterprises have to pay average market interest rates, the profits
of state-owned enterprises have completely disappeared in recent years, and serious losses have
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been witnessed across the entire spectrum.
Table 3.9 Comparison between annual interest rates (interest payment/liability) of enter
prises of different ownerships
Unit: %
Year
State-owned
enterprises
Joint
ventures
Private
enterprises
Enterprises
with funds
from Hong
Kong,
Macao and
Taiwan
Foreign-funded
enterprises
Whole
society
2001
2.46
4.84
4.84
2.89
2.98
4.13
2002
2.23
4.65
4.64
2.81
2.61
3.92
2003
2.67
5.38
4.61
2.59
2.28
3.93
2004
2.86
-
3.81
2.17
1.92
3.31
2005
2.61
10.46
4.57
2.29
2.38
3.93
Source: Hong Kong Institute for Monetary Research, "Honor Thy Creditors Beforan Thy
Shareholders: Are the Profits of Chinese State-Owned Enterprises Real?" ， Working Paper,
No.16/2009.
Table 3.10 Comparison between annual interest rates (financing cost/liability) of enterpr
ises of different ownerships
Unit: %
Year
State-owned
enterprises
Joint
ventures
Private
enterprises
Enterprises
with funds
from Hong
Kong,
Macao and
Taiwan
Foreign-funded
enterprises
Whole
society
2001
2.55
10.09
7.14
3.19
3.56
4.37
2002
2.66
5.79
10.76
3.34
3.41
4.18
2003
2.73
12.10
13.35
3.01
3.12
4.17
2004
2.67
-
7.12
2.49
2.60
3.57
12.45
7.26
4.37
3.90
4.41
2005
2.51
Source: Ibid.
According to the research done by Liu Xiaoxuan and Zhou Xiaoyan (2001), the observed
values of some 330,000 enterprises from 2000 to 2007 indicated that, in terms of real interest rates
(enterprise financial expense/enterprise total liability), a state-owned enterprise actually has to pay
only a financing rate of 1.6%. We regard the interest rates of the liabilities of enterprises other than
state-owned enterprises as interest rates formed by the market, and the weight of various main
bodies other than state-owned enterprises is set as 100%. Upon weight adjustment and weighted
average, the market interest rate we have is around 4.68%. From 2000 to 2007, the market interest
rate is 2.92 times as much as the financing interest rate of state-owned enterprises on average.
Table 3.11 Relevant indexes of enterprise financing (2000～2007)
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Unirule Institute of Economics
Ownership
Real interest rate
State-owned and state-holding
Collective
collective-holding
and
Corporate
corporate-holding
and
Individual
individual-holding
and
Proportion to total liability (weight)
Before adjustment
After adjustment
0.016
0.2876
-
0.055
0.0533
0.0748
0.042
0.2390
0.3355
0.054
0.1378
0.1934
Foreign capital and foreign
capital-holding
0.037
0.1413
0.1983
Hong Kong, Macao and
Taiwan and Hong Kong,
Macao and Taiwan-holding
0.042
0.0762
0.1070
Others
0.069
0.0648
0.0910
Note: data on real interest rates and weights before adjustment come from the paper written by Liu
Xiaoxuan and Zhou Xiaoyan (2011).
Scale factors were simultaneously taken into account by Liu Xiaoxuan’s research. They pointed
out that, when grouped according to scales, the financing costs of large and medium-sized private
enterprises were 6% higher than those of state-owned enterprises; and the financing costs of small
private enterprises were 9% higher than those of small state-owned enterprises (Liu Xiaoxuan and
Zhou Xiaoyan, 2011).
In this research, we have adopted the interest rate levels suggested by Liu Xiaoxuan and Zhou
Xiaoyan. The average real interest rate of loans extended to state-owned enterprises during the
period from 2000 to 2007 was 1.6%. The average market interest rate from 2000 to 2007 was 4.68%,
and this level was even lower than the RMB benchmark lending rates of financial institutions
published by the People’s Bank of China (see the table below). It should be said that it was a
relatively reliable and conservative rate.
Table 3.12 RMB benchmark lending rates of financial institutions published by the People’s
Bank of China
Date
of
2002.
2004.
2006.
2006.
2007.
2007.
2007.
2007.
2007.
2.21
10.29
4.28
8.19
3.18
5.19
7.21
8.22
9.15
5.31
5.58
5.85
6.12
6.39
6.57
6.84
7.02
7.29
of
2007.
2008.
2008.
2008.
2008.
2008.
2010.
2010.
2011.
adjustment
12.21
9.16
10.9
10.30
11.27
12.23
10.20
12.26
2.9
7.47
7.2
6.93
6.66
5.58
5.31
5.56
5.81
6.06
adjustment
1-year
interest
rate (%)
Date
1-year
interest
rate (%)
Source: Website of the People’s Bank of China.
b. Interests actually paid by state-owned enterprises
We know that total assets contribution rate = (total profit+total tax+interest payment)/total
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Unirule Institute of Economics
assets×100 %. In the formula, total tax is the sum of sales tax and extra charges and value added tax
payable. In the chapters of “Industry” of China Statistical Yearbook from 2001 to 2009, there were
“main indexes of state-owned and state-holding industrial enterprises by sector” and “main
economic benefit indexes of state-owned and state-holding industrial enterprises by sector”. They
included such data as total assets contribution rate, total profit, tax on main businesses and extra
charges, and value added tax payable in the current year. Based on these figures, we may work out
the interests paid by state-owned and state-holding industrial enterprises each year.
Table 3.13 Interests paid by state-owned enterprises 2001～2009 Unit: 100 million yuan
Item
2001
Interest
1133.85
s paid
2002
2003
2004
1144.87
1085.41
1608.25
2005
2006
1222.77 1433.37
2007
2008
2009
1825.3
2508.11
2362.39
c. Financing costs payable by state-owned enterprises
If the interest rates payable by state-owned enterprises is calculated according to a market
interest rate of 4.676%, the difference in interest payment from 2001 to 2009 was around 2,753.85
billion yuan, accounting for 47% of the total nominal profits of state-owned and state-holding
industrial enterprises.
Table 3.14 Interests payable but not paid by state-owned enterprises according to mark
et interest rates 2001～2009
Unit: 100 million yuan
Item
2001
2002
2003
2004
2005
2006
2007
2008
2009
Interests
3313.68 3345.88 3172.11 4700.11
payable
3573.55 4189.02 5334.44 7329.95 6904.08
Differen
ce
in 2179.83 2201.01 2086.70 3091.86
payment
2350.78 2755.65 3509.14 4821.84 4541.69
(4) Government subsidies obtained by state-owned enterprises
Before 2007, the financial organ of the State provided subsidies in certain amounts for the
losses of state-owned enterprises each year. According to China Statistical Yearbook 2005, from
1994 to 2004, the subsidies offsetting the losses of state-owned enterprises reached 365.292 yuan.
With China’s accession into the WTO and the promise to immediately cancel all the subsidies within
the scope of Article 3 of the Agreement on Subsidies and Countervailing Measures and the subsidies
for state-owned enterprises, we have been unable to find the subsidies to loss-making general
business enterprises since 2007 from the data published by National Statistical Bureau of China.
However, such subsidies actually still exist.
From 2007 to 2008, while enjoying huge overall profits, PetroChina and Sinopec still received
a total of 76.349 billion yuan of subsidies, and the reason for the subsidies was “the financial
supporting subsidies provided to this group by the Chinese Government with a view to ensure the
market supply of crude oil and petroleum products.” In contrast, however, local private oil refineries
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Unirule Institute of Economics
have never enjoyed refinery subsidies in the past decade and more. Besides, there are no supporting
downstream sales systems as well. In 2008 and 2009, several airline companies and other
state-owned enterprises also received fiscal subsidies (Xinhua News Agency, 2008; Zhou Jun, 2010).
According to incomplete statistics, from 2007 to 2009, state-owned enterprises received a total of
some 199.3 billion yuan of fiscal subsidies.
Besides, government funding may also be regarded as a form of hidden subsidy. In 2008,
among the 54.78 billion yuan of operating budget expenditures of state-owned capitals, 27 billion
yuan was used as new funding for central enterprises or supplementary state-owned capitals (Xinhua
News Agency, 2008); in 2009, among the 87.36 billion yuan of operating budget expenditures of
state-owned capitals, 7.5 billion yuan was used to supplement capitals (Xinhua News Agency, 2009).
From 2008 to 2009, two airline companies, five power groups and two power grid companies
received a total of about 16 billion yuan of funding from SASAC.
The subsidies to loss-making state-owned enterprises have all along served as deductions in
fiscal revenues and have not been regarded as expense items. For state-owned enterprises, the
convenience lies in the fact that they have dodged budgetary supervision procedures, and the taxes
paid by enterprises are often directly refunded to offset fiscal subsidies (Yang Tao, 2008).
Table 3.15 Fiscal subsidies received by state-owned enterprises 2001～2009
100 million yuan
Item
2001
2002
2003
2004
2005
2006
Data
source 1
261.76
214.01
194.04
181.98
166.57
180.22
94.15
50.00
Data
source 2
Data
source 3
2007
2008
2009
85.78
677.71
10.97
177.57
Data
source 4
Fiscal
subsidie
s
261.76
214.01
194.04
181.98
166.57
Unit:
180.22
495.31
277.8
798.6
955.51
809.57
177.57
Note: Data source 1: China Statistical Yearbook 2007 (National Bureau of Statistics of China, 2007);
this data source was discontinued after 2006.
Data source 2: The subsidies received by oil enterprises (for details please refer to Table 3
attached);
Data source 3: “Main financial indexes of state-owned and state-holding enterprises across the
country” for May 2008 published by the website of the Ministry of Finance; this
data was discontinued after that.
Data source 4: Expenditure on “operating budgets of state-owned capitals” published by
SASAC (Xinhua News Agency, 2008) with the subtraction of capital expenditures.
Since some of the data coming from different sources overlapped one another and some were
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Unirule Institute of Economics
independent from one another, we have made choices according to our own understanding. The
boldfaced figures are those adopted by us.
On the other hand, the prices of oil products are under control in our country. After 2008, in
particular, the controlled prices were often higher than the prices in the international market which
has actually constituted subsidies for monopoly state-owned enterprises. See the two tables below:
Table 3.16 Comparison of pre-tax retail diesel prices between China and some other c
ountries Unit: USD/gallon
Country
2006
2007
2008
2009
Belgium
2.44
2.70
3.82
2.30
France
2.31
2.53
3.61
2.17
Germany
2.31
2.62
3.63
2.26
Italy
2.65
2.85
3.96
2.53
Netherland
2.52
2.82
3.94
2.27
UK
2.36
2.55
3.58
2.15
US
2.26
2.44
3.34
2.00
Average
2.41
2.64
3.70
2.24
China
2.36
2.62
3.17
2.96
Source: U.S. Energy Information Administration (EIA) (except China), and the diesel price in
China is the average of the ceiling prices of the oil products of different labels published by State
Development and Reform Commission.
Table 3.17 Comparison of pre-tax gasoline prices between China and some other coun
tries Unit: USD/gallon
Country
2006
2007
2008
2009
Belgium
2.26
2.55
3.20
2.21
France
2.12
2.41
3.02
2.15
Germany
2.15
2.43
2.91
2.15
Italy
2.42
2.70
3.34
2.46
Netherland
2.49
2.92
3.51
2.31
UK
2.14
2.39
2.95
1.92
US
2.40
2.62
3.09
2.19
Average
2.28
2.58
3.14
2.20
China
2.34
2.52
3.03
2.86
Source: Ibid.
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Unirule Institute of Economics
Fig. 3.2 Comparison of pre-tax gasoline prices between China and some other countri
es
Unit: USD/gallon
Source: Ibid.
We may find from Fig. 3.2 that, since September 2008, the pre-tax prices of gasoline products
in China have been higher than those of the rest major countries. From September 2008 to June
2010, the average gasoline price in China was 29.34% higher than the average price of other
countries.
According to EIA’s data and the annual reports of PetroChina and Sinopec, except for 2008,
the average crude oil prices of PetroChina in the rest years were higher than the international crude
oil prices. In 2009 when the international crude oil prices significantly dropped over the previous
year, the gasoline prices of PetroChina and Sinopec only slightly decreased.
Table 3.18 Comparison of oil prices 2006～2009
oil
Crude oil of
in the North
Sea
(Brent)
Crude oil
(Minas)
Unit: USD/barrel
PetroChina
Sinopec
Crude
oil
Gasolin
e
Crude
oil
Gasolin
e
Year
Crude
(WTI)
2006
62.09
57.25
53.95
59.81
86.36
55.06
89.60
2007
60.81
60.50
63.87
65.27
93.86
56.48
98.21
2008
98.27
98.43
98.34
87.55
118.42
84.37
129.05
2009
38.89
34.33
36.63
53.90
112.95
45.14
124.79
Source: Website of EIA (http://www.eia.doe.gov/), annual reports of PetroChina (2006~2009),
annual reports of Sinopec (2006~2009).
Note: The price units of PetroChina and Sinopec were converted from yuan/ton into USD/barrel
according to the average exchange rates in the current year.
By multiplying the price difference between Chinese and foreign refined oil products listed
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Unirule Institute of Economics
above with the retail volumes of refined oil products of PetroChina and Sinopec, we may work out
the actual subsidies received by them through the price differences.
Table 3.19 Retail volumes of refined oil products of PetroChina and Sinopec (2006~20
09)
Unit: million ton
2006
2007
2008
2009
PetroChina
47.33
52.34
58.60
61.22
Sinopec
72.16
76.62
84.1
78.9
Total
119.49
128.96
142.70
140.12
Source: Annual reports of PetroChina (2006~2009), and annual reports of Sinopec (2006~2009).
Since the specific sales revenues of gasoline and diesel sold at gas stations were not included in
the annual reports of PetroChina and Sinopec, this report assumes that the proportion of year-round
volume of gasoline to that of diesel sold at gas stations is 1:2 and then calculates the differences
between the sales revenues due to differences in average prices in major countries. From 2006 to
2009, the total price difference due to price factors was around 107.1 billion yuan.
Direct fiscal subsidies and the differences in sales revenues caused by prices may be regarded
as the general subsidies for state-owned enterprises. See the following table.
Table 3.20 General subsidies for state-owned enterprises
t: 100 million yuan
Uni
2006
2007
2008
2009
Difference in sales revenue
caused by price deviation
-118.12
-101.33
-1198.18
1364.11
Fiscal subsidy
180.22
177.57
955.51
809.57
Total
62.1
76.24
-242.67
2173.68
Note: For price deviation, please refer to Table 3.16 and Table 3.17.
(5) Losses brought along by monopoly profits or monopoly
In the report of Market Competition Status of the Chinese Economy: Evaluation and Policy
Suggestions published by the Unirule Institute of Economics, we adopted the formula of real profits
= (operating profits+administrative expenses+total welfare costs+fiscal subsidies), had monopoly
welfare losses plus the total of administrative expenses and total welfare costs as the maximum
estimated social cost of monopoly, and worked out the welfare losses in coal mining and dressing,
oil and natural gas, tobacco, fertilizers, pesticides, power generation, power supply, public utilities
and other sectors with administrative monopoly. The results are shown in the following table.
Table 3.21 Welfare losses caused by monopoly in some of the administrative monopoly
industries in 2007
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Unirule Institute of Economics
Name of industry in Industry
Minimum
Chinese
estimation estimation of minimum of
of minimum of
(100 million (100 million estimation maximum
estimation maximum
code
yuan)
Maximum Proportion Proportion Proportion Proportion
yuan)
to
sales estimation to
revenue
to
sales value
revenue
added estimation
to
added
value
Soft coal and hard
coal
mining
and 610
1336.88
2297.66
0.16
0.28
0.34
0.58
620
73.92
107.91
0.17
0.25
0.32
0.46
690
0.47
0.80
0.13
0.22
0.23
0.40
2435.01
2847.68
0.34
0.39
0.40
0.47
790
41.61
63.95
0.08
0.13
0.23
0.35
1610
17.01
27.29
0.18
0.30
0.41
0.66
1620
1421.38
1672.27
0.39
0.46
0.50
0.59
1690
2.67
4.60
0.16
0.28
0.42
0.73
2511
523.66
718.91
0.06
0.08
0.32
0.44
fertilizer 2621
124.34
203.93
0.10
0.16
0.32
0.53
33.76
56.35
0.08
0.14
0.31
0.52
24.17
31.08
0.25
0.32
0.49
0.63
61.76
98.17
0.06
0.09
0.21
0.33
56.23
92.30
0.07
0.12
0.26
0.42
dressing
Wood
coal
mining
and dressing
Mining and dressing
of other coals
Natural crude oil and
natural
gas 710
exploration
Service
activities
relevant to oil and
natural
gas
exploration
Tobacco redrying
Cigarette
manufacturing
Processing of other
tobacco products
Crude oil processing
and
petroleum
product
manufacturing
Nitrogen
manufacturing
Phosphate
fertilizer 2622
manufacturing
Potash
fertilizer 2623
manufacturing
Compound fertilizer 2624
manufacturing
Chemical
pesticide 2631
manufacturing
Thermal power
4411
830.87
1050.60
0.12
0.16
0.29
0.37
Hydropower
4412
244.68
320.36
0.26
0.35
0.37
0.48
Nuclear power
4413
36.22
44.41
0.22
0.27
0.30
0.37
Power supply
4420
1075.10
1445.21
0.07
0.09
0.25
0.33
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Unirule Institute of Economics
Production
and 4430
21.50
36.54
0.09
0.16
0.31
0.52
4500
86.43
133.49
0.10
0.15
0.32
0.49
4610
62.97
121.61
0.16
0.30
0.32
0.62
4620
3.28
5.79
0.11
0.20
0.27
0.48
supply of heat power
Production
and
supply of fuel gas
Production
and
supply of tap water
Sewage treatment and
its recycling
Source: the Unirule Institute of Economics, 2010.
The report pointed out that: “In the above 22 industries, the minimum estimated potential total
loss in social welfare was 851.394 billion yuan which accounted for 35% of the total added value;
and the maximum estimation was 1,138.092 billion yuan, accounting for 46% of the total added
value. In descending order of welfare losses, the top 10 industries ranked as follows: natural crude
oil and natural gas exploration, soft coal and hard coal mining and dressing, tobacco manufacturing,
power supply, thermal power, hydro power, nitrogen fertilizer manufacturing, heat production and
supply, wood coal mining and dressing and compound fertilizer manufacturing.” (the Unirule
Institute of Economics, 2010)
Book monopoly profit is different from the entire welfare loss brought along by monopoly. One
is a financial concept, while the other is a concept in economics; one is welfare transfer, while the
other is the net loss caused for the society. It is hard to compare the two, and we cannot infer
monopoly profits from monopoly welfare losses. In addition, although there are a lot of state-owned
enterprises in these industries, there are enterprises of other types as well. Without data on specific
proportions, it is hard to work out the specific data on the losses brought along by state-owned
monopoly enterprises. Although the welfare losses as a result of monopoly should be recorded in
monopoly enterprises’ accounts from the perspective of the entire society, they cannot be recorded
in the financial accounts at the enterprise level. Therefore, this part is not included in the sum
calculations thereafter. There report was thus conservative enough in spite of the missing data.
5. Discussion on the “enterprise as society” and “the burden of retired workers”
Some people say that since “enterprise as society” is a general phenomenon among
state-owned enterprises, it should be added to the total cost as a reasonable cost, and the enterprises
should receive corresponding preferential treatments for it. According to this idea, the cost of
“enterprise as society” of state-owned enterprises should offset the above-mentioned deduction of
nominal profits. In other words, it should be added to nominal profits.
In our view, however, the “enterprise as society” of state-owned enterprises is just one of the
malpractices of this enterprise system, and it is just the underserved costs that we should not evade
when evaluating “state-owned enterprises” that may be able to reflect the real efficiencies of
state-owned enterprises. On the other hand, the most effective way for state-owned enterprises to
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Unirule Institute of Economics
reduce this cost is to conduct socialization reforms on “enterprise as society”. That is, turn these
supporting institutions into independent institutions facing the social public that are no longer
burdens of enterprises. Only by doing so may state-owned enterprises improve their efficiencies.
The Unirule Institute of Economics estimated the cost of “enterprise as society” of
state-owned coal enterprises in the Cost and Price Formation of Coal and the Internationalization of
Its External Costs. The conclusion was that the cost account for around 1.55% of the total cost
(2008). In that report, we modified the overrated cost of coal with this estimation. That is, we did
not recognize the rationality of this cost. Therefore, this report will not amend the nominal profit
with the cost of “enterprise as society”.
Some other people hold that since a large number of state-owned enterprises have long
histories, the number of retired workers is significantly more than that of non-state-owned
enterprises, and this will accordingly increase the cost. However, China already largely completed
the socialization reform of social security at the beginning of the 21st Century. The Circular of the
State Council on Effectively Do Well in the Payment of Basic Pensions to the Retired Personnel of
Enterprises on Time and in Full and the Basic Living Allowances of the Laid-off Workers of
State-Owned Enterprises (G. F. (2000) NO. 8) promulgated by in 2000 clearly pointed out that “a
social security system independent from enterprises shall be established”, and “the local
governments shall formulate the working plans and implementation plans on the socialized granting
of basic pensions, and strive to largely realize the target in granting basic pensions by social
insurance handling institutions or by banks, postal offices and other social service institutions upon
entrustment by the end of this year.” (2000) By now, social security and employment has become an
important item in fiscal expenditure, amounting to a total of 680.4 billion yuan in 2008 (National
Bureau of Statistics of China, 2009).
Therefore, it is obvious that “the burden of retired workers” should not become an excuse of
the high costs of state-owned enterprises either. It should be deducted from the calculation.
6. The real performance of the state-owned and state holding industrial
enterprises
Based on the above calculation on the subsidies, low interest rate differentials, lack of land
rents and resource rents enjoyed by state-owned and state-holding industrial enterprises, we have
worked out the total real profits (Table 3.22) by deducting the 7,491.4 billion yuan from the total
nominal profits.
Table 3.22 Comparison between nominal profits and real profits 2001~2009
Unit: 100 million yuan
Item
2001
2002
2003
2004
2005
2006
2007
2008
2388.56
2632.94
3836.2
5453.1
6519.75
8485.46
10795.19
9063.59
2179.83
2201.01
2086.7
3091.86
2350.78
2755.65
3509.14
4821.84
Nominal
2009
9287.03
profit
Low
4541.69
interest rate
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differential
Land rent
3769
3856
3970
4089
4019
4232
4927
5168
5282
289.19
309.12
350.31
447.08
682.07
611.94
663.74
707.32
915.1
261.76
214.01
194.04
181.98
166.57
62.1
76.24
-242.67
2173.68
-4111.22
-3947.2
-2764.85
-2356.82
-698.67
823.77
1619.07
-1390.9
-3625.44
-4111.22
-3947.2
-2764.85
-2356.82
-698.67
551.93
1084.78
-1390.9
-3625.44
Resource
rent
General
subsidy
Real profit
Net
real
profit
Theoretically speaking, the profit of an enterprise in the previous year will affect the overall
operation and the generation of profit of the enterprise in the next year, and the impact will be
dynamic and accumulative. Therefore, many variables are hard to control. To simplify the situation,
we assume that the profit of an enterprise in the previous year will not affect its profitability in the
following year. From 2001 to 2009, state-owned and state-holding industrial enterprises suffered an
accumulative total loss of 1,725.84 billion yuan, and the average real rate of return on net assets was
-4.39%.
Table 3.23 Real performances of state-owned and state-holding enterprises 2001~2009
Item
2001
2002
2003
2004
2005
2006
2007
2008
2009
-11.50
-10.92
-7.20
-4.96
-1.38
0.94
1.58
-1.80
-4.26
real rate of return on net
assets (%)
Fig 3.3 Comparison between real and nominal rates of return on net assets of state-owned
and state-holding enterprises
As shown in Fig. 3.3, although the real rates of return of state-owned and state-holding were
negative before 2005, there was a relatively fast growth from 2001 to 2007. This largely coincided
with the periodical trend of economic growth. During the period from 2001 to 2007, the GDP
growth rate in China was on the rise on the whole and reached its peak in 2007 with a growth rate of
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Unirule Institute of Economics
14.2% over the previous year. The growth rate slowed down after 2007 and dropped to 9.1% in 2009.
See the following figure. Therefore, the changes in the real performances of state-owned enterprises
were mainly the result of the periodic factors of the national economy.
Fig. 3.4 China’s GDP growth rates 2001~2009
14.2%
15%
12%
8.3%
9.1%
10.0%
10.1%
2003
2004
11.3%
12.7%
9.6%
9.1%
2008
2009
9%
6%
3%
0%
2001
2002
2005
2006
2007
Source: National Bureau of Statistics of China, China Statistical Yearbooks (2002~2010).
What is worth noting is that the estimation of land rents cannot sufficiently reflect the land
rents that were payable but not paid by state-owned enterprises. This report focuses on the
state-owned and state-holding industrial enterprises included in China Statistical Yearbooks.
However, with the diversification of the multi-leveled ownerships brought along by the mutual
shareholding between enterprises and the mixed operation of enterprises, many industrial enterprises
have begun to invest and operate heavily in finance, real estates, services and other tertiary
industries. Some state-owned enterprises invest and operate in tertiary industries with allocated land
or land transferred at low cost, and it is hard to estimate the commercial rents generated from such
businesses due to the lack of data support. We have only conducted a rough estimation on the total
amount which may be found in Sub report 3.
The differences between the nominal operating costs and real costs of state-owned enterprises
are mainly embodied in land rents, resource rents and the financing costs of funds. It is just the
acquisition and use of such elements at low costs that has turned the rents of this part of resource
elements into the profits of monopolistic departments and exaggerated the enterprises’ operating
efficiencies. Being the biggest monopolists of land, mineral and financial resources, and the
governments are constantly increasing the control over resources. It is the existence of
administrative monopoly that has resulted in the serious inequality between state-owned and private
enterprises in acquisition of resources. Therefore, although it seems that state-owned enterprises are
enjoying bigger and bigger value-added space, the added values have been mainly realized through
the monopoly of resources and the rise in the prices of scarce resources.
It must be pointed out that the above estimations about the real performances of state-owned
enterprises are still quite conservative. First, theoretically speaking, the factor of administrative
monopoly pricing should be deducted from industrial added values; second, market interest rates
should also include the part of private finance which is generally higher than the interest rates of
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Unirule Institute of Economics
state-owned enterprises that are not market oriented. Due to the limitation in data availability, these
factors were not quantified and adopted in the calculation of the real performances of state-owned
enterprises. Even so, the real profits and the return on equity (ROE) of state-owned enterprises are
already negative. That is, the state-owned enterprises are actually in the red on the whole.
7. Summary
Comparing the economic performances of the state-owned enterprises in China, we may find
that, from 2001 to 2009, the ROEs of state-owned and state-holding enterprises have all along been
lower than those of non-state-owned enterprises. This means that when a unit of asset is transferred
from a non-state-owned enterprise into a state-owned enterprise, it will create an opportunity loss.
The vast scale of state-owned assets means huge opportunity losses for the society.
When the nominal incomes of state-owned enterprises are restored –when the land rents, the
rents for other resources, preferential interest rates and subsidies are deducted – the ROEs of
state-owned and state-holding industrial enterprises were negative from 2001 to 2009. This means
losses in absolute values for the owners of state-owned enterprises – the people of the whole
country.
Therefore, although we believe that there may be some excellent and high efficient
state-owned enterprises, the state-owned enterprises are still negative in terms of efficiency on the
whole in terms of the financial status of enterprises.
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Unirule Institute of Economics
Attached table 1 Nominal performances of state-owned and state-holding enterprises
2001～2009
Unit: 100 million yuan
Item
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total
profit
2388.56 2632.94 3836.20 5453.10 6519.75 8485.46
10795.1
9063.59 9287.03
9
Net
profit
1600.34 1764.07 2570.25 3653.58 4368.23 5685.26 7232.78 6797.69 6965.27
Owner
35741.2 36139.1 38381.0 47479.2 50625.0 58656.3 68568.5 77388.8 85186.5
’s
7
7
2
5
0
7
9
9
7
equity
ROE
(%)
4.48
4.88
6.70
7.70
8.63
9.69
10.55
8.78
8.18
Source: The data on total profits and owner’s equity come from China Statistical Yearbook 2010;
the data on net profit are equal to total profits
— Income taxes were paid according to prescribed tax rates, the income tax rate before 2007 was
33%, and the income tax rate for 2008 and 2009 was 25%.
Attached table 2 Nominal performances of industrial enterprises above designate
d size 2001~2009
Unit: 100 million yuan
Item
2001
2002
2003
2004
2005
Total
profit
4733.43 5784.48 8337.24
Net
profit
3171.40 3875.60 5585.95 7992.63 9917.70
2006
2007
2008
2009
11929.3 14802.5 19504.4 27155.1 30562.3 34542.2
0
4
4
8
7
2
13067.9 18193.9 22921.7 25906.6
7
7
8
7
Owner
55424.4 60242.0 69129.5 90286.7 102882. 123402. 149876. 182353. 206688.
’s
0
1
6
0
02
54
15
38
83
equity
ROE
(%)
5.72%
6.43%
8.08%
8.85%
9.64%
10.59% 12.14% 12.57% 12.53%
Source: The data on total profits and owner’s equity come from China Statistical Yearbook 2010;
the data on net profit are equal to total profits
— Income taxes were paid according to prescribed tax rates, the income tax rate before 2007 was
33%, and the income tax rate for 2008 and 2009 was 25%.
Attached table 3 Nominal performances of non-state-owned industrial enterprise
s above designated size 2001~2009
Unit: 100 million yuan
Item
Net
profit
2001
2002
2003
1571.06 2111.53 3015.7
2004
2005
2006
4339.05 5549.47 7382.71
2007
2008
2009
10961.1 16124.0
18941.4
9
9
Owner
19683.1 24102.8 30748.5 42807.4 52257.0 64746.1 81307.5 104964. 121502.
’s
3
4
4
5
2
7
6
49
26
equity
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Unirule Institute of Economics
ROE
(%)
7.98%
8.76%
9.81%
10.14% 10.62% 11.40% 13.48% 15.36% 15.59%
Source: The data on total profits and owner’s equity come from China Statistical Yearbook 2010;
the data on net profit are equal to total profits
— Income taxes were paid according to prescribed tax rates, the income tax rate before 2007 was
33%, and the income tax rate for 2008 and 2009 was 25%.
Attached table 4 Collection ratio of special oil gain levy
Crude oil price (USD/barrel)
Collection ratio
Quick deduction
barrel)
40~45
20%
0
45~50
25%
0.25
50~55
30%
0.75
55~60
35%
1.5
Above 60
40%
2.5
(USD ／
Note: The collection ratio of special oil gain levy is determined according to the monthly weighted
average price of the crude oil sold by an oil exploitation enterprise, and the cutoff point is USD
40/barrel.
Attached table 5 Subsidies received by PetroChina and Sinopec
Unit: million yuan
PetroChina
Sinopec
Total
2005
-
9415
9415
2006
-
5000
5000
2007
1197
7381
8578
2008
16914
50857
67771
2009
1097
0
1097
Total
19208
58238
Source: Annual reports of PetroChina and Sinopec.
Attached table 6 Changes in the average retail prices of gasoline and diesel
Average
retail
price
of
gasoline
Time
Adjustment range
Average retail price of
diesel
Price
Price
Price
including
exclusive
tax
tax
(yuan/litre)
(USD/gallon)
6.85
3.24
6.90
3.39
7.03
3.34
7.08
3.48
of
including
tax
(yuan/litr
e)
Price
exclusive
tax
(USD/gallon)
The prices of gasoline and diesel
2010-6-1
were lowered by 230 yuan and 220
yuan per ton respectively
2010-4-14
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The prices of gasoline and diesel
of
Unirule Institute of Economics
were raised by 320 yuan per ton
2009-11-10
2009-9-29
2009-9-1
2009-7-28
2009-6-30
2009-6-1
The prices of gasoline and diesel
were raised by 480 yuan per ton
The prices of gasoline and diesel
were lowered by 190 yuan per ton
The prices of gasoline and diesel
were raised by 300 yuan per ton
The prices of gasoline and diesel
were lowered by 220 yuan per ton
The prices of gasoline and diesel
were raised by 600 yuan per ton
The prices of gasoline and diesel
were raised by 400 yuan per ton
6.79
3.21
6.81
3.33
6.43
3.01
6.40
3.11
6.57
3.09
6.56
3.19
6.34
2.96
6.31
3.05
6.51
3.05
6.50
3.16
6.06
2.80
5.99
2.88
5.76
2.64
5.65
2.69
5.54
2.52
5.50
2.60
5.65
2.97
5.64
3.02
6.32
3.34
6.56
3.52
5.57
2.67
5.72
2.80
5.20
2.49
5.30
2.59
5.36
2.45
5.30
2.47
4.99
2.27
4.88
2.27
4.76
2.11
4.71
2.13
The prices of gasoline and diesel
2009-3-25
were raised by 290 yuan and 180
yuan per ton respectively
The ex-factory price of gasoline
2009-1-14
was lowered by 140 yuan per ton;
and the ex-factory price of diesel
was lowered by 160 yuan per ton
The ex-factory price of gasoline
2008-12-19
was lowered by 900 yuan per ton;
and the ex-factory price of diesel
was lowered by 1,100 yuan per ton
2008-6-20
The prices of gasoline and diesel
were raised by 1,000 yuan per ton
The ex-factory price of gasoline
2007-10-31
was raised by 500 yuan per ton; and
the ex-factory price of diesel was
raised by 500 yuan per ton
2007-1-14
The ex-factory price of gasoline
was lowered by 220 yuan per ton
The price of gasoline, diesel and jet
2006-5-24
fuel oil were raised by 500 yuan per
ton
The ex-factory price of gasoline
2006-3-26
was raised by 300 yuan per ton; and
the ex-factory price of diesel was
raised by 200 yuan per ton
The ex-factory price of gasoline
2005-7-23
was raised by 300 yuan per ton; and
the ex-factory price of diesel was
raised by 250 yuan per ton
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Unirule Institute of Economics
The ex-factory price of gasoline
2005-6-25
was raised by 200 yuan per ton; and
the ex-factory price of diesel was
4.54
2.00
4.50
2.03
4.39
1.93
4.38
1.98
4.50
1.99
4.38
1.98
4.39
1.93
4.25
1.92
raised by 150 yuan per ton
2005-5-23
2005-5-10
2005-3-23
The ex-factory price of gasoline
was lowered by 150 yuan per ton
The ex-factory price of diesel was
raised by 150 yuan per ton
The ex-factory price of gasoline
was raised by 300 yuan per ton
Note: RMB and USD were exchanged according to the average exchange rate in the current year;
1 gallon=3.7854 litres; foreign oil prices were mainly calculated according to the average prices of
95# to 98# oil; the oil prices in China were calculated according to the average prices of oil of
different labels ranging from around 93# to 97#
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Unirule Institute of Economics
Chapter 4
Current performance of state-owned enterprises (2):
Distribution
In this Chapter, we will begin by analyzing the distribution of factor rewards by the owners
of factors and then analyze the distribution of the part that becomes the nominal profits of
state-owned enterprises.
1. The influence of subsidies and costs payable but were not paid on distribution
from the perspective of national income
By putting the data in the analyses in the previous chapter together, we will now examine the
performance of state-owned enterprises in distribution from the perspective of the entire national
income.
From a statistical point of view, we may analyze it with the concept of gross domestic
product (GDP). This concept is largely corresponding to the concept of value added of industry
(VAI), and the latter may be found from the relevant statistics on state-owned enterprises.
According to the definition of National Bureau of Statistics of China, VAI does not include
interests, land rents, other resources rents and other factor incomes. However, with a little
processing, it may be compared with GDP. Article 13 Industry of China Statistical Yearbook 2010
contained this section: “14-8 Main indexes of the state-owned and state-holding industrial
enterprises in various regions”. It included “VAI” 2and “total profit” and other data mentioned
above.
According to the definition given by National Bureau of Statistics of China, VAI includes
depreciation of fixed assets, laborer’s remuneration, net taxes on production and operating surplus,
and should be calculated according to the following formula:
VAI = Total Industrial Output—Industrial Intermediate Input＋ VAT Payable
Although there are slight differences between the definitions of VAI and GDP given by
National Bureau of Statistics of China (e.g. the former does not include interests, rents and other
factor incomes), they largely correspond to each other upon slight processing.
From VAI and the “total profit”, “VAT payable in the current year”, “original value of fixed
2
The latest data on VAI in China Statistical Yearbook 2009 were those of 2007, and we have calculated the VAIs
of 2008 and 2009 according to the Statistical Communiqués of the People’s Republic Of China on National
Economic And Social Development for 2008 and 2009 which noted that the growth rates of state-owned and
state-holding enterprises in 2008 and 2009 were 9.1% and 6.9% respectively (Website of National Bureau of
Statistics of China, 2009)
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Unirule Institute of Economics
assets”, “VAT payable in the current year” and “business taxes and surcharges” in “14-8 Main
indexes of the state-owned and state-holding industrial enterprises in various regions”, we may
get:
（1）
（2）
Depreciation of fixed assets = Original value of fixed assets*5.7%
Net tax on production = VAT payable in the current year ＋Business taxes and
surcharges — Subsidies
（3）
（4）
Operating surplus = Total profit
Laborer’s remuneration = VAI － Depreciation of fixed assets －Net tax on production
— Total profit
Thus, we may get the distribution structure of VAI as shown in the figure below. In this figure,
VAI = 100%.
Since we know that state-owned enterprises have not paid land rents, paid fewer resource
rents, obtained a great deal of interest preferential treatments and thus have fewer costs, we call
this VAI as “nominal VAI”.
Fig 4.1 Distribution structure of the nominal VAI of state-owned and state-holding
industrial enterprises (2001~2009)
Laborer’s remuneration
36.4%
Total norminal profit
22.3%
Nettaxes on production
23.2%
Depreciation of fixed assets
18.2%
Source: Calculated based on the data from China Statistical Yearbook 2010 (National Bureau
of Statistics of China, 2010).
There are two points to note in this figure:
（1） The total nominal profit accounted for around 22.3% of VAI;
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Unirule Institute of Economics
（2） The “Laborer’s remuneration” (VAI － Depreciation of fixed assets － Net tax on
production — Total profit) was about 9,363 billion yuan, much higher than the “gross
wages” in the same period. We can only regard it as “other remunerations of laborers” other
than the wages. We will analyze it in details later.
We then add the following contents to the distribution part of this nominal VIA: (1) Low
interest rate differential; (2) Land rents payable; (3) Resources rents payable but not paid; and (4)
Subsidies. Now we have the following figure. In this figure, the theoretical VAI is 100%, but the
actual sum of all the parts has exceeded the total VAI. As the residue upon deducting other parts,
the profit was actually a negative figure. Limited by expression skills, the negative profit is
displayed beyond the pie chart.
Fig 4.2
Adjusted distribution structure of the nominal VAI of state-owned and
state-holding industrial enterprises (2001~2009)
Total real profits
-6.3%
Source: Calculated based on the data from China Statistical Yearbook 2010 (National Bureau
of Statistics of China, 2010).
Since profit is the residue upon deduction of various costs, when we have added low interest
rate differential, land rents payable and resources rents payable but not paid into the distribution
structure of VAI, the total profit becomes -1,645.3 billion yuan, accounting for 6.3% of VAI.
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Unirule Institute of Economics
The understated costs and subsidies together account for about 26.9% of VAI; before these
costs were deducted, the total nominal profit accounted for about 22.3% of VAI.
This means that, from 2001 to 2009, the profits of state-owned and state-holding industrial
enterprises were the results of the interest differentials lower than the market interest rates, the
land rents payable that were paid, the resources rents payable that were not paid in full and the
subsidies. The over 7,000 billion yuan of wealth had been transferred from the resource owner
into the hands of state-owned and state-holding industrial enterprises.
From another angle, we may work out the actual VAI by deducting (1) low interest rate
differential, (2) land rents payable, (3) resources rents payable but not paid in full, and (4) general
subsidies from the nominal VAI, and then calculate the tax ratio according to the proportion of net
taxes on production to subsidies mentioned above (24% in all). Thus, we may get another sum.
However, under this circumstance, the total profit is also significantly reduced. See the figure
below.
Fig 4.3 Analysis of the components of VAI of state-owned and state-holding industrial
enterprises (2001~2009) Unit: 100 million yuan
Source: Calculated based on the data from China Statistical Yearbook 2010 (National Bureau
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of Statistics of China, 2010).
These conclusions led to one problem. Since the nominal profits of state-owned and
state-holding industrial enterprises appeared to be understated costs:
（1） It would be extremely unreasonable to assess the management boards and the employees
with the nominal profit. We may conclude that a part of the total profit had been distributed
among the management boards and the employees as performance incentives. Since the real
profit was a negative figure, this part of remuneration actually came from the incomes that
ought to have been obtained by other owners of factors.
（2） Since understated costs were caused by the non-payment of land rents, there seemed to be
more profits. When houses were built on the state-owned land and then sold to the
employees at prices excluding the land prices, it means that the employees received a part
of distributed profits which was quite unreasonable, too.
In a word, it is obvious that the “laborer’s remunerations” of state-owned and state-holding
industrial enterprises were quite unreasonable, and these remunerations also came from other
owners of factors.
2. The monetary and non-monetary incomes of the employees of state-owned
enterprises
(1) The remuneration and internal distribution systems of state-owned enterprises
Before SASAC was established, according to the provisions of the Regulation on the
Transformation of Management Mechanism of the Industrial Enterprises Owned by the Whole
People (1992), industrial enterprises owned by the whole people enjoyed the right of wage and
bonus distribution and might determine their own remuneration levels. The Opinions concerning
Deepening the Reform in the Internal Personnel, Labor and Distribution Systems of State-owned
Enterprises issued by State Economic and Trade Commission in 2001 holds that “the wage level
of the employees of an enterprise shall be determined by the enterprise itself according to the local
social average wage and the enterprise’s economic benefit under the State’s macro control.” With
the Opinions serving as the legitimate and reasonable policy basis for state-owned enterprises to
determine their own remuneration levels, the State primarily gave up the government’s
supervision and control over the internal distribution of state-owned enterprises.
The Detailed Rules for the Implementation of the Interim Measures on the Management of
the Remunerations of the Persons in Charge of Central Enterprises promulgated in 2004 adopted a
performance-oriented annual remuneration system among the persons in charge of enterprises.
After 2004, the employee remunerations of state-owned enterprises began to exceed
remunerations of other types and the social average level, and the contradiction between income
and distribution became increasingly prominent. In 2010, SASAC began to adopt “management
on the budget of gross wages”, and exercise “dual control” on the wages of central enterprises:
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one was the control of gross wages, and the other was the control over per capita wages.
SASAC began to conduct new pilots in governance structures in some of the central
enterprises in 2005 to have the remuneration committees within the boards of directors to decide
the remunerations of senior executives. However, the pilots failed to display the positive
correlation between remunerations of state-owned enterprises and their profits. As shown in the
annual reports of 31 listed companies in the main board markets of Shanghai and Shenzhen stock
exchanges by February 15 2009, the net profits of 17 companies rose over those in 2007, and the
net profits of the rest 14 companies declined in varying degrees. However, in terms of the
remuneration of senior executives, 21 companies rose over 2007, only 2 companies remained
unchanged, and 8 companies dropped over 2007.
Although some state-owned enterprises have established the system of board of directors,
many of the board members are senior executives at the same time. As a result, they lack
necessary independence. According to the analysis of the 406 state-owned listed companies with
complete materials on their board members, the average insider control level (number of inside
directors/total number of board members) is 67% (Feng Pengcheng, 2010). Under such a
circumstance, it is obviously likely that some senior executives may evaluate their own
performances and determine their own remuneration levels.
In December 2009, SASAC promulgated the latest Interim Measures for Assessment of the
Operational Performance of Persons in Charge of Central Enterprises which for the first time link
up “economic value added” (EVA) with the remunerations of the senior executives of central
enterprises. However, it cannot change one fact. That is, the operational performances of central
enterprises are not based on fair market competitions. What is the most important is that, just as
mentioned above, the nominal profits of state-owned enterprises are not real, and it is wrong to
award the management boards based on such nominal profits.
(2) Comparison between state-owned enterprises and other economic organizations and the
social average level
According to China Statistical Yearbook 2010, in 2005, the average wage of state-owned and
state-holding enterprises excelled the average incomes of other units for the first time. After that,
the gap has kept increased each year. In 2008, the average wage of the employees of state-owned
enterprises was 17% higher than that of non-state-owned enterprise units (weighted average). In
2009, the average wage of the employees of state-owned units was 65.62% higher than that of
urban collective units and 8.87% higher than that of other units.
The main reason for the gradually widening gap between the incomes of the employees of
state-owned enterprises and the incomes of other units and the whole society after 2004 was the
“focusing on the restructuring of major enterprises and leaving minor ones to fend for themselves”
among state-owned enterprises began in 1997. From 1997 to 2009, the number of state-owned and
state-holding enterprises dropped from 98,600 to 20,500. The small state-owned enterprises with
either losses or poor performances were closed down, suspended operation, merged with others or
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shifted to different line of production, and most of the enterprises left are those in “important
industries and key sectors relating to national safety and the lifeline of the national economy”.
Fig 4.4
types
2001～2009 Comparison of average wages between enterprises of different
Source: China Statistical Yearbook 2010 (National Bureau of Statistics of China, 2010).
The range of the gross wages of enterprises in our country is based on the Provisions on the
Composition of Gross Wages promulgated by National Bureau of Statistics of China in 1990.
However, according to the Provisions, invisible incomes such as insurance and welfare funds,
labor protection fees, housing accumulation funds, extra insurance premiums, transfer incomes
and other incomes are not covered in the gross wage. As a result, most state-owned enterprises
have made use of the loopholes in wage linkage policies and grant welfare subsidies and invisible
incomes to senior executives and ordinary employees under these gray excuses.
According to the data of relevant statistical agencies, in some monopoly industries, the
highest proportion of off-the-book income to the entire gross wage has reached 60%. We may find
such examples through the annual reports of listed companies. In the annual reports of listed
companies, employees’ remuneration mainly consists of three parts: wage, salary and allowance,
employee welfare benefits and social insurance premiums. According the Provisions, only wage,
salary and allowance belong to gross wage, and the rest belong to off-the-book income.
In the previous chapter, we obtained the “laborer’s remuneration” which is more general than
gross wage based on VAI. From 2001 to 2008, the “laborer’s remunerations” other than the wages
accounted for about 153% of the “gross wages”. We now calculate the “laborer’s remunerations”
of “private enterprises” and “non-state-owned enterprises” with the same method and then
compare them with that of state-owned enterprises.
Fig 4.5 Proportion of the per capita income of state-owned enterprises to that of private
enterprises
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Source: Calculated based on the data from China Statistical Yearbook 2010 (National Bureau
of Statistics of China, 2010).
Fig 4.6 Proportion of the per capita income of state-owned enterprises to that of
non-state-owned enterprises
Source: Calculated based on the data from China Statistical Yearbook 2010 (National Bureau
of Statistics of China, 2010).
From the above two figures we may find that, before 2004, the per capita “labor’s
remuneration” of state-owned enterprises was lower than those of private and non-state-owned
enterprises (=industrial enterprises above the designated size—state-owned and state-holding
industrial enterprises); after 2004, the per capita “labor’s remuneration” of state-owned enterprises
excelled those of private and non-state-owned enterprises and the differences have become
increasingly bigger. The growth in 2008 was exceptionally noticeable when it was 63% higher
than private enterprises and 36% higher than non-state-owned enterprises. This means that:
(1) Under the context of global financial crisis and the decline in income growth and even the
absolute income, the income growth of state-owned enterprises has been somewhat rigid.
(2) Compared with the disparity in wage levels, the gap in “laborer’s remuneration” between
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state-owned enterprises and non-state-owned enterprises has been more remarkable. This means
that the off-the-book monetary incomes of the employees of state-owned enterprises are much
higher than those of non-state-owned enterprises.
(3) The considerable growth in the “laborer’s remuneration” of the employees of state-owned
enterprises after 2008 reflects in part the trend of “the state advances as the private sector retreats”
from a
(3) Comparison of wage levels between different industries
The correlation between remuneration levels and industries has been constantly strengthened
and the differences between industries have been widened. According to China Statistical
Yearbook 2009, the sub-sectors ranking among the top five in terms of the average wages of
employees in 2008 were securities, other financial activities, air transport, software and computer
service. Among them, the average employee income of the securities industry was 10 times as
much as that of the textile industry. Within the industrial sector alone, the top five industries were
tobacco products, oil and natural gas exploitation, electric and thermal production and supply, oil
refinery, coking and nuclear fuel, and ferrous metal smelting and rolling processing.
A considerable part of state-owned enterprises, especially those in a monopolistic position
may obtain high profits without improving market competitiveness or expanding market sales
volumes thanks to the monopoly of key resources, the use of land, minerals and other natural
resources at low cost or even for free and the preferential credit and taxation treatments, and the
existence of the policies linking up wages with efficiencies have also caused gross wages to rise.
The average incomes of the employees of such monopoly state-owned enterprises are far higher
than the average incomes of the employees of general state-owned enterprises. About one third of
the wage differences between different industries in our country have been caused by monopoly
factors (Song Xiaowu, 2009).
According to a statistical yearbook compiled by Statistics Evaluation Bureau of SASAC on
July 11 2006, the wages of the employees of 12 employees in petroleum and petrochemical,
telecommunications, coal, traffic and transportation and electric power industries was 2 to 3 times
higher than the average wage level across the country. The median of labor cost per capita of the
employees of these enterprises was within the range of 60,000 to 70,000, while the average
employee wage in eastern provinces and the central regions in that year were 22,400 yuan and less
than 15,000 yuan respectively. The data of National Bureau of Statistics of China indicated that
the average wage of the employees in electric power, telecommunications, finance, insurance,
water, electricity and gas supply and tobacco industries were 1 to 2 times higher than those of
other industries. If off-the-book incomes and the differences in welfare benefits are taken into
account, the actual income gap may be 5 to 10 times.
According to Wang Xiaolu’s estimation, in 2005, there were 8.33 million employees in
electric power, telecommunications, petroleum, finance, insurance, water, electricity and gas
supply and tobacco industries. This number was less than 8% of the total number of employees
across China, but their gross income and off-the-book income was 1.07 trillion yuan, accounting
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for 55% of the gross wage of employees across the whole country in the same year (Wang Xiaolu,
2007). Based on these figures, we find that the per capita annual income of the monopoly
industries reached 128,500 yuan, 6 times higher than the average annual wage (18,364 yuan)
of the fully-employed employees of the whole country in the same year. This also coincides
with the 5-10 times mentioned above. Most of the enterprises in these industries are state-owned
enterprises.
Table 4.1 5 industrial sectors with the highest incomes in 2008 and the proportions of
state-owned enterprises
S/N
1
Industry
Tobacco products
2
Oil
and
exploration
natural
3
Production and supply
electric power and heat
4
Oil refinery,
nuclear fuel
5
Ferrous metal smelting and
rolling processing
coking
gas
of
and
Proportion of total output value
of state-owned enterprises to the
total output value of the industry
(%)
Average wage of
employees (yuan)
99.33
62442
96.11
46763
91.62
42627
72.39
35612
41.54
34559
Source: China Statistical Yearbook 2009 (National Bureau of Statistics of China, 2009).
Most of the state-owned enterprises in these industries are central enterprises. See Table 2.1,
Fig 2.3 and Fig 2.4.
The income levels of the employees of labor-intensive state-owned enterprises and
state-owned enterprises in industries with perfect competitions are relatively low. For example, in
textile, leather, fur, feather (down) and its products and chemical fiber manufacturing industries,
the wages of the employees of state-owned enterprises were not only significantly lower than
those of other units, but also slightly lower than urban collective units. A majority of the
enterprises in competitive industries are private enterprises. Therefore, the gap in employees’
incomes between monopoly industries and competitive industries may partially reflect the income
gap between state-owned enterprises and private enterprises.
Table 4.2 5 industrial sectors with the lowest incomes in 2008 and the proportions of
state-owned enterprises
S/N
81
Industries
Proportion of the total
output
value
of
state-owned
enterprises
to
industrial total output
value (%)
Average wage
of employees
(yuan)
Unirule Institute of Economics
1
Wood processing and wooden, bamboo, vine,
palm and straw products
2.91
16290
2
Textile
3.14
16671
3
Agricultural and sideline foodstuff processing
5.49
18069
4
Stationary and sporting goods manufacturing
1.56
18079
5
Leather, fur, feather (down) and their products
0.82
18119
Source: China Statistical Yearbook 2009 (National Bureau of Statistics of China, 2009).
(4) Comparison of employee benefits
An employee’s income mainly includes wage, salary and allowance, benefit, social insurance
and housing accumulation fund. According to the annual reports of listed companies, most of the
state-holding enterprises do not have any non-monetary welfare spending in employees’
remunerations, and the rest enterprises have little per capita non-monetary welfare spending.
However, the employees generally enjoy good welfare benefits.
Table 4.3 Employees’ wage and welfare spending of PetroChina Company Limited (2009)
Category
Total amount actually paid
(million yuan)
Per capita (yuan)
Wage, salary and allowance
45,173
75751
Employee benefits
3,564
5976
Social insurance premiums
12,723
21335
Among them:
insurance premiums
2,974
4987
7,011
11757
551
924
321
538
147
247
Housing accumulation funds
4,011
6726
Labor union funds and
employee education funds
1,517
2544
Others
311
522
Total
67,299
112854
medical
Basic endowment
insurance premiums
Unemployment
insurance premiums
Work-related
insurance premiums
Maternity
premiums
injury
insurance
Source: 2009 Annual Report of PetroChina Company Limited.
a. Retirement benefits
With respect to the welfare benefits of retirees, in addition to participating in and enjoying
the integrated planning on the endowment of retirees with fixed contributions organized by local
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governments, some of the state-owned enterprises also participate in the supplementary
endowment insurance schemes and medical insurance plans under the management of independent
insurance companies.
In the case of China Unicom, for example, in 2009, some sub-branches of some of the
province branches of China Unicom Limited under the Group also provided their employees with
other supplementary benefits after retirement, mainly including pension benefits, reimbursement
of medical expenses and supplementary medical insurance. The supplementary endowment
insurance scheme was: every month, each employee was paid with insurance premiums with fixed
contributions according to 2% to 20% of the monthly average base pay of employees in the
previous year.
As a supplement to endowment insurance, enterprise annuity is a subsidiary endowment
insurance established for respective employees by the enterprises according to respective
economic strengths and according to the relevant national provisions. According to existing entry
standards on enterprise annuities and actual practices, in addition to the capable non-state-owned
enterprises that have the sense of social responsibility, only the state-owned enterprises with
satisfactory performances have the ability and are willing to develop enterprise annuity plans at
the same time.
According to incomplete statistics made by State Administration of Taxation, by the end of
2008, 33,000 enterprises in China had established enterprise annuity systems which covered
10,380,000 employees or only about 6% of the number of those participating in the national basic
endowment insurance scheme. With respect to the industries in which the enterprises that have
established annuity systems are located, most of the enterprises are in electric power, railway,
finance, insurance, telecommunications, coal, nonferrous metal, transportation, petrol and
petrochemical and other high-income or monopoly sectors.
b. Medical insurance
The standards on the payment of the national medical insurance are: 8% of the wage base is
paid by the unit, and 2% is paid by the individual employee. In addition to the medical insurance
prescribed by the State, the state-owned enterprises with good performances also buy commercial
supplementary medical insurance for their employees. For example, according to 2009 annual
reports, Jinxi Axle Company Limited paid 11,796 yuan of medical insurance benefits to each of its
employee, while Aerospace Communications Holdings Co., Ltd. paid 41,977 yuan of medical
insurance benefits to each employee which far excelled the standard prescribed by the State.
Only 62% and 60% of the urban employed persons are insurants of endowment insurance
and medical insurance respectively. And the rates of insurance participation of peasant workers are
even lower, and only less than 20% and 31% of them are insurants of endowment insurance and
medical insurance respectively. The social security contribution bases of many service workers are
lower than general wages and some are even lower than minimum wage standards. Meanwhile,
over 90% of enterprise annuities are paid by central enterprises, and the supplementary insurance
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has further widened the secondary distribution gap (Zhang Shiping, 2010).
c. Housing
The housing welfare benefits provided by state-owned enterprises include monetary subsidies
and subsidies in kind, and monetary subsidies include accumulation funds and one-time monetary
housing subsidies.
According to the current provisions on the accumulation fund system, the deposit ratios of
accumulation funds of an employee and his employing unit should not be lower than 5% of the
average monthly wage of the employee in the previous year, and should not be higher than 12% in
principle. Many state-owned enterprises and public institutions in monopoly industries have raised
the percentage to 20%. According to the principle of “equal payment by individual employee and
his employing unit”, individual employees are the ultimate beneficiaries of the housing
accumulation funds. Thus, it can be seen that the excessive payment of accumulation funds for
employees in monopoly industries is a typical payment of additional welfare benefits in disguise.
Housing accumulation fund is a mutual fund aiming at improving the living conditions
of the people. However, the reporter has discovered through interviews that, due to the
excessive contributions in violation of regulations by some monopoly industries, housing
accumulation fund has become another major welfare benefit of the employees of these units
in disguise. The deposit ratio of housing accumulation fund determined by Jiangxi Province is
8% of the wages of employees. However, in recent years, some central monopoly enterprises
in Jiangxi have once raised the deposit ratio to 15% and even 20%. The Audit Department of
Ningxia Hui Autonomous Regions discovered through audit the other day that, in 2005, the
wage base of the housing accumulation funds of the over 14,000 employees of the local
electric power system was 2 times higher than the local average social wage.
Such phenomena are not individual cases. In some developed regions across China, such
monopoly industries with good performances such as electric power and banking intentionally
put various subsidies and allowances into housing accumulation accounts and grant them to
the employees as benefits while avoiding supervision.
The reporter has discovered in Jiangxi and Ningxia that some monopoly enterprises pay
1,000 to 2,000 yuan of housing accumulation funds to their employees. In contrast, some
enterprises and units in difficulties only pay 30-40 yuan of housing accumulation funds to
their employees.
December 6, 2006
China Youth Daily
According to the 2006 Audit Report of Shandong Province recently issued, the monthly
wage base of Shandong Branch of CNC is 21,300 yuan, the deposit ratio is 15%, and each
employee deposits 6,389 yuan on average; the per capita deposit amount of Jinan Water Tank
Factory is only 11 yuan. The policy formulated by the government with aim to help ordinary
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employees solve the housing problem has become the tool of a few high-income units to gain
welfare benefits for their employees.
July 30, 2007 Dongfang Daily
According to the housing reform policy issued by the State Council in 1998, enterprises
should stop in-kind housing allocation among their employees and adopt monetary housing
allocation in the form of subsidies in cash. There are no specific provisions on the standards of
cash subsidies, and enterprises may formulate housing reform plans suitable to themselves by
taking into account respective actual situations and financial capacities. Therefore, there have been
significant differences in the amounts of housing subsidies. For example, according to CNC’s cash
housing subsidy plan, if an eligible employee has not been allocated with a house before the
preferential sales plan ends or the house allocated is substandard, CNC must pay him a one-time
monetary housing subsidy calculated based on his length of service, position and other standards.
Based on this plan, CNC set aside a total of around 4.142 billion yuan of cash housing subsidy. As
of December 31 2009, the amount of unpaid one-time monetary housing subsidy was 2.508 billion
yuan.
(5) Non-monetary incomes of the employees of state-owned enterprises
State-owned enterprises also provide a large amount of non-monetary welfare benefits –
housing subsidy in kind which may take two forms. One is the building of houses by state-owned
enterprises on the land allocated by the State for free, and the other is that the enterprises sells the
commodity houses bought in the market to respective employees at low prices. Although the State
has put an end to in kind house allocation, in reality, however, the vast land occupied by
state-owned enterprises either for free or at low costs has provided “favorable conditions” for
them to build houses on their own.
According to the investigation conducted by Office the Report on the Chinese Real Estate
Market (REICO) of China Real Estate Chamber of Commerce under All-China Federation of
Industry & Commerce, among affordable housing, there are cooperative housing, houses built
with collected funds and houses independently constructed on land used by special units that are
only sold to specific objects at cost prices or prices of housing reform. These houses account for
quite a high proportion of all affordable housing, and those who are eligible to build such houses
are generally central enterprises and public servants. A welfare housing scheme was once again
launched in Guangzhou in 2006. According to the Plan of Guangzhou Municipality on Housing
Construction (2006～2010) issued in 2006, within five years, the army, Guangzhou offices of
central and provincial units and the large and medium-sized state-owned enterprises in Guangzhou
will build 37,600 sets of affordable housing with a total construction area of 3 million m2 on
“self-owned land” . No doubt, it is a serious mistake to regard state-allocated land as “self-owned
land”. This measure will help some of the employees of these “units” to obtain housing at
relatively low subsidized prices. This, in essence, is to make the profits from state-owned land
their own.
The Baoshi Garden community between the fourth and the fifth ring roads of Beijing
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made open for occupancy in 2004 is a group real estate purchase project of PetroChina, and
the buyer is PetroChina North China Marketing Company. The difference between the
purchase price and the market price was more than 1,000 yuan. The property management
company of Baoshi Garden is Beijing Tong Da Ren He Property Management Co., Ltd. which
is a subsidiary of PetroChina North China Marketing Company. The property management
fee of this community is 1.08 yuan/m2 every month, which is a little more than half of the
property management fees of other residential buildings in Jia Ming Tong Cheng.
In 2009, Beijing North China Petrol Service Corporation under PetroChina bought 8
residential buildings, 2 commercial buildings and 2 underground parking lots in Phase III of
Sun Star City in Chaoyang District, Beijing with 2.06 billion yuan in group purchase. The
housing price of the group purchase was more than 9,000 yuan/m2, which was far lower than
the market price of 23,000 yuan of the community.
Besides, we have also found that the employees of the 3rd Research Academy of CASIC
bought the houses in Jia Zhou Shui Jun in Fangshan District in January this year in group
purchase at a price of merely 2,594 yuan. Online rumors also indicate that Sinopec has
recently bought the Guancheng Midtown in Guangqumen area. As disclosed by an insider,
Sinopec bought the project with 300 million yuan, and the unit price is around 13,500
yuan/m2. The houses bought are also used as staff housing.
In fact, there have all along been group real estate purchases by state-owned units in
Beijing, and the rest group purchases failed to arouse public concern only because the housing
prices were not high then. It is reported that many of such early high-end housing projects as
Zhonghai Kai Xuan in Xidan were bought by ICBC, Bank of Communications, Datang Group
and other central enterprises or agencies, and the market prices now has already risen by two
to three times.
Beijing Evening News, 2009-09-13
As introduced by people from Anshan Iron and Steel, Anshan Iron and Steel now does not
provide housing subsidies and only normally deposits accumulation funds for the employees.
Since it has its own land and an independent housing development system, when the employees
buy houses from Anshan Iron and Steel, the prices are 30%-50% lower than the market price.
This, in fact, is one mode of enterprise welfare benefit which has become an invisible subsidy.
The Economic Observer, 2006-07-17
3. Comparison of income of senior managers between state-owned enterprises
and other types of enterprises
The listed companies in China began to disclose executive annual salaries in 1998. In that
year, the average annual salary of the board chairmen and general managers of over 840
companies was 51,800 yuan. In 2006 the average annual salary of listed state-holding companies
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exceeded that of private enterprises for the first time.
According to the information from SASAC, from 2004 to 2008, the average annual salaries
of the senior executives of the central enterprises under the supervision and management of
SASAC under the State Council were 350,000 yuan, 430,000 yuan, 478,000 yuan and 550,000
yuan respectively. The annual growth rate was around 14%. In 2009, the average annual salary of
the CEOs of central enterprises was about 600,000 yuan. Relevant studies indicate that the average
annual salary of the three senior executives of state-owned monopoly enterprises with the highest
salaries was 653,000 yuan (Gao Minghua, 2010). The remuneration structure of the senior
executives of central enterprises is characterized by capital salary plus performance salary, and a
few listed companies also provide stock options. Performance salary is a component part of the
entire remuneration value system with loose assessment scales. Although most state-owned
enterprises have copied the executive incentive measures in Europe and America, they have only
imitated the forms and there still lacks a supervision mechanism.
According to the annual reports of listed state-owned companies, the remunerations of quite a
number of members of the boards of directors and the boards of supervisors of listed companies
were “zero”. However, they also hold other posts and receive remunerations and allowances from
the shareholders or other affiliated units. We cannot find the specific remunerations of these senior
executives. Besides, the senior executives of state-owned enterprises also enjoy institutional
advantages that market-oriented enterprises do not have such as the level treatment of
administrative officials and position-related consumption. These institutional bonus systems also
belong to the remunerations of the senior executives of state-owned enterprises. Relevant
researches indicate that the annual remunerations of the senior executives were always far fewer
than their position-related consumptions. During the period from 1999 to 2002, the average
position-related consumption of the senior executives of listed companies was 11.8 times higher
than their average annual remuneration (Chen Donghua, 2005).
Fig 4.7 Comparison between average annual remuneration and average positionrelated consumption of listed state-owned companies
Unit: 10000 yuan
Source: Chen Donghua, 2005.
According to the analysis of the efficiencies of the senior executive incentive schemes of
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listed companies of different ownership structures conducted by Investor Journal by assessing the
profit generated from each yuan of annual salary received by a senior executive, central
enterprises still enjoy remarkable advantages. However, the fairness in the linkage between the
operational efficiency of a state-owned enterprise and the remunerations of its senior executives is
often challenged.
First, the advantages enjoyed by state-owned enterprises in the occupying and use of
resources may ensure their profits. This advantage in resources may be embodied in two aspects.
One is the monopoly power in occupying resources. The entry barriers constituted by
administrative monopoly enable state-owned enterprises to obtain monopoly profits. The other is
the enterprises’ occupying and use of land, mineral and other resources at low costs or even for
free.
Second, the senior executives of some state-owned enterprises are actually selected through
administrative appointment but not market-oriented selection. Market-oriented remuneration
inevitably calls for market-oriented selection of senior executives and market-oriented
performance assessment. However, the current administrative appointment of senior executives
and market-oriented remunerations have formed a pair of paradox. The administrative
appointment system has resulted in the fact that many senior executives are “senior officials” at
the same time who have stable positions and face low risks. The administrative authorities have
bestowed the senior executives with great powers, and it is hard to evaluate the link between the
development of an enterprise and the efforts made by its senior executives.
Third, the senior executives of state-owned enterprises do not have to pass reasonable
examinations to obtain high remunerations, and the examination mechanism is unclear. There is
still not a relatively complete and convincing examination system which may judge how much of
the performance of a state-owned enterprise has come from the market development, effective
management and technical innovation of the management board, and how much of it has come
from the appreciation of the resources occupied and the institutional profits brought along by the
monopoly status.
The decision-making mechanisms on remunerations of some countries
The French government exercises strict control over the remunerations of state-owned
enterprises, especially monopolistic state-owned enterprises. The government has set up a
committee responsible for the management of the salaries of state-owned enterprises with the
participation of finance, labor and other relevant competent departments, and determines the
remunerations of chairmen of the boards and general managers and the wage growth plans of
enterprise employees. The salaries of general managers do not float, and does not adopt the
annual salary system. The public servants of the Ministry of Finance are not allowed to work
in the state-owned enterprises used to be under their jurisdiction.
In Japan, the remunerations of the senior executives of enterprises funded by the
government are largely the same with those of public servants, and the remunerations of the
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senior executives of government-run enterprises at various levels are equivalent to about 25%
of those of the senior executives of private enterprises.
In the US, the salaries of the employees of state-owned enterprises and public servants
are unifiedly determined according to the average salary of private enterprises. As authorized
by the US Congress, US Bureau of Labor Statistics conducts a nationwide survey on the
salaries of some of the private enterprises each year (involving millions of employees) which
then serves as the basis for public servants’ remuneration adjustment. The remunerations of
the members of the boards of directors of state-owned enterprises are prescribed by the US
Congress or the special acts on state-owned enterprises adopted by state assemblies. The
remuneration system of federal employees is generally adopted for the senior executives of
enterprises. For example, the remunerations of the board of directors of Tennessee Valley
Authority are prescribed by the Tennessee Valley Authority Act.
4. Comparison of the tax payment between state-owned enterprises and other
types of enterprises
(1) Payment of income taxes
According to Investor’s Journal’s analysis, among all the listed companies, the income taxes
of private enterprises (average values from 2007 to 2009) were significantly higher than those of
state-owned enterprises. Among the more than 1,700 A-share listed companies, 992 companies
(nearly 60% of all the listed companies) had the nature of state-owned enterprises. The average
income tax of the 992 state-owned enterprises was only 10%, while that of private enterprises
during the same period reached 24%, 14% higher than the state-owned enterprises. This means
that the tax burdens of private enterprises were far heavier than those of state-owned enterprises.
This data has been adopted in this research.
It should be recognized that tax burdens were imbalanced among state-owned enterprises.
Among the 50 state-owned enterprises with the heaviest tax burdens, 37 or 74% of them belong to
SASAC, local state-owned assets supervision and administration commissions and local
governments, and the average tax burden of them was 31%.
The industries that were able to enjoy preferential policies on income taxation were mainly
high and new technology and public utilities industries. According to the provisions of the
Enterprise Income Law of the People’s Republic of China, high and new technology may be pay
enterprise income taxes at a rate of 15% in the first year; the enterprise income taxes over the
incomes of the enterprises engaged in the investment and operation of the public infrastructure
projects under the key support of the State may be exempted or reduced. In addition, local
governments have also formulated their own preferential policies on the income taxes of high and
new technology enterprises, and direct exemption or reduction or refund after collection are often
adopted to provide preferential treatments for listed companies.
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Judging from the trend of the reform of the policies on income taxes, both the preferential
income tax policies on science and technological industries and high and new technology
industries and the taxation policies on the pre-tax deduction of domestic equipment deduction and
scientific research costs have reduced the tax burdens of enterprises.
Preferential tax policies enjoyed by Hubei Aviation Precision Machinery Technology Co.,
Ltd.:
a. According to the Notice on Publicizing the Certification of the First Group of High
and New Technology Enterprises in Hubei Province in 2008 (E.K.J.F.J.[2009]NO.3) issued
by Hubei Provincial Department of Science and Technology, Hubei Provincial Department of
Finance, Hubei Provincial Office of State Administration of Taxation and Hubei Provincial
Local Taxation Bureau, the high and new technology enterprise status of Hubei Aviation
Precision Machinery Technology Co., Ltd. was approved, the Certification No. is
GR200842000075, and the issuance date was December 1, 2008. The company would pay
enterprise income taxes according to a tax rate of 15%.
b. According to Notice of the Ministry of Finance and the State Administration of
Taxation on Implementing the Spirits concerning Taxation Issues of the Decision of the
Chinese Communist Party Central Committee and the State Council on Strengthening
Technical Innovation, Developing High Technology and Realizing Industrialization
C.S.Z.[1999]NO.273, the company’s incomes from technical development are exempted from
business taxes.
c. According to the relevant provisions of the Ministry of Finance and the State
Administration of Taxation concerning the Interim Measures on the Tax Credit for Enterprise
Income Taxes for Investment in the Technological Transformation of Homemade Equipments
C.S.Z.[1999]NO.290 and the Document E.G.S.H.(2007)NO.55 of Hubei Provincial Office of
State Administration of Taxation, the company may begin to enjoy tax credit for enterprise
income taxes for investment in the technological transformation of homemade equipments as
of 2006.
Source: 2009 Annual Report of Hubei Aviation Precision Machinery Technology
Co., Ltd.
In terms of tax levels in 2009, the tax levels of petrol and petrochemical enterprises were not
low. One reason for it that we should not ignore was that, as of January 1 2009, 106 large-scale
state-owned enterprises that were eligible for tax consolidation after the coming into force of the
new Enterprise Income Tax Law including PetroChina, Sinopec and many other energy, steel and
aviation giants became ineligible for the consolidated payment of enterprise income taxes. That
means a rise the burdens in enterprise income taxes.
(2) Comparison of overall tax burdens
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In 2009，the overall tax burdens of central enterprises, local state-owned enterprises and
private enterprises were 8.8%, 3.5% and 3.1% respectively. The tax burdens of central enterprises
were higher than those of private enterprises (Ren Pengyu, 2010). In the list of top tax paying
enterprises in China published by the State Administration of Taxation and the Journal of Taxation,
304 of the top 500 independent enterprises paying territorial taxes were state-owned enterprises,
and the total ratal accounted for 75.58% of the total ratal of the 500 enterprises; 305 of the top 500
group enterprises paying taxes were state-owned enterprises, and the total ratal accounted for
89.75% of the total ratal of the 500 enterprises; and 65 of the top 100 enterprises paying enterprise
income taxes were state-owned enterprises, and the total ratal accounted for 77.84% of the total
ratal of the 100 enterprises. The overall tax burdens of central enterprises were higher than those
of private enterprises, and this has the following reasons:
First, due to monopoly management, most of the listed central enterprises are in industries
with higher burdens in main businesses such as petrol, coal, petrochemical, finance and real
estates, and in all these industries there are special tax categories. In terms of different industries,
mining and quarrying, real estates and financial service are the three industries with the heaviest
tax burdens, and some of the special tax categories in these industries should be regarded as
resources rents. In these industries, central enterprises enjoy overwhelming advantages in
proportions to production values. In the mining and quarrying industry, for example, the total sales
amount of listed central enterprises in 2009 accounted for 87% of the total sales amount of the
entire industry. This proportion was 36% in the real estates industry which was higher than those
of local state-owned enterprises and private enterprises. In the financial service industry, this
proportion was 76%.
Petrol, coal and other resources enterprises have to pay a certain proportion of resources
taxes. Although the special oil gain levies of petrol enterprises should be regarded as resources
rents, they should be financially regarded as tax burdens. In the real estates industry, listed
companies have to pay high business taxes. Moreover, the 30%~60% of land value increment
taxes may also significantly raise the companies’ tax burdens. In the financial industry, business
tax has caused the overall tax burden of the industry to be significantly higher than the rest general
manufacturing industries.
Second, when calculating the tax burden of income tax, we compare the income tax with the
pre-tax tax. Statistics indicate that, due to monopoly advantages, the net profit margin on sales of
listed central companies is also significantly higher than that of private enterprises. As a result, the
general tax burden of central enterprises calculated while having incomes as the denominator is
higher than the income tax burden calculated while having pre-tax profit as the denominator.
The main reason for the significant difference between it and the income tax burden worked
out with incomes as the denominator is the high profit rate of central enterprises. According to the
statistics of the Data Research Department of Investor Journal, in 2009, the overall net profit
margin on sales of central enterprises reached 11.03%, while that of private enterprises was only
8.85%. The reason for central enterprises higher net profit on sales is also their monopolistic
advantages. Under the environment where there is insufficient competition in the market, central
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enterprises may have stronger pricing power over their products, and therefore enjoy higher gross
profit ratios. Moreover, compared with private enterprises, central enterprises may save quite a
part of sales expenses.
(3) Comparison in tax burdens between state-owned enterprises and non-state-owned
enterprises from the composition of VAI
Analyzing from the perspective of the entire VAI with the data on the nominal VAI provided
by National Bureau of Statistics of China, the total tax burden of state-owned enterprises (nominal
tax burden-subsidies-resources rents for oil and natural gas paid) accounts for about 24.1% of VAI,
while that percentage of non-state-owned enterprises is 18%. By taking into account the fact that
most of the state-owned enterprises are in monopoly industries, the rest special tax categories
other than resources rents paid, and the fact that the average rate of value-added taxes of
non-state-owned enterprises is relative low (10.8%) due to the small average scales, we may
largely consider that state-owned enterprises and non-state-owned enterprises have similar tax
burdens.
However, while the share of the total profit of state-owned enterprises is higher than that of
non-state-owned enterprises, it is relative abnormal for the percentage of income taxes (2.2%) to
be significantly lower than that of non-state-owned enterprises (5%). The result is that the
proportion of net profit of state-owned enterprises is significantly higher than that of
non-state-owned enterprises (15.8%). See the figure below.
Fig 4.8 Comparison of the tax burden structures in VAI between state-owned
enterprises and non-state-owned enterprises
Source: Calculated based on the data from China Statistical Yearbook 2010 (National Bureau of
Statistics of China, 2010).
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5. The profits payment and dividend distribution of state-owned enterprises
(1) Debates on the dividend distribution of state-owned enterprises
The great debate on the dividend distribution of state-owned enterprises in China began from
the report entitled Dividend Distribution of State-owned Enterprises: How Much? To Whom?
Issued by the World Bank on November 17 2005 and did not stop when the Ministry of Finance
officially promulgated the Measures on the Management of the Charging of Profits from the
State-owned Capitals of Central Enterprises on December 11 2007. The proportion of profits to be
turned over stipulated in the Measures aroused many disputes soon after the promulgation of the
Measures. The appropriate proportion of profits to be turned over and the whereabouts of dividend
expenditure have become the hotspots in the current concerns over the dividend distribution of
state-owned enterprises.
The World Bank report (2005) aroused general concerns and debates in the society. Those
who support the distribution of dividends by state-owned enterprises mainly hold the following
three main views: ① Since the State is the investor of state-owned enterprises; it has the right to
participate in dividend distribution as a shareholder. Speaking of the nature of state-owned
enterprises, the shareholders of state-owned enterprises should nominally and legally be the entire
people across the country, and the competent governmental departments only exercise power on
behalf of them. Therefore, the entire citizens ought to become direct beneficiaries, and distribution
principles benefiting partial groups should not be separately formulated. ② The high wages and
high welfare benefits of state-owned monopoly enterprises come from the high profits under
administrative monopoly. These profits ought to be turned over to the State and then, through
secondary distribution of the government, be used to safeguard public undertakings such as
education, medical care, and substantiate endowment accounts. If a monopoly industry privately
determines the purpose of the monopoly profits without the consent of the shareholders (the
people), it has actually abandoned the people’s consignment and infringed upon the wealth which
ought to be the property of the entire people. ③ The World Bank’s report held that, in order to
improve investment efficiency and expand consumption, it is also necessary to re-examine the
governance structure and the distribution policy of state-owned enterprises so as to restrict the
effective flow of state-owned capitals and the investment and financing conducts of state-owned
enterprises through reasonable dividend distribution. Besides, the government has taken on the
majority of the reorganization costs of enterprises such as schools, hospitals and other social
responsibilities, and the costs caused by the out of work and early retirement of employees. In fact,
the dissection of the above social burdens is just one of the important reasons for the constant
improvement in profit levels of state-owned enterprises. This has also given more reason for the
State to offset these costs.
There are also scholars who are not in the opinion that the State should bring the profits of
state-owned assets under management. Their stance is substantiated by two main reasons. One is
that charging too much dividends from monopoly state-owned enterprises will force the
enterprises to manage to increase costs and lower profits, such as trying every means to translate
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profits into the incomes and welfare benefits of their employees. The other is that this will lead to
financial chaos in the country. The State should quit from market competition sectors as quickly as
possible so that state-owned capitals may only take on the functions in offsetting market failures
and meeting social public demands (Li Sen, Zhao Xiuling, 2004).
The above opinion actually deals with the two stages of development in essence, and the
latter one is the ultimate goal. It’s just that when this goal is barely attainable for the time being, it
is necessary to bring the profits of state-owned assets under management.
It is generally believed that the current range of dividend ratio of 5%~15% is too low. In
developed countries, dividend distribution strategies and ratios are usually proposed by the boards
of directors of state-owned enterprises which will then be finalized upon discussion with relevant
governmental agencies. The present dividend distribution mechanism of listed companies is quite
mature. Compared with the distribution of dividends of listed companies, the proportions of
dividends distributed by state-owned enterprises seem a little lower. Currently, listed companies
distribute around 40% of their profits to their shareholders as dividends on average. In some other
countries, the dividends turned over generally account for 1/3 to 2/3 of their profits, and some
even reach 80%-90% of profits. In OECD countries, the dividend rates of different companies
vary greatly from one another. The proportion of dividend paid to profit usually reflects a
company’s own prospect for growth.
As for the design of the dividend distribution mechanism, some scholars hold that, while
satisfying the basic requirements of government shareholders on ROI, in order to ensure the
sustainable development of state-owned enterprises, the State may adopt provisions on the rates of
return required by government shareholders for enterprises of different types (Wang Ping, 2010).
The World Bank came up with a double-tier structure with specific proportions of dividends. That
is, the dividends of each state-owned enterprise are composed of two parts: fixed dividends and
variable dividends. The relative weights of the two parts should take the characteristics of
industries into consideration. Specifically speaking, the greater the changes in the profits of an
industry is, the larger the variable part should be; and the fixed dividend rates are determined
according to the situation of the specific industries on a unified basis. This rate may be set up by
referring to the historical data on dividend distribution and profits of the listed companies in the
same industry both at home and abroad. The World Bank suggests that the average distribution
rate of central enterprises may be established within the range of 20% - 50%. Since state-owned
enterprises belongs to public trust, some domestic scholars and foreign governmental officials
hold that more rigorous standards should be set up on the proportions of surplus cash retained by
state-owned enterprises. For a state-owned enterprise totally controlled by the State, it is a
reasonable policy on dividend distribution to distribute all of its profits as dividends.
We are of the opinion that “dividend distribution” and “the turning over of profits” should be
distinguished from each other. The latter means that the manager of an enterprise should turn all
the profits over to the owner, and the owner will then decide the proportion of the profits that will
be distributed as dividends and the proportion to be used in reinvestment. The crucial problem is
not how much of the profits should be distributed as dividends, but that the owner of a
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state-owned enterprise should have the right to determine the proportion of dividends.
(2) Profits turned over by state-owned enterprises
Fig 4.9 Profits realized by state-owned enterprises
Source: Website of the Ministry of Finance of the People’s Republic of China.
According to the list of the state-owned assets operation of 108 central enterprises in 2009
published by SASAC, the total profit of the enterprises on the top ten list of profits such as
PetroChina, China Mobile, China Telecom, China Unicom and PetroChina was 530.69 billion
yuan, accounting for 73.76% of the total profit of the central enterprises under the management of
SASAC. Among them, the profits of PetroChina and China Mobile were 128.56 billion yuan and
148.47 billion yuan respectively, and the total profit of the two enterprises exceeded 1/3 of the
profits of all the central enterprises.
Thus, it can be seen that the profits of state-owned enterprises mainly come from central
enterprises, while the profits of central enterprises are mainly realized through enterprises in
monopoly industries.
In 2007, the State Council issued the Opinions of the State Council on the Pilot
Implementation of the State-owned Capital Operating Budget (G.F. [2007] NO.26). According to
the Opinions, pilots would begin in 2007 to collect the profits from state-owned assets realized in
2006 by some enterprises, and the central-level state-owned capital operating budget would be
officially implemented as of 2008. This ended the 13 years of history in which state-owned
enterprises did not have to distribute dividends to the government. Currently, however, the central
state-owned capital operating budget only covers the central enterprises subject to the supervision
and management of SASAC, China National Tobacco Corporation and China Post Group, and
over 6,000 enterprises affiliated to over 80 central departments (units) such as science and
technology, education, culture, health, administration, politics and law, agriculture, railway and
finance departments have not been covered in that scope.
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Fig 4.10 Profits turned over by state-owned enterprises
Source: Website of the Ministry of Finance of the People’s Republic of China.
Note: The total amount in 2007 was relatively low because only the profits from state-owned
capitals some of the enterprises were collected in that year.
The profits turned over by state-owned enterprises only account for a very low proportion of
their overall profits. In 2009, the total profit turned over by state-owned enterprises accounted for
7.38% of the total profit of state-owned enterprises. In 2010, this proportion further dropped to
2.12%. Except for the profits turned over, all the rest profits are distributed within state-owned
enterprises.
(3) Dividend rates of state-owned enterprises listed abroad
The World Bank report (2005) indicated that, although the Chinese state-owned enterprises
did not provide dividends to the government from 1994 to 2007, those that listed in overseas
markets have followed the international convention on dividend distribution policies. From 2002
to 2008, the average dividend rate of the 172 Chinese enterprises owned directly or indirectly by
the Chinese Government through shareholding that were listed in Hong Kong Stock Exchange
was 23.2%, and the median was 22.7%. According to the data of August 2005, the average
dividend rate of the main Chinese state-owned enterprises listed in the US was 35.4%.
Table 4.4 Dividend rates of main Chinese state-owned enterprises listed in the US (ADRs)
Dividend per share
Earnings per share
Dividend rate
PetroChina
2.37
7.59
31%
China Mobile
0.13
1.41
9%
Sinopec
1.45
5.91
25%
China Telecom
0.83
4.02
21%
China Unicom
0.12
0.39
31%
Huaneng Power
1.21
2.14
57%
Aluminum China
2.13
7.40
29%
Yanzhou Coal Mining
1.57
6.36
25%
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Guangshen Railway
0.71
0.85
84%
China
Airlines
0.48
1.15
42%
Eastern
Note: The unit of share prices is USD;
Source: www.finance.yahoo.com, August 1, 2005.
According to the data of the one-year observation on 1,264 Chinese state-owned companies
conducted by the World Bank, 35% (444) did not distribute dividends. The Chinese state-owned
enterprises with negative profits rarely distribute dividends, and only 8 or 0.6% of the 1,264
companies distributed dividends when they were at a loss.
(4) Expenditure structure of dividends turned over
According to the statistics provided by the Ministry of Finance, from 2008 to 2011, the total
operating budget expenditure of state-owned capitals was 285.186 billion yuan. These funds were
mainly used in state-owned economic and industrial restructurings, subsidies of reforms and
reorganizations, new investments and supplemented state-owned capitals, post-disaster production
resumption and reconstruction of central enterprises and relief subsidies for the reform of central
enterprises. From 2008 to 2001, the total expenditure spent in the above five areas amounted to
235.04 billion yuan, accounting for 82.42% of the operating budget expenditures state-owned
enterprises. Among the 27 billion of state-owned capital supplements in 2008, the three major
state-owned airline companies and the five major electric power companies received huge capital
injections. China Eastern Airline received 9 billion yuan in two lots, and China Southern Airline
received 3 billion yuan. In 2009, 60 billion yuan of special funds of the total operating budget
expenditure of state-owned capitals were used in telecom reorganization and reform.
Fig 4.11 The structure of operating budget expenditures of state-owned capitals 2008~2011
Source: See the table below.
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10 billion yuan of funds were brought into public budgets and used to supplement social
securities, and these funds only accounted for 3.51% of the total expenditure. In terms of the
expenditure structure, the dividends taken over currently are mainly transferred within the central
enterprise system, and few have been spent to benefit the people. The common practice in the
international community is that the representatives of state-owned shareholders (no matter which
agencies they are) generally require turning the dividends of state-owned enterprises over to the
financial departments and then used in public expenditures.
Table 4.5 The structure of operating budget expenditures of state-owned capitals 2008
~2011
Unit: 100 million yuan
2008
2009
2010
New
investments
and
supplemented
state-owned
capitals
270
75
52.5
State-owned economic
industrial restructurings
and
81.5
59
Subsidies for
reorganization
and
reform
2011
Total
397.5
495.5
636
600
130.5
80
810.5
139.6
20
1.5
357.4
Relief subsidies for the reform
of central enterprises
120
29
149
Major technical innovations of
central enterprises
32
35
67
Energy conservation
emission reduction
30
35
65
45
45
30
60
10
10
5
5
10
10
40
50
50
50
10
2.56
12.56
Post-disaster
production
resumption and reconstruction
of central enterprises
Development
industries
of
196.3
and
emerging
Overseas
investments
central enterprises
of
30
Construction of the capacity of
central enterprises in ensuring
safety production
Social security
enterprises
of
central
Brought into public financial
budget
Supplemented social security
Reserves
Subtotal of expenditures
547.8
873.6
440
858.56
2719.96
Operating budget revenue of
state-owned capitals
443.6
988.7
421
788
2641.3
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Margin
-104.2
115.1
-19
-70.56
-78.66
Note: Since the Ministry of Finance began to publish budget expenditure from 2010, the data on
the expenditures in 2008 and 2009 came from SASAC which were slightly different from the data
on total expenditure of the Ministry of Finance.
6. Summary
To sum up, our basic conclusion is that the dividend distribution of state-owned enterprises
neither embodies equality nor serves as an important factor correcting social injustice as we
thought before. It has actually seriously infringed upon the principle of equality.











Through paying fewer or not resources rents including land rents, natural resources rents and
other resources rents, a great deal of the incomes of resource owners have been transferred
into state-owned enterprises;
through preferential interest rates lower than the market levels, the incomes of the owners of
loan resources have been transferred into state-owned enterprises;
through huge governmental subsidies when there are enormous nominal profits, the resources
of public finance have been transferred into state-owned enterprises;
state-owned enterprises have obtained unjust monopoly profits through administrative
monopoly;
through higher controlled prices, the interests of consumers have been transferred into
state-owned enterprises;
the obvious preferential treatments in tax reduction and exemption have damaged the
interests of public finance and have transferred this part of interests into the hands of
shareholders both at home and abroad;
state-owned enterprises did not turn their profits over to the owners for distribution for a long
time and barely distributed any dividends on the whole;
even after the operating budget was adopted, the profits turned over by central enterprises
have been spent mostly on central enterprises, and the public finance have not obtained any
profits from state-owned capitals;
internal rewards have been conducted within enterprises over the nominal profits generated
from the above-mentioned factors so that the profits of other factor owners and the public
have been transferred into the hands of the management boards and the employees of
state-owned enterprises;
building residential houses on land allocated by the State which are then sold to the
employees of the enterprises has transferred the land profits of the State into the hands of the
employees of state-owned enterprises; and
due to the relatively high nominal profits and the fewer income taxes, nominal net profits are
higher to a greater extent and the owners of these state-owned and state-holding enterprises
have received higher returns on investment.
Therefore, from an overall point of view, state-owned enterprises have also played a negative
role in income distribution.
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Chapter 5 “Guo Jin Min Tui” and its impact on market competition:
The nature of “Guo Jin Min Tui” and relevant case studies
Having experienced large-scale restructurings in the 1990s, the state-owned enterprises in
China have gradually exited from competitive sectors. According to the Decision of the Central
Committee of Chinese Communist Party concerning Several Major Issues in the Reform and
Development of State-owned Enterprises, the state-owned economy should mainly control the
important industries and key sectors relating to the lifeline of the national economy including the
backbone enterprises in industries relating to national safety, natural monopoly industries,
industries providing public products and services, pillar industries and high and new technology
industries. According to the Decision, state-owned enterprises have gradually secured the absolute
dominant positions in key areas of the national economy. Besides, the distribution of central
enterprises is becoming increasingly more centralized. From 2003 when SASAC was established
to early April 2010, the number of central enterprises upon reorganization has reduced from 196 to
126, and SASAC plans to further reduce that number to below 100 within 2010. It seems that the
state-owned enterprises in China are becoming bigger and bigger. What’s more, what some of the
state-enterprises have done under the support of the government due to the impact of the global
financial crisis since 2008 has further left the impression of “Guo Jin Min Tui” with us.
Since 2009, the debates over “Guo Jin Min Tui” have become increasingly intensified. The
government has adopted a quite cautious attitude towards the phenomenon of “Guo Jin Min Tui”
as summarized by scholars. Minister Ma Jiantang of National Bureau of Statistics of China said
when attending the China Economist Forum that the statistical data in China cannot substantiate
the alleged the general existence of such a phenomenon as “Guo Jin Min Tui”. No conclusions
have been reached over such debates by far.
Is “Guo Jin” a phenomenon only in some sectors or a general phenomenon that can be found
in all sectors? Based on data supports, this article analyzes the features of “Jin” and “Tui” of
state-owned enterprises in recent years and reaches our independent conclusion on the debates
over “Guo Jin Min Tui”: there is not a general phenomenon of “Guo Jin Min Tui” on the whole,
but there are indeed structural signs of “Guo Jin Min Tui”. Then, this article examines the
noticeable features of “Guo Jin Min Tui” in key sectors in recent years through case studying.
These features have, along with the upturn of monopoly and the neglect of property rights such as
the establishment, safeguarding and expansion of monopoly in individual industries and
state-owned enterprises’ infringement upon the lawful property rights of private enterprises,
damaged market orders and have given a heavy blow on China’s private economy.
1. Characters of “Jin” and “Tui” of state-owned enterprises in recent years
The view of Minister Ma Jiantang of National Bureau of Statistics of China that “the
statistical data in China cannot substantiate the alleged the general existence of such a
phenomenon as ‘Guo Jin Min Tui’” has its good reason. If we look at the two indexes on industrial
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data in China Statistical Yearbook in recent years – the gross industrial output value and the
occupation of funds- we may find that the shares of state-owned enterprises have kept declining.

The proportion of the gross industrial output value of state-owned and state-holding
enterprises since 1999 has kept declining year after year
Table 5.1 Proportion of the gross industrial output value of state-owned and
state-holding enterprises
Unit: 100 million yuan
Year
Gross
industrial
output value

Gross industrial
Proportion
output value of
gross industrial output
state-owned and
value of state-owned
state-holding
and
enterprises
enterprises
1999
72707.04
35571.18
0.49
2000
85673.66
40554.37
0.47
2001
95448.98
42408.49
0.44
2002
110776.48
45178.96
0.41
2003
142271.22
53407.9
0.38
2004
201722.19
70228.99
0.35
2005
251619.5
83749.92
0.33
2006
316588.96
98910.45
0.31
2007
405177.13
119685.65
0.30
2008
507448.25
143950.02
0.28
2009
548311.42
146630.00
0.27
of
the
state-holding
On the whole, the proportion of the funds of state-owned and state-holding
enterprises has gradually declined since 1999
The asset in a certain period is the sum of the net value of fixed assets and the current assets3.
Due to the lack of the annual average balances of the current assets and net value of fixed assets of
state-owned and state-holding enterprises by sector in 1998, the calculation may only begin from
1999 for the moment.
Table 5.2 Proportion of industrial funds occupied by state-owned and state-holding
enterprises
Unit: 100 million yuan
Total funds of all enterprises
Total
funds
state-owned
of
Proportion
and
state-holding
enterprises
3
By taking into account the index of profit-tax rate to capital: profit-tax rate to capital refers to the proportion of
the profits and total taxes realized within a certain period of time to the asset (net value of fixed assets and current
assets) in the same period.
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Unirule Institute of Economics
1999
94924.87173
63824.5718
0.67
2000
103702.7022
68372.02129
0.66
2001
111924.2
71214.08
0.64
2002
120281.02
72353.85
0.60
2003
137556.18
76446.38
0.56
2004
160733.96
82687.69
0.51
2005
195362.18
89845.78
0.46
2006
231091.42
115408.2
0.50
2007
275470.27
115408.2
0.42
2008
339199.62
138948.51
0.41
2009
402585.77
164967.39
0.41
We may find that except for 2006, the indexes of the funds occupied by state-owned
enterprises in the rest years declined year after year.

The funds ratios/ gross industrial output values/VAI of some basic industries have
displayed a growing momentum in recent years
Although we may largely say that there are no phenomena of “Guo Jin Min Tui” in industrial
sectors, structural analysis may give us a different answer. According to the categories of
industrial sectors classified by National Bureau of Statistics of China, we have conducted
structural analysis on 11 major basic industries.
Our selection of the industries has been based on the sectors involved in by state-owned
enterprises as designated by the Notice of the General Office of the State Council on Forwarding
the Guiding Opinions of the SASAC about Promoting the Adjustment of State-owned Capital and
the Reorganization of State-owned Enterprises promulgated in 2006. That is, absolute control
should be applied to the important industries and key sectors relating to the lifeline of the national
economy including the backbone enterprises in industries relating to war industry, power grid and
power supply, petroleum and petrochemical, telecommunications, coal, civil aviation and shipping.
Local state-owned enterprises should control such sectors as coal gas and tap water. The 11
industries are as follows:
11 basic industries selected
1. Coal mining and dressing
7. Non-ferrous metal smelting and rolling
processing
2. Oil and natural gas exploitation
8. Transportation equipment manufacturing
3. Ferrous metal mining and dressing
9. Production and supply of electric and
heat power
4. Non-ferrous
dressing
10. Production and supply of fuel gas
metal
mining
and
5. Oil refinery, coking and nuclear fuel
processing
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11. Production and supply of water
Unirule Institute of Economics
6. Non-ferrous metal
rolling processing
smelting
and
Analyzing according to the changes in the proportion of the funds of the state-owned and
state-holding enterprises in the 11 industries to the funds of all the enterprises, VAI and the gross
industrial output value from 1999 to 2009, we may find that there are structural “Guo Jin Min Tui”
phenomena in China.
In terms of funds, the proportion of state-owned enterprises in oil and natural gas exploitation
rose from 96.3% in 2005 to 98.6% in 2006, dropped in 2008 (95.6%) and then resumed the
uptrend in 2009 (95.7%). The proportion of state-owned enterprises in the electrical steam and hot
water production and supply industry rose from 85.8% in 2005 to 88.2% in 2008. The proportion
of state-owned enterprises in ferrous metal smelting and rolling processing, production and supply
of fuel gas and transportation equipment manufacturing rose from 56.7%, 57.1% and 51.6% in
2008 to 57.5%, 68.7% and 52.9% in 2009 respectively.
In terms of gross industrial output value, the proportion of state-owned enterprises in oil and
natural gas exploitation rose from 90.5% in 2005 to 98.9% in 2006. The proportion of state-owned
capitals in electric power, steam and hot water production and supply rose from 89.3% in 2005 to
91.6% in 2008. What is worth noting is that the proportions of state-owned enterprises in coal
mining and dressing and transportation equipment manufacturing rose in 2009. The former rose
from 59.1% in 2008 to 59.2% in 2009, while the latter rose from 44.8% in 2008 to 46.4% in 2009.
The VAIs also indicate the rise of the proportions of state-owned enterprises in oil and natural
gas exploitation and electric power, steam and hot water production and supply. The proportion of
state-owned enterprises in oil and natural gas exploitation rose from 88.9% in 2005 to 99.2% in
2006, and the proportion of state-owned enterprises in electric power, steam and hot water
production and supply rose from 87% in 2005 to 88.8% in 2006. Besides, the proportion of
state-owned enterprises in oil refinery and coking rose from 59.5% in 2006 to 61.7% in 2007.
Table 5.3 Proportions of relevant values of state-owned and state-holding
enterprises to those of all the enterprises within respective industries
Ferrous
Fuel
Oil
metal
steam and
refinery
smelting
hot water
and
and
production
coking
rolling
Electric
Oil
Index
Year
and
natural gas
exploitation
power,
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Coal
Transport
production
mining
ation
and supply
and
equipment
dressing
manufact
uring
processing
and supply
Fund
gas
2005
96.3%
85.8%
-
-
-
-
-
2006
98.6%
86.8%
-
57.5%
70.5%
-
56.8%
2007
96.7%
87.0%
-
57.6%
59.8%
-
55.6%
2008
95.6%
88.2%
-
56.7%
57.1%
-
51.6%
2009
95.7%
87.4%
-
57.5%
68.7%
-
52.9%
Unirule Institute of Economics
VAI
Gross
industrial
output
value
2005
88.9%
87.0%
64.7%
-
-
-
-
2006
99.2%
87.6%
59.5%
-
-
-
-
2007
97.3%
88.8%
61.7%
-
-
-
-
2005
90.5%
89.3%
-
-
-
67.8%
51.8%
2006
98.9%
90.0%
-
-
-
66.0%
50.2%
2007
96.9%
90.8%
-
-
-
63.3%
49.8%
2008
96.1%
91.6%
-
-
-
59.1%
44.8%
2009
94.6%
91.6%
-
-
-
59.2%
46.4%
Note: China Statistical Yearbook of 2009 and 2010 lacked relevant data on VAI.
Fig 5.1 Proportion of the gross industrial output values of state-owned and
state-holding enterprises to all the enterprises in respective industries
Fig 5.2 Proportions of the funds of state-owned and state-holding enterprises to all
the enterprises in respective industries
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We may find from the above analysis that there has been no phenomenon of “Guo Jin Min
Tui” in the industrial sectors in recent years on the whole. What is worth noting is that there has
been a remarkable rise in the proportions of state-owned enterprises in some basic and resource
sectors.

The degrees of monopoly of monopoly industries have increased
In the report of “Market Competition Status of the Chinese Economy: Evaluation and Policy
Suggestions”, the Unirule Institute of Economics conducted a quantitative description of the
degrees of monopoly of various industries with the index of market power. We found that, in
some industries, the degrees of monopoly in 2007 were significantly higher than those in 2002
(the Unirule Institute of Economics, 2010). See the table below.
Table 5.4
descending order)
Market force indicators in relevant industries in 2002 and 2007 (by
Industry
33
16
25
13
39
32
26
19
Non-ferrous metal smelting and rolling
processing
Tobacco product
1.216***
Oil refinery, coking and nuclear fuel
processing
Agricultural
processing
Electrical
and
sideline
machinery
and
foodstuff
equipment
manufacturing
Ferrous
metal
smelting
and
rolling
processing
Chemicals
0.992***
and
chemical
products
manufacturing
Leather, fur, feather (down) and their
products
1.222***
1.037***
0.724***
1.101***
1.018***
1.055***
2007
1.481***
1.397***
1.389***
1.229***
1.143***
1.134***
1.132***
1.111***
28
Chemical fiber manufacturing
1.073***
1.107***
17
Textile
1.017***
1.100***
22
Papermaking and paper products
1.025***
1.096***
15
Beverage manufacturing
1.003***
1.093***
35
Telecommunications
equipment
manufacturing
1.004***
1.069***
34
Metal products
1.037***
1.061***
42
Handicrafts and other manufacturing
0.916***
1.060***
18
20
105
2002
Textile and garment, shoes and hat
manufacturing
Wood processing and wooden, bamboo,
1.061***
1.054***
1.048***
1.045***
Unirule Institute of Economics
vine, palm and straw products
14
Food manufacturing
0.975***
1.036***
21
Furniture manufacturing
0.999***
1.034***
24
Stationary
and
manufacturing
36
Special equipment manufacturing
0.921***
1.007***
27
Pharmaceutical manufacturing
1.032***
1.004***
30
Plastic products
1.017***
1.000***
43
sporting
goods
Discarded resource and scrap material
recycling and processing
0.988***
0.927***
1.013***
07 年无此行
业
31
Non-metallic mineral products
1.009***
0.973***
37
Transportation equipment manufacturing
0.963***
0.971***
41
29
Instrument, meter, cultural and office
machinery manufacturing
Rubber products
Telecommunications
40
0.948***
0.941***
0.919***
equipment,
computer and other electronic equipment
0.986***
manufacturing
23
0.930***
Printing and record medium reproduction
0.900***
0.890***
0.812***
Note: *** p<0.01, ** p<0.05, * p<0.1
Source: the Unirule Institute of Economics, 2010.
We found that most the industries among the top were those with increased proportions of
state-owned enterprises. See the figure below. This means that the rising statistical amount of
state-owned enterprises in some industries were relevant to the rise in the industries’ degrees of
monopoly as a result of the changes in the policies and regulatory measures adopted.
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Fig 5.3 Nine industries with the biggest market powers and relatively rapid growth
rates
Source: See the above table.
The industries that were relatively noticeable were the non-ferrous metal smelting and rolling
processing industry, the tobacco products industry, and the oil refinery, coking and nuclear fuel
processing industry.
2. Typical cases about “Guo Jin”
The phenomenon of “Guo Jin Min Tui” can be found in some important industries. What is
more important is that, an individual case in one industry plays a role in influencing the entire
system. Therefore, these should be regarded as important instances of the phenomenon of “Guo
Jin Min Tui”. Next, through 7 case studies, we will illustrate the facts that administrative
monopoly is being strengthened and rules market competition are being destroyed even if
state-owned enterprises are retreating on the whole.
(1) Establishment, safeguarding and expanding monopoly in individual industries: the
petroleum industry
In China, the petroleum industry has very strong administrative monopoly characteristics.
The government has endowed the three oligopoly companies— PetroChina, CNOOC and
Sinopec— with absolute monopoly statuses through relevant policies.
Both PetroChina and Sinopec are petroleum and petrochemical enterprises integrating both
upstream and downstream businesses. PetroChina’s main assets are in upstream exploitation,
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Unirule Institute of Economics
Sinopec is focused on crude oil refinery and the production of chemical products, and CNOOC is
mainly engaged in offshore oil exploitation and development and oil refinery. The three
enterprises have basically monopolized all sectors from oil and gas production, oil refinery and
crude oil sales to the sales of refined oil.
a. Monopoly in the wholesale of product oil
After the cancellation of the Ministry of Petroleum Industry, PetroChina, Sinopec and
CNOOC actually obtained partial industrial management powers in respective fields. In March
1998, the Plan on the Institutional Reform of the State Council was adopted at the 1st Meeting of
the Standing Committee of the 9th National People’s Congress. According to the Plan, strategic
reorganizations should be conducted in the petroleum industry and the petrochemical industry to
set up two especially large enterprise group corporations: PetroChina and Sinopec. Later in May
1999, the General Office of the State Council issued the Opinions concerning the Cleaning up and
Rectification of Small Oil Refineries and the Standardization of the Circulation Orders of Crude
Oil and Product Oil (G.B.F.[1999]NO.38). According to this document, all the product oil
produced by domestic oil refineries should be dealt in by the wholesale enterprises of PetroChina
or Sinopec. No other enterprises may engage in wholesale businesses, and no oil refinery may
engage in self marketing. Thus, it has established the administrative monopoly statuses of
PetroChina and Sinopec in the wholesale markets of product oil.
Besides, State Economic and Trade Commission and four other ministries and commissions
also formulated the Opinions on the Implementation of the Cleaning up and Rectification of Small
Oil Refineries and the Standardization of the Circulation Orders of Crude Oil and Product Oil
(G.J.M.M.Y.[1999]NO.637) based on No. 38 document which once again emphasized on
PetroChina and Sinopec’s statuses. It clearly stipulates that: all the gasoline, kerosene and diesel
produced by domestic oil refineries should be dealt in by the wholesale enterprises of the two
groups, and no other enterprises or units may engage in wholesale businesses.
b. Monopoly in supply and delivery
The three companies also enjoy obvious administrative monopoly in supply and delivery. In
2003, the Ministry of Railways issued the Notice concerning Strengthening the Management over
Oil Transportation (T.Y.H.[2003]NO.150) which expressly prescribes that plans of oil
transportation must be submitted via PetroChina or Sinopec, and the transportation plans
submitted by any other units will not be accepted. By excluding private enterprises, this has
directly affected the purchase and sales of oil by private enterprises.
In addition, the Circular on Printing and Issuing the Pilot Program Extension Plan of Ethanol
Gasoline for Vehicles and the Detailed Rules of Implementation for the Extension of the Pilot
Program of Ethanol Gasoline for Vehicles (F.G.G.Y.[2004]NO.230) jointly issued by State
Development and Reform Commission and seven other ministries and commissions in 2004
stipulates that ethanol gasoline can only be produced and supplied by PetroChina and Sinopec.
Article 3 of the Detailed Rules of Implementation for the Extension of the Pilot Program of
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Ethanol Gasoline for Vehicles clearly prescribes that “when popularizing ethanol gasoline for
vehicles, PetroChina and Sinopec should give full play to the capacities of existing storage
facilities and the functions of their existing relatively complete supporting marketing networks in
various provinces and municipalities; the delivery centers and gas stations of ethanol gasoline for
vehicles should, in principle, be rebuilt based on existing oil depots and gas stations according to
the scheme of the planning within the marketing areas of the products of the denatured fuel
ethanol products established by PetroChina or Sinopec as shareholders; no new projects should be
launched and repeated construction is prohibited ”. In order to implement the working plan of the
eight ministries and commissions on the promotion of ethanol gasoline for vehicles, Heilongjiang
Province formulated the Measures of Heilongjiang Province on the Management of the Promotion
and Use of Ethanol Gasoline for Vehicles in August 2004. The Measures has two core contents.
One is the totally contained use of ethanol gasoline within the administrative area of Heilongjiang
Province since October 1, 2004, and the other is that ethanol gasoline for vehicles can only be sold
through the exclusive dealing of Heilongjiang Provincial Marketing Branch of PetroChina.
Frame 1: Articles on the monopoly in the supply of ethanol in the Detailed Rules of Implementation for the
Extension of the Pilot Program of Ethanol Gasoline for Vehicles
……
II. Product Supply
i. Denatured fuel ethanol must be produced and supplied by enterprises approved by the State; the production and supply of
ethanol gasoline for vehicles has been designated to China National Petroleum Corp (CNPC) and China Petrochemical
Corporation (Sinopec).
ii. CNPC shall join in the construction of the 300,000 ton/year denatured fuel ethanol project of Jilin Fuel Alcohol Co., Ltd.
as a shareholder, the products of the project shall first be promoted and sold across Jilin Province by CNPC, and the spare
products shall be sold to Liaoning Province; the 100,000 ton/year denatured fuel ethanol project of Heilongjiang Huarun
Alcohol Co., Ltd. shall also be promoted and sold in Heilongjiang Province by CNPC.
iii. CNPC shall join in the construction of the 300,000 ton/year denatured fuel ethanol project of Henan Tianguan Group,
the products of the project shall first be promoted and sold across Henan Province by CNPC, and the spare products shall
be sold to 9 prefectures and cities in Hubei Province and 4 prefectures and cities in Hebei Province.
iv. CNPC shall join in the construction of the 320,000 ton/year denatured fuel ethanol project of Anhui BBCA Biochemical
Co., Ltd., the products of the project shall first be promoted and sold across Anhui Province by CNPC, and the spare
products shall be sold to 7 prefectures and cities in Shandong Province, 2 prefectures and cities in Hebei Province and 5
prefectures and cities in Jiangsu Province.
v. Market adjustment of the oil components and denatured fuel ethanol of CNPC and Sinopec may be realized according to
market prices through mutual supply.
……
c. Monopoly in the import of crude oil
Currently, the import of crude oil in China may be classified into two categories: state trading
and non-state trading. The right of importation in state trading is controlled by five major central
petroleum enterprises: Sinopec, PetroChina, CNOOC, Sinochem and Zhuhai Zhen Rong. 22
enterprises are eligible to import crude oil in non-state trading. However, half of the 22 enterprises
have backgrounds of state-owned enterprises, including companies affiliated to PetroChina and
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Sinopec.
At present, if an enterprise beyond the systems of PetroChina and Sinopec wishes to import
crude oil, it must hold the production arrangement certificates produced by the two groups, and
then the customs office may clear the oil, and the railway department may arrange the
transportation plan. Besides, the crude oil should also be sold back to the two groups which will
then be responsible for the unified marketing arrangement. According to Lin Ling, Director of the
Comprehensive Management Department of China Chamber of Commerce for Petroleum Industry,
although private petroleum enterprises have acquired the “qualification for the import of crude oil
through non-state trading” and the “import quota of non-state trading”, it is very difficult for them
to import crude oil according to the existing policies in our country. Besides, the crude oil
imported through non-state trading can only be processed by the refineries of PetroChina and
Sinopec and cannot be supplied to local oil refineries or put into circulation. This is also the core
and key for the management of crude oil import through non-state trading.
d. Monopoly in storage
Private enterprises have been even marginalized from the storage of oil. China launched the
construction of national strategic oil reserve bases in 2003. Although private enterprises took up
half of the market shares in the domestic oil retail market, they have been all along kept outside
the gate of national strategic oil reserve with the excuse of “it is too difficult to bring them under
supervision and management”. On the contrary, PetroChina, Sinopec and CNOOC became
involved in the national strategic oil reserve project from the outset and have received oil reserve
construction investments from the State.
It is thus clear that, although natural monopoly does exists in some places in the production,
processing, marketing and even import of oil, it is obvious that excluding competitions from
private enterprises by setting up monopoly rights is administrative monopoly, and this man-made
monopoly has brought along tragic results for private petroleum enterprises. According to the
statistics made by China Chamber of Commerce for Petroleum Industry, by early 2008, 2/3 of the
663 private oil wholesale enterprises across the country had ceased operation or gone bankrupt,
1/3 of the 45,064 private gas stations had gone bankrupt, over 10,000 private gas stations were at a
loss, and hundreds of thousands of employees were laid off. In addition, before 1998, private
petroleum enterprises took up over 85% of the shares in the national product oil market and paid
over 100 billion yuan of taxes. Now, however, due to the lack of product oil sources, the total tax
payment of these private enterprises is less than 20 billion yuan.
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Frame 2: Some progress in breaking the monopoly in import and storage
In June 2010, in addition to PetroChina and Sinopec, Zhenhua Petroleum Holding Co., Ltd. under China North
Industries Group Corporation acquired the right to import crude oil in a real sense upon approval. After that, Zhenhua
Petroleum may directly import and dispose of on its own the crude oil imported through non-state trading within the
quota. Thus, Zhenhua Petroleum has become the third enterprise supplying crude oil to its own oil refineries.
On May 14 2010, National Energy Bureau conducted the bid invitation for storing national oil reserves with social
storage capacity. Social storage capacity refers to the storage capacity of the petroleum enterprises other than PetroChina
and Sinopec. It includes the storage capaticy of CNOOC and other central enterprises. Relevant stakeholders indicated
that “the bid invitation is just the sequencing of qualifications”. However, the national oil reserves were mostly the
entrusted to PetroChina and Sinopec, and this bid invitation actually broke the monopoly of the two oil giants in oil
storage. For the first time since the oil restructuring in 1998, private enterprises were able to participate in oil
construction and operation at the state level on an equal footing. Among the 6 successful bidders, Penglai Anbang and
Laizhou Dongfang are subsidiaries of central enterprises, Yantai Harbor is a local state-owned enterprise, and Zhoushan
Century, Zhoushan Jin Run and Zhejiang Tian Lu are private enterprises.
(2) Illegal merger between oligarchs: merger between telecommunications giants in violation
of the Antimonopoly Law
According to Article 21 of the Antimonopoly Law, reports on the reorganizations of central
enterprises and most of state-owned real estates enterprises must be submitted for approval.
However, the mergers between most of the enterprises were not reported, and the merger between
CNC and UNICOM is a typical example.
On May 24 2008, the Ministry of Industry and Information Technology and the National
Development Reform Committee and the Ministry of Finance jointly issued the Announcement on
the Deepening of Telecommunications Restructuring, and merged the 6 fundamental
telecommunications operators into three groups: China Unicom was merged with CNC; the
fundamental telecommunication businesses of China Satcom were merged into China Telecom,
China Telecom purchased Unicom’s CDMA network, and China Railcom was merged into China
Mobile.
On October 15, 2008, China Unicom and CNC announced that they were officially merged.
However, the merger between the two companies did not follow the provisions of the
Antimonopoly Law entering into force as of August 1 2008 to submit a report to the Ministry of
Commerce. Article 21 of the Antimonopoly Law clearly provides that “When a concentration falls
under the notification criteria issued by the State Council, a report must be notify in advance with
the antimonopoly execution authorities. Without notification the concentration shall not be
implemented.” The Provisions of the State Council on Notification Thresholds for Concentrations
of Undertakings contains provisions on the notification criteria: undertakings concerned in the
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preceding financial year is more than RMB 10 billion yuan, or the combined nationwide turnover
within China of all the undertakings concerned in the preceding financial year is more than RMB
2 billion yuan, and the nationwide turnover within China of each of at least two of the
undertakings concerned in the preceding financial year is more than RMB 400 million yuan.
According to the Major Asset Reorganization Report on the Merger between China United
Network Communications Limited and China Netcom Group Corporation (Hong Kong) Limited
issued on September 24 2008, in 2007, China Netcom’s operating revenue was about 100.47
billion yuan, and the operating revenue of CNC was around 86.92 billion yuan. Thus it can be
seen that the operating revenues of both companies have met the notification criteria. However, as
of May 1 2009, as confirmed by relevant officials from the Ministry of Commerce, the report on
the merger between the two companies were not submitted to relevant governmental authorities.
Frame 3: Introduction to the China Telecom after the merger
China United Network Communications Corporation Limited (China Unicom) is an especially large-scale state-holding
telecommunications enterprise established on January 6 2009 through the merger between the original China Unicom and the original CNC
upon the approval of the State Council.
The Official Reply to the Relevant Issues concerning the Merger between China Netcom Group Corporation
Limited and China
United Network Communications Limited (G.Z.G.G.[2009]NO.1) issued by SASAC on January 6 approved China Netcom Group
Corporation Limited to be merged by China United Network Communications Limited through absorption. Upon the merger, the new
group company uses the title of China United Network Communications Corporation Limited (China Unicom). China Unicom will inherit
all the assets, creditor’s rights, debts and businesses of China United Network Communications Limited and China Netcom Group
Corporation Limited, and China Netcom Group Corporation (Hong Kong) Limited will be cancelled according to law.
(3) State-owned enterprises trespassing on the lawful property rights of private enterprises:
Shanxi Provincial Government took back the mining rights of small coal mines
State-owned enterprises also enjoy privileges in the coal industry. First, state-owned
enterprises enjoy two privileges in allocation of coal resources: a. they may obtain the right of
mining through signing transfer agreements or other administrative measures, while
non-state-owned enterprises can only obtain such rights through biddings, auctions, listing in the
stock market and other market measures; b. the coal resources fees of state-owned enterprises may
be regarded as capital investments of the State, while non-state-owned enterprises have to pay
them in cash4. In the integration of coal resources since 2009, state-owned enterprises have
4
Website of Land and Resources http://www.mlr.gov.cn/xwdt/xwpl/201001/t20100105_131813.htm. As for the
measures on the granting of the right of mining, Article 15 of the Administration of Granting and Assigning
Mining Industry Rights Tentative Provisions provides that: Granting of a mining industry right means the granting
of a mining industry right to a mining industry right applicant by ways such as approval of application, invitation
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acquired a new privilege: administrative measures have been taken to designate state-owned coal
enterprises to acquire non-state-owned coal enterprises, and this has further intensified the
monopoly of state-owned enterprises in coal resources.
The Plan of Shanxi Province on the Restructuring and Revitalization of the Coal Industry was
issued in May 2009. One of the core contents of the Plan is to spare no efforts to press ahead with
the integration of the coal industry in Shanxi: by 2011, the total number of coal mines across the
whole province will drop from 2,598 to 1,000, and by 2015, this number will further drop to 800.
The retained mines should all realize mechanized mining (mainly combined machinery mining),
and all the miners should be well trained. In fact, by early 2010, the total number of coal mines in
Shanxi has reduced from 2,600 before the integration to 1,053, 70% of the mines have reached the
capacity of above 0.9 million tons/year, all the small coal mines with capacities below 0.3million
tons/year have been washed out, the average capacity per mine has risen from 0.3 million
tons/year to above 1 million tons/year, and all the mines retained will fully realize mechanized
mining. Second, the degree of industrial concentration has remarkably improved. The number of
business entities has reduced from over 2,200 to 130, and there have formed 4 especially large
coal groups with production capacities of over 100 million tons/year and 3 large coal groups with
production capacities of over 50 million tons/year. For example, as one of the 5 major coal groups
in Shanxi Province (Datong Coal Mine Group, Shanxi Coking Coal Group, Yangquan Coal Group,
Lu’an Mining Group and Jincheng Anthracite Mining Group), Lu’an Group participated in the
integration of coal resources and the enterprise mergers and reorganizations in 13 counties and
districts in the 6 cities of Linfen, Xinzhou, Jinzhong, Shuozhou, Luliang and Changzhi, involving
in 3.02 billion tons of coal resources. After the integration, the number of coal mines reduced from
110 to 40 to form a production scale of 41.1 million tons per year. Such large-scale reorganizations
have provided the government and state-owned enterprises much room to squeeze the living space
of private enterprises.
The government has a number of excuses for the integration of the coal industry such as “the
main purposes for the formulation of the policies by the government are improving current
situation and efficiency of resources development and utilization and maintaining the safety of the
ecological environment” (China Land and Resources News, 2009). However, these reasons cannot
stand water, such as in the Wangjialing mine disaster in 2010. The mine belongs to Huajin Coking
Coal Co., Ltd. which is a state-owned enterprise. The accident proved that the safety of
state-owned enterprises is not necessarily more reliable. Let alone whether the government’s plans
are reasonable or not, mergers between companies follow the principles of free will and fairness,
and the government should neither fix prices nor buy or sell by force. However, the mergers of the
small coal mines in Shanxi have run against these principles.
First, the free will principle has not been followed in the transactions of property rights. For
example, once a certain county in Linfen, Shanxi notified the responsible persons of small coal
mines to attend a meeting at the county government. At the meeting, each participant was
provided with a paper which wrote “I volunteer to sell my coal mine to the Group Company”.
They neither could see the buyer nor knew the price or when they could receive the money (China
for bids and auction.
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Economics Times, 2009).
Second, the transaction prices have not followed market principles and have been fixed by
the government. The Notice of the General Office of the People’s Government of Shanxi Province
on Forwarding the Measures of the Provincial Land and Resources Department on the Handling of
the Fees of Resources and Mining Rights Involved in the Mergers and Reorganizations of Coal
Mine Enterprises (J.Z.B.F.[2008]NO.83) prescribed that “the fee of the mining right of a coal mine
that should be integrated should be calculated in the following method: multiply 1.5 times of the
fee of the mining right paid by the owners of private coal mines in 2004 by the reserves of the
mines.” Since the fees of mining rights in 2004 were 1.8yuan/ton for coking coal and 1 yuan/ton
for thermal coal, and 1.5 times of the fees were 2.7yuan/ton for coking coal and 1.5yuan/ton for
thermal coal respectively. According to estimations made by insiders, however, the fee of the
mining right of a coal mine should be 14-15 yuan/ton which was 5-10 times higher than the
Provincial Government’s offer (China Economics Times, 2009).
Besides, since a number of private enterprises in Zhejiang Province have engaged in the coal
industry in Shanxi, we may find from some of the public statements made by Shanxi Zhejiang
Enterprise Unite that what Shanxi Provincial Government has done has been quite inappropriate.
Shanxi Zhejiang Enterprise Unite appeals in the Urgent Report on Effectively Maintaining the
Lawful Rights and Interests of the Coal Mine Enterprises Invested by Zhejiang Merchants in
Merger and Reorganization Activities to the government at a higher level to coordinate Shanxi
Provincial Government’s “one size fits all” policy on private coal mine capitals and protect the
investment confidences of private capitals.
Economic compensation is the most crucial issue in the resources integration in the merger
and reorganization of small coal mines in Shanxi Province. According to the Measures of the
Provincial Land and Resources Department on the Handling of the Fees of Resources and Mining
Rights Involved in the Mergers and Reorganizations of Coal Mine Enterprises, two methods
should be adopted to address the issues. The first one is merger and reorganization. If a coal mine
has paid the fees according to the standard prescribed by Measures of Shanxi Province on the
Integration and the Paid Use of Coal Resources (Decree No. 187) and has directly transferred its
mining right, the enterprise conducting merger and reorganization should return to it the fees
corresponding to the remaining amount of resources (excluding the resources the fees for which
have not been verified), and provide an economic compensation according to 50% of the original
fee or turn it into the shares of the new enterprise established upon the merger and reorganization
in a manner of resource capitalization. According to the second method, if a coal mine under
merger and reorganization has paid the fees according to relevant provisions before Decree No.
187 came into force, when it directly transfers its mining right, the enterprise conducting merger
and reorganization should return to it the fees corresponding to the remaining amount of resources
(excluding the resources the fees for which have not been verified), and provide an economic
compensation according to 100% of the original fee or turn it into the shares of the new enterprise
established upon the merger and reorganization in a manner of resource capitalization. Shanxi
Zhejiang Enterprise Unite points out that although it seems that such provisions are fair enough
and may be feasible in the integration between state-owned enterprises, it will be nothing short of
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a robbery if a private coal mine is merged in this way. The shares of many private coal mines have
been bought by investors at prices several or even dozens of times higher than the resources fees,
and much has been invested in infrastructure construction and the workers’ wages throughout the
years. If an investors can only get a compensation equivalent to half or one time of the fee for the
mining right during the integration, it is certain that he will lose everything that has been invested.
Therefore, the parties in the integration of coal mines must sign agreements on the basis of
equality and free will, mineral resource evaluation must be conducted according to the relevant
provisions of the State, and the evaluation price should serve as the price for integration. Only in
this way may we ensure that the investors’ interests will not be infringed upon.
(4) Directly annexing private enterprises: Shandong Iron and Steel annexed Rizhao Iron and
Steel
The case in which a profit-making private enterprise — Rizhao Iron and Steel was annexed
by a loss-making state-owned enterprise — Shandong Iron and Steel Group is a typical example
of “an elephant swallowed by a snake”, reflecting the adverse market environment faced by
private enterprises in China. In this case, the government and a state-owned enterprise worked
together to squeeze the living environment of a private enterprise.
In March 2008, the state-owned properties of the enterprises affiliated to Jigang Group,
Laigang Group and Shandong Metallurgical Industry General Company combined to form
Shandong Steel Group with a registered capital of 10 billion yuan which was the largest company
solely invested by the State in Shandong Province. Rizhao Iron and Steel Co., Ltd. was established
in February 2003. It was a large iron and steel complex integrating businesses in oxygen
generation, sintering, ironmaking, steelmaking and steel rolling. From March 31 when the
construction began to September 28 2003 when iron and steel were first produced, it only took
Rizhao Steel 181 days. By the end of 2004, the company’s annual production capacity reached 3
million tons.
The encounter over reorganization between Shandong Steel and Rizhao Steel lasted several
years, and Rizhao Steel finally compromised. However, in the first half of 2009, both Jigang
Group and Laigang Group were at a loss, while the private enterprise of Rizhao Steel realized a
net profit of 1.8 billion yuan. Such a case in which a loss-making state-owned enterprise annexed
a profit-making non-state-owned enterprise also aroused a wide range of disputes.
First, it was a process of government-led reorganization, and the reorganization was not
conducted on the basis of free will and equality between market entities. Shandong Provincial
Government issued the Opinions on Further Speeding up the Restructuring of the Iron and Steel
Industry as early as in 2007. According to the Opinions, a large-scale iron and steel base will be
built in Rizhao, and this is a key step in the regional layout adjustment of the iron and steel
industry in Shandong. Besides, according to the Plan of Shandong Province on the Adjustment and
Revitalization of the Iron and Steel Industry (2009-2011) (printed and issued by the General
Office of the People’s Government of Shandong Province on April 22, 2009), Shandong Steel will
limit the production and close down the backward production facilities of Rizhao Steel, Jigang and
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Laigang so as to spare 20 million tons of production capacity for the fine iron and steel base in
Rizhao. The Plan also clearly put forward Shandong Iron and Steel Group’s target in the
reorganization of the iron and steel enterprises in Shandong Province.
There will be nothing to be said against it if reorganization is conducted between market
entities based on the principles of free will and equality. However, if the provincial government
issues a document with aim to promote the reorganization of the enterprises within the province,
this is a measure above the enterprises and an intervention in the market rules. The annex of a
profit-making private enterprise by a loss-making state-owned enterprise under the support of the
government has not only violated the Company Law, but also made the market competition
environment in China more unpredictable.
Frame 4: Articles of Plan of Shandong Province on the Adjustment and Revitalization of the Iron and Steel Industry (2009-2011) relating to Shandong Iron and Steel Group
……
III. Main points of development
……
ii. Expanding backgone enterprises. Efforts should be made to help Jigang and Laigang under Shandong Iron and Steel Group to, in the light of the requirement of the national plan
on the adjustment and revitalization of the iron and steel industry, close down backward production facilities, gradually cut down on production capacities, speed up technological
transformation and the research and development of new products, and strive to improve the grade of products. Support Qinggang’s overall relocation according to the Provincial
Government’s unified plan. Support Rizhao Steel to speed up the closing down backward production facilities and bring the production capacity retained into the fine iron and steel base
in Rizhao. Meanwhile, supervise and urge other small and medium-sized iron and steel enterprises within the Province to complete the tasks in closing down backward production
facilities on time and strictly prohibit expansion of scales without authorization.
……
IV. Policy measures……
ii Speed up the merger, cartelization and reorganization of enterprises. Grasp the current opportunity in the State’s support of cartelization and reorganization,
follow the principles of “government providing supervision and guidance, enterprises serving as subjects, and operating according to law”, facilitate the substantial
reorganization of Shandong Iron and Steel Group among the iron and steel enterprises within the Province and rise the industrial concentration of the iron and steel
industry. Speed up the transition of inland iron and steel production capacity into coastal areas while closing down backward production facilities and conducting
mergers and relocations. Carefully do well in the initial preparation of the contrstruction of the fine iron and steel base in Rizhao and strive to begin construction as
early as possible. No new plants should be built in inland areas, the existing small and medium-sized iron and steel enterprises should not expand their production
capacities any longer, and the enterprises falling short of the entry conditions should gradually exit from the market. No land or projects should be approved any longer
for the new production capacities of inland iron and steel enterprises. Accelerate the closing down of backward production facilities, establish the accountability system,
and the enterprises failing to complete the tasks in closing down backward production facilities should not be expanded, rebuilt or relocated.
……
Second, the rationality of the price at which Shandong Iron and Steel Group purchased
Rizhao Steel was also worth consideration. According to the reorganization agreement reached
on September 6 2009, the two sides conducted asset reorganization through increasing investment
in Rizhao Co., Ltd. of Shandong Iron and Steel Group together. Shandong Iron and Steel made the
investment in cash and acquired 67% of the shares; Rizhao Steel bought 33% of the shares with its
net assets upon appraisal. However, the announcement did not specify the amount of Shandong
Iron and Steel’s investment. The two sides agreed that the registered capital of Rizhao Co., Ltd. of
Shandong Iron and Steel should be determined when the asset appraisal was completed, and the
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two sides should complete the capital injections within 180 days upon the signing of the
reorganization agreement. However, there was a great difference in the attitudes of the two sides
on the evaluated price and it was on August 30 in 2010 that the two sides signed the second
reorganization agreement. According to this agreement, Shandong Iron and Steel should complete
the purchase of Rizhao Iron and Steel’s assets before November 30 this year. However, there is a
significant change in the second reorganization plan: the joint capital increase has become a
lump-sum purchase5.
(5) Excluding competitors with the excuse of public interests: newsstands are forbidden in
Beijing Subway
Early in 2010, Beijing Municipal Government and Beijing Subway jointly issued an order to
forbid newsstands which aroused a great deal of debates. It is a typical case in which state-owned
enterprises marginalize competitors with the excuse of public interests.
The ban originated from Article 26 of the Measures of Beijing Municipality on the
Management of Rail Transit Safety amended and came into force as of June 16, 2009: “Piling up
articles, street performing, setting up stalls without authorization and other conducts affecting
transit, rescue and evacuation shall be forbidden in the concourses, platforms and evacuation exits
of urban rail transit stations and carriages.” Moreover, the Letter concerning the Opinions on the
Provision of Beijing Daily Messenger and the Stop Selling of Other Newspapers and Magazines
within Subway Stations issued on January 4 2010 mentioned that “according to the Memorandum
of the Meeting on the Provision and Selling of Newspapers and Magazines within Rail Transit
Stations, as the only subway newspaper approved by Beijing Municipality, Beijing Daily
Messenger is an important front of service and publicity and may be provided free of charge
without affecting the subway security order … According to the newly amended Measures of
Beijing Municipality on the Management of Rail Transit Safety and the Memorandum of the
Meeting on the Provision and Selling of Newspapers and Magazines within Rail Transit Stations,
except for Beijing Daily Messenger, all units and individuals shall stop all conducts in selling
newspapers and magazines within rail transit stations; conducts in selling newspapers and
magazines within rail transit stations shall be banned by the public security organ in strict
accordance with law.”
Only allowing the free provision of one newspaper in stations under the excuse of public
safety is a practice which is rarely seen around the world. There are newsstands and the selling of
newspapers is allowed in the crowded subway stations in all the major cities around the world that
are as crowded as the subway stations in Beijing6.
5
The media quoted the views of relevant insiders of a certain iron and steel group under Shandong Iron and Steel
in saying that there indeed has been a change in the Shandong Iron and Steel’s plan on the reorganization of
Rizhao Iron and Steel. Du Shuanghua was not satisfied with the value upon asset appraisal and the future mode of
operation and decided to simply take the money and would not get involved in the operation of the newly founded
company. It is reported that Rizhao Iron and Steel’s total asset has been appraised at 24.2 billion yuan by relevant
intermediatary agencies, but Du Shuanghua refused to accept this appraisal result and believed that the value of his
company should be 28 billion yuan.
–— Shandong Iron and Steel to Purchase Rizhao Iron and Steel in “Lum p
Sum” – Du Shuanghua May Take the Money and Run, www.chinanews.com, September 6, 2010
6
According to recent surveys conducted by the reporters of Global Times around the world, the ban of
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Frame 5: Letter concerning the Opinions on the Provision of Beijing Daily Messenger and the Stop Selling of Other Newspapers
and Magazines within Subway Stations
On December 1 2009, the relevant departments of Beijing Municipality held a meeting focusing on the problems in the selling of
newspapers and magazines within rail transit. After the meeting, the Memorandum of the Meeting on the Provision and Selling of
Newspapers and Magazines within Rail Transit Stations has been issued. The Memo clearly points out that, except for Beijing Daily
Messenger, all units and individuals shall stop all conducts in selling newspapers and magazines within rail transit stations; conducts in
selling newspapers and magazines within rail transit stations shall be banned by the public security organ in strict accordance with law.
However, the Public Transport Security Corps and the leaders at various levels have recently found in the security checks on rail transit
that newspapers and magazines are still sold on both sides of the platforms of a number of stations.
This is to inform you the opinions on the provision of Beijing Daily Messenger and the stop selling of other newspapers and
magazines in rail transit stations:
I. On the free provision of Beijing Daily Messenger in rail transit stations.
According to the Memorandum of the Meeting on the Provision and Selling of Newspapers and Magazines within Rail Transit Stations,
as the only subway newspaper approved by Beijing Municipality, Beijing Daily Messenger is an important front of service and publicity
and may be provided free of charge without affecting the subway security order. However, the places where Beijing Daily Messenger is
provided shall be in locations designated by the subway stations with big spaces and convenient for the evacuation of passengers outside of
platforms.
II. Sales of other newspapers and magazines except for Beijing Daily Messenger.
According to the spirit of “except for Beijing Daily Messenger, all units and individuals shall stop all conducts in selling newspapers
and magazines within rail transit stations; conducts in selling newspapers and magazines within rail transit stations shall be banned by the
public security organ in strict accordance with law” of the newly amended Measures of Beijing Municipality on the Management of Rail
Transit Safety and the Memorandum of the Meeting on the Provision and Selling of Newspapers and Magazines within Rail Transit
Stations, the subway operating company is asked to conduct research on the sales of newspapers through newsstands within rail transit and
stop the selling of other newspapers and magazines except for Beijing Daily Messenger within rail transit as soon as possible.
Public Transport Security Office of Beijing Municipal Public Security Bureau
Jan. 4, 2010
……
With
banSecurity
arousing
repugnance,
Subway Company indicated on May 10
Public the
Transport
Corps great
of Beijing
Municipal PublicBeijing
Security Bureau
2010 that
the4, relevant
departments had organized experts to conduct argumentations, field surveys
January
2010
and security evaluation on the plan on setting up newsstands along subway lines. Upon approval,
Beijing Subway Company plans to, while ensuring safety operation, begin on May 12 to choose
13 locations in 12 stations along Line 5 and Line 10 with bigger spaces and meeting the
requirements on passenger traffic organization and passenger evacuation to pilot the selling of
newspapers and magazines. However, it has been an enigmatic repetition from the ban in the first
place to today’s pilots.
(6) Excluding competitors directly through legislations or the formulation of policies:
Exclusion of competitors by the Postal Law
newspapers in subway as hazardous articles cannot be found in Newyork where the “9.11” Terrorist Attack took
place, or Toyko where the Sarin Gas Incident occurred, or London where subway explosions happened. ——
The ban on the selling of newspapers in Beijing subway has attracted particular resentment from both Chinese and
foreigners, January 18, 2010, Global Times.
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In the postal industry, the competitors are marginalized through legislations. The new Postal
Law of the People’s Republic of China was officially promulgated in April 2009. Article 55 of this
Law clearly prescribes that “Express delivery enterprises shall not deal in the mail delivery
businesses under the franchised operation by postal enterprises, and shall not deliver the
documents of state organs.” The Provisions on the Scope of the Franchised Operations of Postal
Enterprises (draft) promulgated by the State Council clearly prescribes that: The domestic express
delivery of letters with single weights less than 100 grams (the delivery of letters within the urban
areas of the especially large cities prescribed by the State with single weights less than 50 grams)
shall be subject to the franchised operation of postal enterprises.
Letter business accounts for 40~60% of the total business volumes of express delivery
enterprises. Among it, 80% are letters with weights below 100 grams, and letters below 50 grams
account for 50~60% of the business volumes of city express. This means that once the standard on
franchised operation comes into force, many private express delivery enterprises will lose their
businesses or even go bankrupt. Although it has confirmed the lawful status of private express
delivery enterprises for the first time, it also goes against the objective of an open market and
discriminates against the private express delivery industry by adopting franchised postal operation.
(Zhang Shuguang, Zhang Chi, 2009)
(7) Extending existing monopoly towards upstream and downstream to marginalize
competitors: PetroChina’s practice in the pipeline fuel gas sector
The market mechanism has preliminarily taken shape in China’s urban gas industry. Within
the industry, there are now such big companies as Towngas China, China Gas, ENN Energy and
China RES Gas. In order to enter the gas market, PetroChina has adopted a strategy on an
integrated vertical management pattern characterized by such measures as “exchanging resources
for market” and establishment of a natural gas market. This strategy is a great exclusion for the
upstream and downstream competitors, and has changed the development direction of the
downstream urban gas industry where market mechanism has preliminarily taken shape.
Using future gas supply as a counter, PetroChina has conducted strategic negotiations with
the 14 provinces and cities along the gas pipelines to determine the specific courses of the trunk
and branch lines of various provinces and cities and has tried to bring the gas distribution
networks of the cities along the 2nd West-to-East gas pipeline into its domain. It has integrated the
affiliating gas companies engaged in downstream businesses to establish PetroChina Kunlun Gas
Co., Ltd. which will further explore the sales market of natural gas. Urban gas has become the
focal point of PetroChina in the next step of development.
While PetroChina was pressing ahead with its gas businesses, many of the private gas
companies with local businesses were marginalized. In 2008 when the construction of the 2nd
West-to-East pipeline rolled out, PetroChina adopted the strategy of “exchanging resources for
market” and began to snatch the downstream urban gas markets. During this process, the gas
franchisor Xinjiang Guanghui LNG Development Co., Ltd. (Xinjiang Guanghui) in Wuwei, Gansu
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Province along the 2nd West-to-East pipeline was marginalized. In September 2007, the
Construction Committee of Wuwei Municipality granted the franchise right of the urban gas
utilization project to Xinjiang Guanghui through open bid invitation. Thus, Xinjiang Guanghui
acquired the construction and operational rights of the residential, commercial, heating and
industrial (except for the filling of LPG of motor vehicles) natural gas utilization projects in the
urban planning areas of Wuwei Municipality, and the franchise right will expire in 30 years’ time.
However, with the aggressive intervention of PetroChina, Xinjiang Guanghui’s franchise right has
been revoked, and the excuse was that PetroChina and the People’s Government of Gansu
Province have entered into an agreement on comprehensive strategic cooperation in December
2007, and the development of the urban gas market in Gansu Province by PetroChina is one of the
important contents of that agreement.
Like Xinjiang Guanghui, many downstream gas suppliers have to mainly rely on the supply
of PetroChina. In Zhuhai where the 2nd West-to-East pipeline ends, Towngas China and other
companies have also withdrawn from the local market because of PetroChina. In Shandong,
PetroChina has entered into a cooperation framework agreement with Shandong Provincial
government. The main contents of the agreement include: PetroChina and Shandong will launch
comprehensive cooperation in oil and gas pipelines, oil refinery, the product oil marketing
network, urban gas and the storage and transportation of oil and gas including harbors and docks.
PetroChina enjoys the absolute advantageous position in the upper and middle stream
markets of natural gas. It has marginalized the participants in the downstream markets where
market mechanism has initially taken shape through vertical agreements. Such an obvious practice
matches the monopolistic conduct of “abuse of dominant market position by undertakings”
defined in the Antimonopoly Law. By signing cooperation agreements with a number of provinces
and relying on its powerful gas supply, PetroChina will reshuffle the downstream urban gas
markets, and the private gas companies which used to dominate those markets now have to face
grim fates. PetroChina has just developed vertical integration and extend into upstream and
downstream industries, especially the gas industry, by making use of its monopolistic advantages.
This has gone against competition and is a great damage to the privatization cause of public
utilities.
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Frame 6: Reorganization of Lanzhou Gas by PetroChina Kunlun Gas Co., Ltd. and Lanzhou Municipal Government
On May 18 2010, Lanzhou Municipal Government and PetroChina Kunlun Gas Co., Ltd. signed a series of cooperation agreements
and decided to conduct asset reorganization on Lanzhou Gas and Chemical Industry Group Co., Ltd. and establish a new company. Kunlun
Gas acquired 50% of the shares of Lanzhou gas and Chemical Industry, and in the new company, Lanzhou Municipal Government and
Kunlun Gas each holds 50% of the shares. Among the 50% of shares of Lanzhou gas transferred to Kunlun Gas, 14.46% were held by
Lanzhou Urban Investment and Development Co., Ltd., 31.39% were held by Lanzhou State-owned Asset Management Co., Ltd., and
4.15% were held by the employees of Lanzhou Gas.
The transfer of the shares of Lanzhou Gas and Chemical Industry Group originated in the Agreement on Comprehensive Strategic
Cooperation signed between the provincial government and PetroChina in December 2007. After that, Lanzhou Municipal Government
and PetroChina Kunlun Gas Co., Ltd. signed the Agreement on the Strategic Cooperation Framework in 2008 which marked the beginning
of the substantial cooperation between Gansu Province and PetroChina.
3. Analysis of the phenomenon “Guo Jin”
From the indexes of gross industrial output value and funds used, we may find that the shares
of state-owned enterprises have dropped in recent years. However, the situations of integration of
state-owned capitals are relatively serious in resources and other basic sectors. The analysis of the
above cases may further prove that there is a structural phenomenon of “Guo Jin” in resources and
other basic industries in our country.
There are three aspects of background. First, the position of state-owned enterprises is
changed. According to the Decision of the Central Committee of Chinese Communist Party
concerning Several Major Issues in the Reform and Development of State-owned Enterprises
(adopted at the 4th Plenary Session of the 15th CPC Central Committee on September 22 1999),
state-owned economy is positioned as: industries that are related to national security, industries
with natural monopoly, industries that supply major products and services for the public, and pillar
industries and the major backbone enterprises in high and new technology sectors. However, in
the Notice of the General Office of the State Council on Forwarding the Guiding Opinions of the
SASAC about Promoting the Adjustment of State-owned Capital and the Reorganization of
State-owned Enterprises (G.B.F.[20006]NO.97), SASAC changed the position of state-owned
enterprises into “industries that are related to national security, major infrastructures and important
mineral resources, industries that supply major products and services for the public, and pillar
industries and the major backbone enterprises in high and new technology sectors”. By changing
“industries with natural monopoly” into “major infrastructures and important mineral resources”,
it has greatly expanded the scope of state-owned economy. Second, industrial revitalization plans
have been formulated both at the state level and in various provinces. In the first half of 2009, 10
industrial revitalization plans were successively issued in China with the emphasis on industrial
restructuring and upgrading and the encouragement of merger and reorganization. After that, local
industrial plans were successively formulated in various provinces and municipalities. Third, the
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prices of resources have risen rapidly. In recent years, the prices of resources have risen rapidly,
and sharp rises in the prices of such resources as oil, steel, coal, copper, iron, aluminum and gold
have continued for nearly 10 years.
We should never ignore the hidden hazards of structural “Guo Jin Min Tui”. Through the
cases provided in this article we may find that the administrative monopoly of state-owned
departments has been strengthened, while the foundation for market competition has been
weakened. State-owned monopoly industries have squeezed the room for development of private
enterprises by making of their political and resource advantages. In addition, the various conducts
of state-owned monopoly enterprises have shown the indifference towards rules and systems. For
example, the merger between Unicom and CNC and the extension of PetroChina into downstream
gas markets have both neglected the Antimonopoly Law. Such disregard of rules will cause great
harm. If the industries relating to the lifeline of the citizens are controlled by monopolistic
state-owned enterprises that ignore rules, the Chinese economy will be under the control of
bigwigs and oligarchy, and the entire market environment will be ruined.
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Chapter 6 The impact of state-owned enterprises on macro economy
Then, how will the macro economy in our country be affected by the existence of
state-owned enterprises? Intuitively speaking, the huge funds obtained from the government by
state-owned enterprises that have been invested in major railway, road and infrastructure projects
will do no good to the rationalization of the GDP structure, and will be unfavorable for the sound
development of the economy in the long run; the too large proportion of state-owned economy is
unfavorable for the effects of wealth distribution. According to Chen Zhiwu’s statistical analysis,
in countries with high proportions of state-owned economy, the asset accretion as a result of
economic growth will not contribute much to the growth in the overall incomes of the citizens
(Chen Zhiwu, 2010), etc.
Next, this article will examine state-owned enterprises’ impacts on the macro economy in
four parts. First, we will analyze whether the monopolistic conducts of state-owned capitals will
affect the economic entities in china on the whole. The concept of “economic fragility” will be put
forward in this part. Economic fragility refers to the sensitivity of price changes to changes in
economic growth; then, we will examine the impacts of the conducts of state-owned enterprise on
the real estate market, the money market and the bulk stock market. The fourth part will be the
conclusion.
1. The integration of state assets and “economic fragility”
In this part, we will examine the impacts of the monopolistic conducts of state-owned
enterprises in resource sectors on the entire macro economy. Since 2010, China’s macro economy
has been faced with the pressure of inflation, and the two main indexes measuring price levels —
CPI and PPI have kept rising. While the GDP has maintained relatively high growth rates year
after year, the price levels in China have fluctuated violently. We have used the concept of
“economic fragility” to describe the degree of price changes along with the changes in GDP
growth rates. This concept is a measurement of the quality of economic growth, and is the
marginal cost of economic growth. The formula is as follows:
d (dP / P) (dP / P)
, P refers to PPI, and G refers to GDP.
d (dG / G) (dG / G)
Through calculating the economic fragility of China and the US in various quarters from
1995 to 2010, we may easily find from Fig 6.1 that, compared with the US, China’s economic
fragility is bigger. That is, a slight growth in GDP will result in a significant rise in prices. This has
made macro control a very difficult task. When we further calculate the mean values and the
standard deviations of the economic fragilities of China and the US, we find that the mean value
and the standard deviation of the US’s economic fragility are 12.2 and 33.8 respectively, and those
of China’s economic fragility are 43.8 and 97.6 respectively. These data also prove that, compared
with the US, China has a greater economic fragility. Besides, since the economic fragility in China
significantly reduced in later stages, we may judge that this has something to do with the overall
gradual exit of state-owned enterprises in China. The overall high economic fragility in China may
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be related to the structural “Guo Jin Min Tui”. Next, we will conduct a selective analysis.
Fig 6.1 Comparison of the differences in economic fragility between China and the US
In terms of the mechanism, institutional entry barriers, institutional exit barriers and low
efficiency may all result in high economic fragility, and these three points are also the important
features of the phenomenon of “Guo Jin Min Tui” in basic industries that we analyzed in the
previous chapter. During economic expansions or recessions, the prices will also change violently
and this will cause high fragility. If there are institutional entry barriers during an economic
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expansion, private capitals will not be able to enter quickly and thus can only expand on the basis
of the original scales, and this will inevitably cause the prices to rise quickly. If there are
institutional exit barriers during an economic recession, private enterprises can only exit on the
basis of the original scales, and this will inevitably cause the prices to drop quickly. Thus, we may
examine the relations between the economic fragility of China and the integration of state-owned
capitals in basic industries.
According to the classification of industrial sectors by National Bureau of Statistics of China,
we have selected 11 basic industries.
11 basic industries selected
1. Coal mining and dressing
2. Oil and natural gas exploration
3. Ferrous metal mining and dressing
4. Non-ferrous metal mining and
dressing
5. Oil refinery, coking and nuclear fuel
processing
6. Ferrous metal smelting and rolling
processing
7. Non-ferrous metal smelting and rolling
processing
8. Transportation equipment manufacturing
9. Electric power and heat production and
supply
10. Fuel gas production and supply
11. Water production and supply
The index used to measure the integration of state-owned capitals: from the perspective of the
occupation of funds, the sum of the average balance of net value of fixed assets and the average
balance of current assets. The data come from National Bureau of Statistics of China. We
conducted an analysis on the correlationship between the proportion of the funds of state-owned
and state-holding enterprises in the 11 industries to the funds of all the enterprises in the 11
industries from 1999 to 2008 and the economic fragility of China, and found that the coefficient of
the correlationship was 0.37. This means that the capital proportion of state-owned and
state-holding enterprises in basic industries has a positive correlation with fragility.
From the above analysis we may find that the current Chinese economy is characterized by
relatively high fragility which is related to the intensified integration of state-owned capitals in
basic industries. If the monopoly issue in the energy sector cannot be fundamentally solved, the
fragility faced by China’s macro economy will remain. It is very difficult to conduct macro control
based on it, and such measures will not be able to solve the root causes.
2. The impact of current performance of state-owned enterprises: real estate
market
(1) Overview of the current real estate enterprises in our country
Since the beginning of the housing commercialization reform in the end of 1990s, the real
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estate industry has gradually become a pillar industry of the Chinese economy. Let’s look at two
indexes: the proportion of real estate investment to fixed assets investment, and the proportion of
real estates investment to GDP. Since 2001, the proportion of real estates investment to fixed
assets investment has been steadily maintained above 17%. According to the statistics of National
Bureau of Statistics of China: in 2008, the new-home sales amount across the whole country was
2407.1 billion yuan, accounting for 7.6% of the GDP in the same period; in 2007, the new-home
sales amount across the whole country was 2990.2 billion yuan, accounting for 10.4% of the GDP
in the same period (China Securities Journal, 2009).
The investment data of the Chinese real estates industry in recent years and the experiences
of developed countries indicate that the real estates industry is now playing an important role in
the national economy. On the other hand, they also tell us that, along with the continued
urbanization process in China, the prosperity of the real estates industry will continue to last for
quite a long period of time. From 2001 to 2009, the average sales price of commercial houses
across the whole country has kept rising quickly. Just because of the high return on investment and
relatively high liquidity of the real estates industry, the real estates industry has not only
contributed to improving the residents’ living conditions, but also become a hot spot for various
industries to seek profits. Thus, state-owned enterprises have entered the real estates industry in
succession and resulted in “prime sites “one after another.
(2) Features of state-owned enterprises’ involvement in the Chinese real estates industry
a. Central enterprises and the real estates industry

A large number of central enterprises have appeared in the real estates market and
bought land at higher prices
Due to the high ROI in the real estates industry, a number of state-owned enterprises have
been active in the real estates market. Data indicate that in 2008, the average net profit rate of
listed real estates companies was 20%, and the average net profit rate of the 16 listed real estates
enterprises affiliated to central enterprises was 21.13%. Among the 136 central enterprises under
the management of SASAC in 2009, 16 companies had real estates as the main business lines,
over 80 enterprises had real estates as a sideline business, and over 70% of the enterprises were
involved in real estates businesses. Real estates is not only a main sideline of central enterprises,
but also an important source of profit of central enterprises.
Since 2009, enterprises with backgrounds in state-owned assets have occupied an important
position in the real estates industry and created one after another “prime sites” of central
enterprises. The central real estates enterprises enjoy advantages in multiple financing channels
and low financing costs and buy land at higher prices. According to the statistics of Centaline
property, among the residential plots auctioned in Beijing in 2009, the average price of the land
bought by state-owned enterprises reached 6859.3 yuan/m2, 2534.7 yuan/m2 higher than the
average price of 4324.6 yuan/ m2 of the land bought by private enterprises. By March 17 2010, 18
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of the 29 non-industrial land plots knocked off were bought by state-owned enterprises or
enterprises with backgrounds of state-owned enterprises. The average price of the land bought by
state-owned enterprises has reached 11,385 yuan/m2, over 30% higher than that of the land bought
by private enterprises.
Frame 1: Several typical prime sites bought by central enterprises in 2009
Since 2009, enterprises with state-owned capital backgrounds have acquired important positions in the real estates
industry and produced one prime site after another.

On June 30 2009, Sinochem Fangxing Investment Management Co., Ltd. under Sinochem Group won the bid for
No. 15 land plot on Guangqu Road with 4.06 billion yuan and set a new record for prime sites in Beijing since the
adjustment in the real estates market in 2007.

On July 23 2009, Gemdale Group won the bid for No. 10 land plot of the characteristic residential area in
Zhaoxiang Township, Qingpu District with 3.048 billion yuan, and the land plot became the prime site in
Shanghai.

In 2009, China Merchants Property Development Co., Ltd. and Shenzhen Overseas Chinese Town Co., Ltd. joined
hands in winning the bid for No. A122-0332 land plot in the mansion area Jiangangshan, Baoan District, Shenzhen
with 530 million yuan. The closing price for the land plot was 18,874.64 yuan/m2, and the land plot thus became
the new prime site in Shenzhen.

At Nanjing Municipal Bureau of Land and Resources on Stempter 8 2009, Poly Real Estate under China Poly
Group (another state-owned enterprise) won the bid for the Jinshajiang land plot in Hexi District with the
whopping price of 1.592 billion yuan, and the land price reached 7,553 yuan/m2.
Besides, among the top 10 land plots in terms of total closing prices in 2009, 8 were bought by state-owned
enterprises; among the top 10 enterprises in terms of the closing land prices, 8 were state-owned enterprises.

Capital advantage of state-owned real estates enterprises
For a long time, state-owned enterprises also enjoy the capital advantages in banks and
governments, and the availability and the convenience of financing excel private enterprises. The
main reasons for this include the commercial bank system in China dominated by state-owned
banks, and the fact that the low risk preference of state-owned banks matches with the
policy-related coverage of deficit for state-owned enterprises’ losses. The Report on the
Development of the Non-public Sector of the Economy 2009 indicated that, among the short-term
loans in 2009, those extended to non-state-owned departments accounted for 15.1% of the total
lending, while those extended to private enterprises only account for 4.7% of the total lending.
State-owned enterprises often enjoy more preferential interest rates and have lower financing costs.
This is also substantiated by another data. Investor Journal conducted analysis on the 986
companies that had published annual reports. According to the results of the analysis, the 986
companies borrowed a total of 2.6 trillion yuan of loans from financial institutions in 2009.
Among them, central enterprises received 1.7 trillion yuan of loans, accounting for 65% of the
total amount of loans, while these central enterprises only account for 18.5% of the total number
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of companies.
Besides, according to the statistical data on the open credit information of 14 domestic banks
in the first two months of 2009 collected by National Business Daily, in the first two months of
2009, the total line of credit of the 14 domestic banks reached 4.52 trillion yuan. Among it, 3.49
trillion yuan and 1.06 trillion yuan were granted to local governments and large-scale investment
projects and enterprises respectively, and only 195.6 billion yuan (less than 1/20 of the total quota)
was extended to small and medium enterprises. Statistical data show that small and medium-sized
enterprises account for 8.5% of China’s GDP, but the line of credit was only 5%. Therefore, in the
flow of banking credits, most of the funds have flown into enterprises with backgrounds in
state-owned capitals. An important reason is that, since state-owned enterprises are consistent with
policy orientations and are bound with state-owned capitals, the banks may face less risk when
extending loans to them.
Frame 2: Examples in which central enterprises received huge lines of credit from banks in 2010
Folllowing are some examples in which central enterprises received huge lines of credit from banks since the beginning of 2010:
On March 10, China Railway Group and Agricultural Bank of China signed an agreement on strategic coorperation (According to the
agreement, Agricultural Bank of China has promised to provide a total of 110 billion yuan of credit line to China Railway Group. This is the
biggest line of credit received by a central enterprise since the beginning of this year).
On March 15, China National Materials Group and Guangdong Development Bank signed an agreement on strategic cooperation in
Beijing (According to the agreement, Guangdong Development Bank will provide full financial services and a line of credit of 5 billion
yuan).
On March 8, China National Building Material Group and the Export-Import Bank of China signed an agreement on strategic
cooperation in Beijing (this was the second time that the Export-Import Bank of China extended credits to central enterprises).
In January 2010, the Export-Import Bank of China and Commercial Aircraft Corporation of China, Ltd. signed a 50 billion yuan
Agreement on Financial Strategic Cooperation Framework.
……
b. Local urban investment companies have been involved in land development and the debt ratios
of local governments have risen
There are a large number of active local state-owned enterprises in different local areas of
China — urban investment and development companies (hereinafter to as “urban investment
companies”). They perform the functions of urban development and construction on behalf of the
governments. Most of the urban investment companies are engaged in primary land development,
and some are also engaged in secondary land development with the aim to make more profits.
Since local governments should neither issue bonds nor directly borrow money from banks while
at the same time have to perform the functions in promoting local economic growth and
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employment, urban investment companies have emerged as the times require to assume the debts
of local governments when conducting infrastructure construction and investing in other projects.
One direct negative impact of urban investment companies is the huge local debts. It has
become a major problem affecting China’s macro economy. Although the land used as loan
collaterals has an appreciation trend within a long period of time in the future, the risks as a result
of excessive debt ratios is a huge hidden danger for China’s economy. The result of a survey
conducted by the Central Bank shows that, by the end of May 2009, there were over 3,800
governmental investment and financing platforms across China with a total asset of nearly 9
trillion yuan. The debts rose to 5.26 trillion yuan and the average debt-to-assets ratio was about
60%. Among them, many local financing platforms did not have fixed sources of income. The
5.26 trillion yuan of debt was equivalent to 15.7% of the national GDP in 2009. Besides, as
forecasted by a research report of CICC, at the end of 2009, the loan balance of the financing
platforms of local governments (excluding bills) was about 7.2 trillion yuan, including about 3
trillion yuan of net new loans extended in 2009. The follow-up loans in 2010 and 2011 would be
2-3 trillion yuan, and the total balance is expected to reach some 10 trillion yuan by the end of
2011. The report held that the loans extended by major listed banks through the financing
platforms of local governments accounted for about 10% of the total loan amount at the end of
2009, and that the majority of these loans were extended by China Development Bank and local
financial institutions. The 10 trillion yuan of debts of local governments accounted for about 1/3
of China’s GDP in 2009 or 70% of China’s foreign exchange reserves (China Securities Journal,
2010).
(3) Consequences of state-owned enterprises’ participation in China’s real estates industry
China’s real estates industry has quickly growth and expanded since the beginning of the
market-oriented reform of housing, China is in a process of quick and continued urbanization, and
the land in China is monopolized by the government. All these constitute important factors for the
rise in housing prices. The state-owned enterprises with large investment in the real estates market
will have the following consequences:
First, it will add fuel to the fire and further distort real estates prices. Currently, central
enterprises have large asset scales and huge cash flows. Due to the limited invested opportunities
and the expectation for the future urbanization process in China, the central enterprises have
invested most of their funds in the real estates industry. In addition, the actual costs of state-owned
enterprises are low (see Chapter 4), the overrating of land prices will cause the prices of assets to
rise too fast, and this is not good for the sound development of not only the real estates industry,
but also the entire Chinese economy.
Second, the market order will be distorted and it will be hard for private enterprises to
compete with them. State-owned enterprises have raised the land prices by making use of the
policy and financial conveniences enjoyed by them and this has somewhat disturbed the market
competition orders and squeezed the development of private enterprises. Besides, in real estates
development, state-owned enterprises often favored by banks and receive large amounts of
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housing loans. This has seriously obstructed the loans normally extended to private enterprises and
increased their operating costs and risks.
Third, it will have impacts on China’s macro economy. One direct negative impact of local
urban investment companies’ purchase of land is the huge local debts which has become a major
issue affecting China’s macro economy. Excessive debt ratios are very dangerous and constitute
tremendous hidden risks for the Chinese economy.
3. The impact of current performance of state-owned enterprises: finance
market and take securities market as an example
The funds of a state-owned enterprise include its own funds and the credit funds provided by
banks. By making use of their own advantages, state-owned enterprises have invested large
amounts of credit capitals into stock exchanges and the markets of other financial derivatives.
(1) Scale of the credit funds flowed into stock exchanges
In terms of the credit funds flowing into stock markets, an enterprise generally may invest
credit funds into the stock market or the real estate market in two ways. One is to directly transfer
credit funds into securities accounts, which is now rarely done as the banks have conducted
thorough investigations on the whereabouts of credit funds. The other is to take some of the credit
funds out through multiple transfers in complicated trading and then invest them into the stock
exchange.
According to the estimation made by Deputy Director Wei Jianing of Department of
Macroeconomic Research, Development Research Center of State Council, by May 2009, the
domestic commercial banks had supplied 5.8 trillion yuan of credit funds which had exceeded the
credit incremental of the whole year of 2008. Assuming that the total loan amount was 5.8 trillion
yuan, about 1.16 trillion yuan of credit funds had flowed into the stock market. Moreover,
according to the data published by the Central Bank, the amount of bill financing in the first five
months in 2009 was 1.7 trillion yuan, accounting for around 30% of all the credit funds.
According to Mr. Wei’s calculation, in the first half of the year, about 20% of the credit funds
flowed into the stock exchange and around 30% of the credit funds flowed into the bill market.
This means that about half of bank capitals have circulated within the financial system. When
funds circulate and swell within the financial system, they become financial bubbles. Currently,
the circulation of the fast-growing amounts of funds in the financial system may easily lift the
share prices, form new financial bubbles, and lift real estates prices (China Economic Weekly,
2009).
Besides, Researcher Zhang Ming from Research Center for International Finance, Chinese
Academy of Social Sciences held that among the 7.37 trillion yuan of newly extended loans in the
first half of 2009, nearly 2 trillion yuan or 30% may have gone into the stock exchange. The
reason for this opinion is that the total deposit of Chinese enterprises in the first half of 2009
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increased by 5.27 trillion yuan. If we take enterprises own profit growths into consideration, we
may find a remarkable gap between the loan increment and the credit increment (Beijing Business
Today, 2009). As shown in Fig 6.2, from March to August 2009, Shanghai Composite Index rose
by nearly 1,400 points, and this trend coincided with the above analysis.
Fig 6.2
Volatility in Shanghai Composite Index March – September 2009
Source: http://vip.stock.finance.sina.com.cn.
Frame 3: Documents issued by China Banking Regulatory Commission on controlling illegal funds in the stock market
With a view to develop the commercial banks’ ability to bring credit risks under control, China Banking Regulatory Commission successively issued the Interim
Measures for the Administration of Fixed Asset Loans, the Interim Measures for the Administration of Working Capital Loans, the Interim Measures for the
Administration of Personal Loans and the Guidelines for the Project Financing Business in 2009. The three Measures and one Guideline may put an end to the
appropriation of illegal funds in principle. The most important method of “entrusted payment” in the documents may realize the supervision of fund flows. In
entrusted payment, after the lender’s examination and approval, the loan fund will be paid to the counter party of the borrower through the lender ’s account, and the
borrower cannot deal with it. According to the provisions of the Interim Measures for the Administration of Fixed Asset Loans, where a loan fund the single amount
of which exceeds 5% of the total project investment or 5 million yuan, the payment should be made through entrusted payment by the lender. According to the
provisions of the Interim Measures for the Administration of Working Capital Loans, the freedom of contract should be respected when one decides to choose either
direct payment or entrusted payment. However, if the credit relationship between the lender and the borrower is newly established and the borrower
has an average credit standing; or the payment receiver is definite and the amount of a single payment is relatively large; or under other
circumstances determined by the lender, the form of entrusted payment should be adopted. In practice, the way fixed asset loans are dealt
with is generally applied by the commercial banks in working capital loans, and entrusted payment is adopted for working capital loans
above 5 million yuan. According to the Interim Measures for the Administration of Personal Loans, entrusted payment should be adopted in
principle, and direct payment should serve as a supplement under exceptional circumstances.
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(2) Speculating in the stock market by state-owned enterprises
The new Securities Law amended in 2005 provides the reason for the funds of state-owned
enterprises to enter the stock market. Article 76 of the Securities Law of the People’s Republic of
China coming into force in 1999 clearly provided that “State-owned enterprises and
state-controlled enterprises may not speculate in stocks being traded on the market.” However,
Article 83 of the Securities Law of the People’s Republic of China amended on October 27 2005
revised this article as: “The state-owned enterprises and state-controlled enterprises that engage in
any trading of listed stocks shall observe the relevant provisions of the state”.
In some listed state-owned companies, the profits from non-core businesses have
substantially exceeded those from primary businesses, and a large proportion of such profits are
those from investments in the stock market. The amounts and proportions of funds invested in the
stock market have all been quite big. According to statistics on the listed state-holding companies
that have published their 2004 annual reports, by March 11 2005, 86 companies had engaged in
short-term investments in national debts or stocks, and the accumulative investment amount had
reached 3.539 billion yuan, accounting for 2.6% of the total net assets. Many central enterprises
have engaged in consigned financing such as China Southern and Baoshan Iron and Steel.
Bank credit funds’ entering the stock market and speculating in the stock market by
state-owned enterprises may do great harm. On the one hand, the bubbles in the stock market have
been aggravated. The more credit funds enter the stock market, the more bubbles and speculations
there will be. The stock market has been put under a high-risk state. In addition, if state-owned
enterprises take large amounts of funds out of the stock market, it will cause market volatilities
and will also affect the normal operation of enterprises.
Frame 4: Speculating in the stock market by China Nuclear Engineering Group Co. and China Shipping (Group)
On June 18 2007, China Banking Regulatory Commission publicized the specific information on the speculating in the stock market or
subscription of new shares through misappropriation of credit funds by China Nuclear Engineering Group Co. and China Shipping (Group),
and imposed administrative penalties on the 8 banking branches involved in the case. According to investigation, since June 2006, China
Shipping obtained at least 2.4 billion yuan of loans from the bank which are then transferred into securities operating agencies to subscribe
for new shares. According to the investigation conducted by China Banking Regulatory Commission, since 2001, China Nuclear
Engineering Group Co. has obtained 51 working capital loans with a total sum of 2.366 billion yuan from the Bank of Communications and
Beijing Bank, and 87.32% of the credit funds have been misappropriated by it. Since June 2006, Shanghai Dongdaming Subbranch of China
Merchants Bank and 5 other banks have extended 2.7 billion yuan of working capital loans to China Shipping (Group). Among them, at
least 2.4 billion yuan have been transferred either directly or inderictely by China Shipping (Group) into securities operating agencies to
subscribe for new shares (Dongfang Daily, 2007).
(3) Speculating in financial derivatives businesses by state-owned enterprises
In recent years, state-owned enterprises, especially large central enterprises have been engaged
in financial derivative businesses and suffered from huge losses. According to one data, in May
2009, SASAC’s website disclosed that 28 central enterprises were engaged in financial derivative
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businesses, and most of them were at a loss. Illegally speculating in financial derivatives by
central enterprises still happens despite repeated prohibition.
We will first look at a case in which an overseas subsidiary of China Aviation Oil suffered
from a great loss through oil derivatives trading. In May 2001, China Securities Regulatory
Commission (CSRC), State Economic and Trade Commission and three other ministries and
commissions jointly issued the Procedures on the Administration of State-owned Enterprises’
Overseas Futures Hedging Transactions. The Procedures clearly stipulates that an approved
state-owned enterprise can only engage in the transactions of standardized contracts listed in
overseas futures exchanges and can only engage in hedging events and shall not engage in
speculation transactions; the futures positions shall not exceed the enterprise’s normal delivery
ability and shall not exceed the import/export quota or the amount prescribed by the permit, and
the holding period of futures should match with the pricing period required for spot preservation.
CSRC successively approved the qualifications in overseas futures hedging of 26 enterprises in
metal, grain and oil and petroleum industries. In the petroleum industry, 7 companies with bigger
oil import volumes were approved: Sinochem, UNIPEC, CNUOC, COSCO, China Aviation Oil,
CMFC Overseas Fishery Co., Ltd. and China Petrochemical International Co., Ltd.
In 2004, however, China Aviation Oil (Singapore) Corp. Ltd. (CAO), an overseas subsidiary
of China Aviation Oil suffered from a huge loss of USD 550 million due to oil derivatives
transactions and applied for bankruptcy protection to the Supreme Court of Singapore. The
business engaged in by CAO was OTC. The specific operations in overseas futures hedging of
China Aviation Oil are mainly implemented through CAO which is registered in Singapore.
International OTC transactions have hardly received any supervision and management from the
government.
There are also a number of other such cases. For instance, according to the 2008 Annual
Report of China COSCO Holdings Company Limited, by December 31 2008, the forward freight
agreements held by the various dry-bulk cargo companies under COSCO had a total floating net
loss (with proceeds realized already deducted) of 4.121 billion yuan (2008 Annual Report of
China COSCO Holdings Company Limited, 2009). Citic Pacific Ltd. announced on October 20
2008 that the leveraged foreign exchange contracts held by the Group for the iron ore projects in
Australia has already incurred a loss of HKD 807 million, and the loss of the valid leveraged
foreign exchange contracts measured in fair price reached HKD 14.7 billion. From July 1 to
October 17 2008, the company had suffered a loss of HKD 807 million.
4. The impact of current performance of state-owned enterprises: bulk stock
In addition to the stock market, the real estates market and financial derivatives, state-owned
enterprises are also looking for new investment channels. Since real estates and energy-intensive
industries are under state control, new investment channels should be found for the funds
withdrawn from these industries, like bulk stocks. Due to the small scales and the easiness in
operation, agricultural product markets have become one of the destinations of these funds.
Sinograin’s raise of wheat price in the summer of 2010 was just a typical case.
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At the end of June 2010, the wheat purchasing prices in Anhui, Shandong and some other
provinces rose by about 10% over the same period of the previous year and were higher than 1
yuan/Jin for the first time, much higher than the policy offer prescribed in the 2010 Preplan on the
Minimum Purchasing price of Wheat jointly issued in early June by State Development and
Reform Commission and other departments. State Administration of Grain made an investigation
report on the causes of the rise in grain prices — Investigation Report on the Causes of Rise in
Grain Prices. The report conducted a comprehensive analysis on the various factors boosting the
wheat price, and clearly points out that the main grain procurement agency — Sinograin has an
unshirkable responsibility. The report also points out that there lacks a competition mechanism in
the existing market-supporting procurement policy dominated by Sinograin.
In 2006 when the market-supporting policy was first implemented, Sinograin and local grain
reserve companies purchased 81.5 billion Jin of wheat at the “minimum purchasing price” jointly
published by State Development and Reform Commission and the Ministry of Finance,
accounting for over 40% of the total wheat yield and over 60% of the total amount of wheat in
circulation of the whole country. In some places in Henan and Hebei provinces, the granaries were
all filled up and there was still wheat stored outdoors. In early November that year, however, the
prices of wheat in the major producing and consuming areas rose instead of dropping. Relevant
departments later organized public auctions in Zhengzhou, Hefei and other places to for over 4
million tons of the wheat in “temporary storage” purchased by Sinograin in the same year. But the
effects in bringing down grain prices were not noticeable. What was worth noting was that the
upset prices of the over 4 million tons of wheat put into the market by the government were all
higher than the minimum purchasing price. This meant killing several birds with one stone for
Sinograin — the market-supporting purchases propped up the grain price, while selling grains at
higher prices increased profits and at the same time met with the government’s requirement in the
principle of selling at normal prices7.
5. Summary
Due to policy and credit advantages, the state-owned enterprises in China often invest huge
funds into non-core businesses such as stocks, real estates, financial derivatives and bulk stocks,
and some even consign intermediaries to engage in speculative businesses. These conducts have
very negative impacts on China’s economy. First, the huge investments from state-owned
enterprises in the above-mentioned fields will boost and distort the prices and cause volatilities in
stock and real estates markets. Second, the stock and real estates markets in China are the vanes of
the Chinese economy. The speculative behaviors of state-owned enterprises will bring hidden risks
for the macro economy of the entire country. In generally, the phenomenon of “Guo Jin” in
7
Selling at normal prices means that state-owned grain procurement and storage enterprises should determine the
selling price based on the purchasing price plus reasonable fees and the minimum profit in the current period. The
specific prices in selling at normal prices should be determined by the state-owned grain purchasing and sales
enterprise with an independent accounting system on its own according to provisions and market prices. The grain
prices of state-owned grain purchasing and selling enterprises should be fixed according to the principle of break
even and minor profits. Selling grains at low prices less than cost is forbidden.
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resource and other sectors has also contributed to the instability of China’s macro economy. Third,
the unequal competition environment faced by state-owned and private enterprises will do harm to
China’s economic stability in the long run.
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Chapter 7 Analysis of Political Economy on Performance of SOEs
I. Historical Origin of Current Problems of SOEs
In early 1990’s, a large number of SOEs ran under deficit or made meager profits. This was
because after the reform in the 1980’s, although much progress was made in the enterprise systems
of SOEs, private enterprises rose, and foreign-funded enterprises got the upper hand. SOEs were
outperformed by private and foreign-funded enterprises in their competition. Therefore, as a whole,
they were generally losing money for years. See the following table.
Table 7.1 Net loss of SOEs (1990-1993, unit: 100 million yuan)
Year
1990
1991
1992
1993
Net loss of SOEs
-500. 58
-435. 55
-384. 99
-361. 80
Source: Calculated according to the data on the website of National Bureau of Statistics of China
(http://www.stats.gov.cn/tjsj/ndsj/2007/indexch.htm).
In this context, at the Third Plenary Session of the Fourteen Central Committee of CPC, a reform
scheme which was later called “to invigorate large enterprises while relaxing control over small
ones” was adopted. Various forms of reform of small and medium-sized SOEs mainly focused on
the reform of property rights, i.e. from contract operation to en bloc sale. Enterprises that suffered
long-term losses were declared bankrupt. The enterprise system of medium and large-sized SOEs
was reformed mainly through corporatization and demutualization.
The so-called medium and large-sized SOEs are mostly SOEs engaged in rare resource or
monopolistic sectors. At the beginning of the 1990’s, Chinese economy had yet to transform from
industrialization to urbanization, the size of Chinese economy was far from exerting a significant
impact on resource prices in the world, and people’s income was not high enough to buy
high-value commodities (such as houses and automobiles). In a word, the middle class that had a
strong purchasing power had not emerged. At that time, land was deemed worthless because it was
allocated over the years, the prices of oil, coal and other natural resources were quite low, and
high-value products (such as mobile phones) still failed to show a bright market prospect.
Therefore, none of the SOEs engaged in these sectors was deemed to have a sound market
environment.
Under such circumstances, the State Council issued the Decision of the State Council on
Implementing the Tax Division Management System in December of 1993, stipulating that “A
distribution system shall be gradually established in which the investment proceeds of state-owned
assets shall be divided in line with contributions, or the after-tax profits of SOEs shall be turned in.
As a transitional measure, most wholly state-owned enterprises that were registered before
1993 may withhold their after-tax profits. In addition, the income tax paid by enterprises
that make meager profits will not be refunded from the treasury.” The bold part was only a
conditional, temporary and transitional arrangement. However, this sentence constituted the major
prerequisite for subsequent problems of SOEs.
In the following 14 years, SOEs did not turn in any profit. Instead, the state finance covered at
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least 368 billion yuan of losses for them. See the following table. It was not until December of
2007 that the Ministry of Finance and SASAC jointly issued the Interim Measures for the
Administration of the Collection of Proceeds from State-owned Capital of Central Enterprises,
which stipulated that central enterprises should be categorized into three types to turn in their
profits, with the highest turn-in rate being 10%.
Table 7.2 Revenue Breakdown of National Finance
Unit: 100 million
Funds Levied
for
Total
Year
Revenue
Taxes
Revenue
Subsidies to
from
Loss-making
Enterprises
Enterprises
Development
of Key
Construction
Projects in
Energy &
Revenue
from the
Fund for
Budget
Adjustment
Revenue
from Extra
Other
Charges for
Revenue
Education
Transportation
1978
1132.26
519.28
571.99
40.99
1980
1159.93
571.70
435.24
152.99
1985
2004.82
2040.79
43.75
-507.02
146.79
1990
2937.10
2821.86
78.30
-578.88
185.08
131.21
1991
3149.48
2990.17
74.69
-510.24
188.22
138.53
28.01
240.10
1992
3483.37
3296.91
59.97
-444.96
157.11
117.47
31.72
265.15
1993
4348.95
4255.30
49.49
-411.29
117.72
102.46
44.23
191.04
1994
5218.10
5126.88
-366.22
53.96
59.10
64.20
280.18
1995
6242.20
6038.04
-327.77
17.42
34.92
83.40
396.19
1996
7407.99
6909.82
-337.40
3.78
11.09
96.04
724.66
1997
8651.14
8234.04
-368.49
103.29
682.30
1998
9875.95
9262.80
-333.49
113.34
833.30
1999
11444.08
10682.58
-290.03
126.10
925.43
2000
13395.23
12581.51
-278.78
147.52
944.98
2001
16386.04
15301.38
-300.04
166.60
1218.10
2002
18903.64
17636.45
-259.60
198.05
1328.74
2003
21715.25
20017.31
-226.38
232.39
1691.93
2004
26396.47
24165.68
-217.93
300.40
2148.32
2005
31649.29
28778.54
-193.26
356.18
2707.83
2006
38760.20
34809.72
-180.22
446.85
3683.85
Note: The state fiscal revenue does not include revenues from domestic and foreign debts.
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Source: Website of National Bureau of Statistics of China (http://www.
stats.gov.cn/tjsj/ndsj/2007/indexch.htm).
Please note that the column for “Revenue from Enterprises” is blank from 1994, but the figure in
the column of “Subsidies to Loss-making Enterprises” is between 10 billion and 30 million every
year.
But in fact, it was in these more than 10 years, especially after 2000, the nominal profit of central
enterprises was significantly improved. See the following figure. The highest nominal profit of
central enterprises amounted to more than 1 trillion yuan a year.
Figure 7.1 Profit of SOEs
Unit: 100 million
18000
16200
16000
13392
14000
11843.5
12000
11000
9047
10000
7368.8
8000
6000
4769
3786
4000
2000
2834 2811
791
1146
214
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Profit of SOEs
Source: Ministry of Finance of the People’s Republic of China.
Note: The data here has a larger caliber than that of the National Bureau of Statistics of China on
“State-owned and Holding Industrial Enterprises”.
It was the huge nominal profit that became important vested interests for managements of central
enterprises, and also an important fact that arouse their awareness as a special interest group. To
date, even after turning in 10% of the nominal profit, SOE managements remain a group that
controls the profit of most SOEs. In contrast, real owners of SOEs, i.e. the whole people and their
agent - the government- fail to effectively exercise the due rights of owners to directly distribute
the nominal profit.
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II. Institutional Status of SOEs in Early 1990s
Since the 1980’s, SOE reform has undergone several phrases, including power decentralization
and profit transfer, contract system, substitution of tax payment for profit delivery,
demutualization and modern enterprise system. Although most measures were transitional, they
left a mark in subsequent enterprise systems of SOEs.
In 1993, China unveiled the Company Law, in which a chapter was dedicated to wholly
state-owned companies. After this, many SOEs carried out corporate reform according to the
Company Law to become wholly state-owned companies. Some SOEs carried out property
diversification to be limited liability companies with many shareholders, and some were
reorganized into stock limited companies that went public.
However, under the shell of companies, SOEs still retained many legacy characteristics and
remnants of reform. Firstly, soft budget constraint still existed. This was quite obvious after 1994.
In more than 10 years, SOEs did not turn in any profit. Instead, the government covered 20-30
billion yuan of losses for them every year. See Table 7.2. Between 2005 and 2008, while China
Petroleum & Chemical Corporation made 174.6 billion yuan of net profit, it still successfully got
72.7 billion yuan of government subsidies. From 2007 and 2009, China National Petroleum
Corporation made a total of 379 billion yuan of net profits, it received a total of 19.2 billion yuan
of government subsidies and 17.5 billion yuan of tax rebates (See “Chapter 3 Current Performance
of SOEs: Efficiency” for details).
Secondly, after a series of reform, too strict control over SOEs was basically solved. However,
insider control emerged, i.e. SOE managements entrenching too much on the interests of owners.
This was proved by the afore-mentioned regulation of the State Council that SOEs were
temporarily not required to turn in their profits. This regulation pushed the logic of power
decentralization and profit transfer to the extreme. Nevertheless, it went against the original
intention of power decentralization and profit transfer, i.e. to increase the interests of owners at the
same time. Another extreme example was the Opinions on Deepening the Reform of Personnel,
Labor and Allocation Systems inside State-owned Enterprises (Guo Jing Mao Qi Gai 〔2001〕No.
230) jointly issued by the then State Economic and Trade Commission, the Ministry of Personnel
and the Ministry of Labor Security in 2001. According to this document, “The employee salary of
an enterprise shall be determined autonomously by the enterprise itself according to local average
salary and economic benefits of the enterprise under the country’s macro control.” This regulation
actually rescinded the upper limit for salary and bonus of SOE employees so that SOE
managements could constantly increase their salaries and bonuses and gradually erode the profit
that belongs to the whole people. This was actually an amplification of insider control, i.e. insider
control by SOE managements as an interest group.
Thirdly, in traditional SOEs, land, minerals and other state-owned natural resources are
acquiescently used free of charge. In the early 1990’s, China had yet to accelerate its urbanization,
Chinese economy was not large enough to significantly impact the supply and demand of natural
resources, and prices of land and natural resources were very low. The market-oriented reform of
these production factors, especially the reform to get SOEs to pay for such resources they use was
not listed on agenda.
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On the other hand, although the concept of land value was gradually recognized, such recognition
was limited to certain circumstances. For instance, according to the Interim Regulations on the
Allocation of Land Use Rights in the Reform of SOEs (State Land Administration, 1998), this
concept was applicable to the management of allocated land use right involved in “the
transformation of SOEs into companies, formation of enterprise groups, shareholding cooperative
reorganization, lease management, merger, consolidation, bankruptcy and other reform.” When no
such changes occurred to SOEs, land was still used for free.
Although a nominal royalty was levied from SOEs for natural resources they used (for instance,
24-30 yuan for each ton of oil), such royalty was much lower than the market rent (In the case of
oil, the mining royalty was about of 10% of the price, i.e. 300-400 yuan per ton). The resource
rent presented much interest space for SOE managements.
In general, in the early 1990’s, the academic community, government and the whole society
seemed to mistakenly think that the SOE reform which only came to the end of stage was
completed, and the existing problems were solved. However, they failed to realize that none of the
intrinsic problem was settled. On the other hand, too much compromise was made to SOE
managements to pull SOEs out of their difficulties and achieve a good effect within a short time
(i.e. “extricate SOEs from difficulties in three years”), and an enterprise system that is balanced in
the long run was not set up.
More than 10 years of SOE reform has shown that the reform oriented to power decentralization
and profit transfer was a failure. This was because SOE managements couldn’t get spurred simply
by “profit transfer”. Instead, they needed to be rewarded according to their actual performance and
punished according to their mistakes. This was just what couldn’t be achieved as the government
which was also an agent managed so many enterprises. For a long time, people thought that SOE
managements were not well mobilized because the profits transferred to them were not enough. In
the end, all the profits were “transferred” to them.
Consequently, in the early 1990’s, the SOE system was actually one in which the principals
almost gave up the control and supervision of SOE managements, providing an institutional
environment for insider control.
III. Interest Group of SOE Managements under Distorted Institutional
Background
Let’s assume that SOE managements consist of managers that pursue maximized personal
interests. In such an institutional environment, their behavior will logically deviate to the direction
most beneficial to them.
As enterprises, SOEs have many means to maximize their profits. In short, there are two major
means, i.e. leverage market competition or use public power to secure laws, measures and
regulatory measures favorable to them. For SOEs, because of the fundamental flaws in their
property right systems and governance structures, they don’t have any advantage in market
competition. Therefore, they are more inclined to using public power.
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It should also be noted that the interests of SOE managements and SOEs differ. If there really are
SOEs that pursue to maximize their own interests, there will also be managements that seek
maximum personal interests which are different from those of SOE owners. In addition to
augmenting the profits of SOEs and making more contribution to SOE owners so as to increase
their personal interests, SOE managements can also increase their own interests by bargaining
with the owners, entrenching on the interests of the owners, securing prices more favorable for
them in the transactions with owners of other essential production factors and other means.
Therefore, SOE managements are actually a group of people that share special interests. These
people are weak at market competition, but good at using public power. Consequently, their
salaries are less allocated by the market, but more determined by the political structure. The
allocation decided by a political process is often a zero-sum game, in which the income of an
interest group increases while the income of another interest group decreases. Therefore, the
conflict of interests between different interest groups in a political structure is more evident and
vehement.
Other interest groups whose interests conflict with SOE managements consist of four parts.: (1)
Competitors of SOEs and consumers of products provided by SOEs, whose interests are directly
harmed by the conflict arising from the market monopoly secured SOE managements with public
power; (2) owners of state-owned natural resources, i.e. the whole people, and owners of
collectively-owned natural resources and production factors, i.e. rural collectives, whose interests
are directly harmed by SOE managements that use public power to take possession of public
natural resources and other production factors without compensation, or get preferably low prices;
(3) owners of SOEs, i.e. the whole people, whose interests are directly harmed by SOE
managements that do not turn in any profit or only turn in a small profit to them; and (4) the
government whose interests are directly harmed by SOE managements that pay less tax.
According to the state nature of China, the government is delegated by the people to carry out
public governance. As a result, interests of the whole people are harmed as SOE managements pay
less tax. Theoretically, owners of SOEs, public natural resources and production factors, and also
the state are all represented by administrative departments. Therefore, the conflict of interests
between the last three parts and SOE managements is shown by the interaction between SOE
managements and administrative departments. However, because administrative departments are
also agents, sometimes they don’t safeguard the interests of the principals.
Since the beginning of the 21st century, prices of land and other natural resources have been rising
significantly as they become rare (See the following three figures). As many central enterprises
monopolize these natural resources, they can gain enormous benefits, arousing the awareness of
SOE managements as a being-for-self interest group.
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Figure 7.2 Land Transaction Price Index) (1999-2009)
200
180
160
140
120
100
80
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Land Transaction Price Index
Source: Website of National Bureau of Statistics of China
Figure 7.3 Coal Price (2000-2007)
600
500
400
300
200
100
0
2000
2001
2002
2003
2004
2005
2006
2007
Price
Source: Monthly Report on Energy Information Exchange between China and Japan, China Coal
Report (Barlow Jonker).
Note: FOB coal price at Qinhuangdao Port.
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Figure 7.4 Crude Oil Price Index (2000 - January of 2010)
7.00
6.00
5.00
4.00
3.00
2.00
1.00
20
00
20 Jan
00
20 -Jul
01
20 Jan
01
20 -Jul
02
20 Jan
02
20 -Jul
03
20 Jan
03
20 -Jul
04
20 Jan
04
20 -Jul
05
20 Jan
05
20 -Jul
06
20 Jan
06
20 -Jul
07
20 Jan
07
20 -Jul
08
20 Jan
08
20 -Jul
09
20 Jan
09
20 -Jul
10
-J
an
0.00
原油价格指数
Crude
Oil Price Index
Source: Website of Energy Information Administration (EIA) (http://www.eia.doe.gov/).
After the promulgation of the Opinions on Deepening the Reform of Personnel, Labor and
Allocation Systems inside State-owned Enterprises, SOE managements are granted the right to
“autonomously determine” the salaries. As a result, they can use the weakness of SOEs in terms of
governance structure to dramatically increase the salaries for themselves and employees. For a
long period, “The boards of directors of state-owned and holding enterprises almost consist of all
insiders. In many SOEs, the board directors and managements are served by the same people,”
said Mr. Zhou Fangsheng, former Deputy Director, Bureau of Enterprise Reform of the
State-owned Assets Supervision and Administration Commission of the State Council (SASAC).
Under such governance structure, it is hard to restrain the impulse of the managements to increase
their salaries and bonuses. For instance, although China National Offshore Oil Corporation
(CNOOC) made “clarification” for the annual income of Mr. Fu Chengyu, chairman of CNOOC,
which amounts to 12 million yuan, saying that “members of the top management have donated the
income approved by the board of directors to the parent company since the first day when the
company went public, ” (Chen Qijue, 2009), an indisputable fact is that Mr. Fu Chengyu is the
chairman of CNOOC, he and three other executive directors whose annual incomes total 339
million yuan have a decisive influence in the board, and no information is available to prove that
the decision on their “nominal remuneration” was made by the board without their involvement8.
The “clarification” made by CNOOC indicates that the management does not understand the real
meaning of criticisms, i.e. whether the remuneration is “nominal”, and regardless of the amount, what’s
the most important is whether the decision-making process is proper. This involves (1) whether members
of top management should receive the money; (2) who decides the purposes of the money; and (3) to
whom the money is donated. “The salary of our employees is too low. So when I received the money, I
donated it to the parent company. There is lying in this. This is my freedom,” said Mr. Fu Chengyu (The
Beijing News, 2009). This proved the problem.
8
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As SOEs don’t pay or only pay a small royalty for state-owned resources, their nominal profits
will increase. Firstly, the nominal reward linked to profits does not properly reflect the efforts of
SOE managements, because royalties of land, oil, coal and other natural resources have been
rising rapidly since 2000, and the rising royalties turned into increasing nominal profits. Secondly,
SOE managements actually entrench on the interests of the whole people, i.e. owners of natural
resource royalties. Therefore, SOE managements pay more attention to bargaining with the whole
people on rent of natural resources. For instance, China National Petroleum Corporation, China
Petroleum & Chemical Corporation and other monopolistic companies pay mineral royalties
against international practices9. After the central government began to collect special gain levy,
they still advocated rising thresholds of special gain levy through various channels.
What’s more, as SOEs were temporarily exempted from turning in their profits from 1994, their
profits were actually allocated by the managements, and the allocation right became the huge
benefits of the managements. Firstly, SOE managements enjoy high duty consumption. According
to a study, the sum of duty consumption of senior SOE executives is about 10 times larger than
their salaries. See Figure 4.7 (Chen Donghua, etc. 2005). As the remuneration of senior SOE
executives keeps rising, the gap between their remuneration and duty consumption will gradually
narrow. Even so, the duty consumption of senior SOE executives is quite astonishing. In addition
to the duty consumption of individual senior SOE executive, there is also the collective duty
consumption of these executives as a group. A typical example is that China Petroleum &
Chemical Corporation said that the chandelier only cost 1.56 million yuan in response to the
accusation that it used a luxury chandelier.
Moreover, the profits are invested in non-core businesses, such as hotels, supermarkets and other
real estate projects. It is reported that the hotel assets of a central enterprise amounts to over 100
billion yuan. Some central enterprises not only deviate from their original industry orientation, but
also ignore the return on such investments. What’s more, some of them make investment to retain
the profits that should be turned in to the whole people or even keep assets resulting from
investment away from supervision. One case in point, Shandong Luneng Group was transformed
from a tertiary industry company under Shandong Electric Power Group Corp. into an enterprise
in which employees hold shares (Li Qiyan, Wang Xiaobing, 2007). This means that the profit
which is not turned in is actually appropriated by the management and employees. This is also
why, against the strong public pressure that SEOs should turn in their profits, the Ministry of
Finance and SASAC only demand that SOEs need to turn in no more than 10% of their profits.
Behind this, we can see the bargaining of SOE managements.
Last but not least, SOEs pay less tax, which means they can keep more after-tax profits.
According to a study on listed companies, between 2007 and 2009, the income tax rate (proportion
of income tax in profit) of listed SOEs was 10% on average, 14 percentage points lower than that
9
It is reported that people from the Assets & Finance Department of China National Petroleum
Corporation (601857) said that “the reform of resource taxes would significantly increase the cost of
enterprises. We reckon that according to the oil price in 2008, if the tax rate is 5%, the resource tax we
pay will increase by 6 times. Under these circumstances, some oilfields may run in the red” and “we
suggest that when unveiling the resource tax reform scheme, the government should cancel special oil
gain levy, mineral resource compensation fees, mining royalty, mining right fee, exploration right fee and
other resource taxes to put in place a reasonable resource tax system which takes the interests of both
central and local governments, and the abilities of enterprises into consideration.” (21st Century Business
Herald, quoted from http://www.jrdao.com, 2010)
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of private companies which was up to 24% (Investor Journal, 2010). As the income tax rate in
China is 25%, it is quite obvious that the income tax rate of listed SOEs results from a lot of
preferential tax reductions and exemptions. Behind this, we can also see the bargaining of SOE
managements.
IV. Identity Exchange between SOE Managers and Government Officials
Before the reform and opening up, SOEs mainly existed in the form of branches or affiliates of
administrative departments. SOE managers were generally managed as government officials, and
SOEs embodied strong administrative characters. In this administrative system, the identity of
SOE managers and government officials was essentially the same, both of whom had certain
administrative rankings, and the administrative rankings of SOE managers corresponded to the
SOEs. Therefore, the identity exchange between SOE managers and government officials was
totally a normal personnel transfer within the CPC and government systems. According to the
requirements of separating the functions of the government from those of the enterprise, SOEs
were transformed into independent corporations, the administrative rankings of SOEs were
gradually rescinded and the identity of SOE managers was separated from that of government
officials. However, the institutional regulation couldn’t eradicate the mixture of functions of the
government and enterprises in reality. Actually, the identity exchange between SOE managers and
government officials is carried out in new forms, and such exchange reflects different interest
mechanisms.
Originally, SOE managers and government officials belonged to the same administrative hierarchy.
Although the reform severs the existing government-enterprise relationships to a great extent, the
“business guidance” relation between competent authorities and SOEs still exists in an
indistinguishable manner. In particular, the interpersonal relations formed before the reform
cannot be dismantled easily. It is because SOE managers and government officials virtually belong
to the same group and promotion hierarchy, share the same target interests that the identity
exchange and cross appointment between them is not surprising. A resume survey of officials of
ministries and commissions under the State Council shows that among 183 officials above vice
ministerial level of 19 ministries and commissions, 56 people have working experiences in SOEs,
the proportion of which is as high as 30.6%. For instance, over half of the officials at the
ministerial level with the Ministry of Industry and Information Technology used to work at
management posts in SOEs. Nearly half of the officials at the ministerial level with the Ministry of
Commerce used to work as managers in SOEs, and nearly 40% of the officials at the ministerial
level with the Ministry of Transport have management background in SOEs.
On the other hand, a large number of SOE managers have government working background. A
resume survey of senior executives of 123 central enterprises shows that 115 senior executives of
47 enterprises that disclose such information have government work background, that is, each
enterprise has an average of 2.45 people with such background. For instance, 7 of the 9 senior
executives of China Guodian Corporation, 8 of the 14 directors of China National Petroleum
Corporation, 7 of the 15 directors of China Petroleum & Chemical Corporation, and 7 of the 14
directors of China Mobile Limited used to work in the government. According to a recent study,
“1,142 senior executives of SOEs that went public in Share-A market used to be government
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officials, accounting for nearly 50% of the total” (Zhou Jun, 2010).
V. “In-house Lobbying” by SOE Managements
The core of SOE managements using public power to expand their interests is to secure the
support of public power. In fact, “to use public power” is a method that any rational enterprise
management would use. As long as the political structure of a society is sound, under the legal
framework, the management of an enterprise can seek the support of public power through a
proper procedure. For instance, in U.S. it is legal for companies to lobby at the Congress which
can legitimately adopt a bill through a proper procedure, although the bill may benefit a company
or some companies.
Of course, there is much criticism in U.S. on the lobbying by interest groups. As pointed out by
Mancur Olson, because the interests of an interest group are only a small fraction of the whole
society’s interests, the bill that an interest group secures by lobbying, which is beneficial to the
interest group, may harm the interests of the whole society. However, it is after all a problem
under the existing US constitutional framework, and the practice itself is not illegal. Therefore,
what needs to be improved is the US constitutional framework.
But in China, due to the different political structure, enterprises seek the support of public power
in a different way. In reference to the expression “lobbying”, we call similar activity in China
“in-house lobbying”. That is to say, SOE managements only need to lobby related administrative
departments instead of the legislature. Because administrative departments are less transparent
than the legislature, and there are special relations between SOE managements and government
officials, it is called “in-house lobbying”.
That the SOE managements can carry out “in-house lobbying” with great success is related to the
identity exchange between SOE managers and government officials. Firstly, SOE managements
and government officials are quite close to each other. Some of them even used to be colleagues,
superiors and subordinates. As a result, it is very easy for them to conspire. Secondly, as
government officials are likely to work in SOEs at an uncertain time in the future, they are quite
willing to provide more preferential policies for SOEs. This would compromise the justice of
policies. In fact, as the administrative promotion hierarchy gets increasingly narrow, SOEs would
be good places to arrange most officials that can’t go further up the hierarchy. The high salaries
and bonuses provided by SOEs can compensate the upward immobility.
The system of cross appointment and identity exchange results in acquaintance between SOE
managers and government officials, which makes it possible for SOE managers to lobby
government officials and SOE managements to conspire with administrative departments.
Although as outsiders, we can hardly know how they reach conspiracy, we can deduce that such
conspiracy does exist. According to some analysis, the consolidated business tax rate of all SOEs
listed in Share-A market except for central enterprises, in which more than three former
government officials serve as senior executives, is only 2.5% in the past three years, much lower
than the average of companies listed in Share-A market which is up to 3.2%.” (Zhou Jun, 2010).
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VI. Constitutional Defects of Government Departments in China: “Department
Legislation”
In a society that has a sound constitutional framework, to secure industrial monopoly or
preferential conditions when bargaining with resource owners, assets owners and the state, the
management of a company needs to lobby the legislative branch and get legislations adopted. But
in China, there are some severe constitutional defects in the actual legislation procedure.
For a long time, there has been a defect in China that administrative departments struggle for
power. Qian Zhengying, former minister of Water Resources once casually mentioned that they
gave up the fundamental principles for departmental power10. In recent years, due to the lack of
constitutional constraints on the behavior of administrative departments, departmental interests get
more conspicuous. As a result, the struggle for departmental power becomes increasingly obvious,
as is evidenced by more and more “department legislation” (Yang Fan, 2010, pages 261-262).
Firstly, administrative departments nominally have the power to make implementation rules and
policies for laws, and also the power to issue the so-called administrative suggestions. However,
although the Law on Legislation specifies the scope of legislation, due to the lack of detailed
definitions, rules, policies and suggestions made by administrative departments often go beyond
the scope prescribed by the law to basic systems. For instance, according to Article 8 of the Law
on Legislation, “fundamental economic system and basic fiscal, tax, customs, financial and
foreign trade systems” are within the scope of legislation. The power to award the right to
monopolize important industries, grant the right to exploit natural resources at a price lower than
the market price, remit land rent against market rules, reduce or remit the profits turned in by
SOEs, reduce or remit the taxes paid by SOEs, allow SOEs to decide the remuneration of
managers and employees while reducing the profits they turn in is subject to modification of the
basic economic system, i.e. fundamental principles of market system. But it is prescribed in
regulations, policies and suggestions of much lower legal force made by administrative
departments that overstep their power.
For instance, the Opinions on Rectifying Small Refineries and Regulating the Circulation Order of
Crude Oil and Refined Petroleum Products (1993, No. 38 Document), which granted China
National Petroleum Corporation, China Petroleum & Chemical Corporation and CNOOC the
monopoly power, was only an administrative document jointly made by the General Office of the
State Council and several other ministries and commissions. The Decision on Implementing a
Tax-sharing System which exempted SOEs the obligations to turn in their profits was only an
administrative decision of the State Council. The Opinions on Deepening the Reform of Personnel,
Labor and Allocation Systems inside State-owned Enterprises (2001) which granted SOE
managements the power to “independently decide” their salaries was only a document of the State
Economic and Trade Commission.
Even when related departmental or industrial laws are made, they are normally drafted by related
administrative departments which may add provisions beneficial to them or relevant enterprises.
Qian Zhengying: “Honestly speaking, we had some selfish calculations. At that time, hydraulic power
and water resources were separately governed by the Ministry of Power Industry and the Ministry of
Water Resources. As the Sanmenxia Project was about to start, to struggle for the leadership of this
project with the Ministry of Power Industry, we changed our stance to support the project.” (1999)
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When such drafts are examined by the National People’s Congress or the Standing Committee of
the National People’s Congress, because the deputies aren’t representative of different interest
groups (such as consumers or competitors) and lack related professional knowledge, some laws
that are defective or partial to administrative departments or some SOEs are adopted. For instance,
the Tobacco Monopoly Law which officially became effective in 1992 stipulated that the tobacco
industry should be monopolized by the government in order to increase fiscal revenue. However,
it turned out that taxes paid by tobacco enterprises only accounted for about 40% of their profits,
much lower than the tax rate which is up to 75% in countries that do not adopt tobacco monopoly
(See “Sub report 4: Evolution of Policies on SOEs“ for details). Also, according to Article 55 of
the Postal Law, “No express delivery enterprise shall provide the correspondence delivery service
which shall be exclusively provided by postal enterprises or deliver the official documents of state
organs.” This directly excludes competition.
After a law is officially promulgated, its implementation rules are normally made by related
administrative departments. During this process, some articles partial to SOEs may be added. In
the revision draft of the Postal Law, there was a provision, i.e. “urban express services for parcels
less than 50 grams and inland express services for parcels less than 100 grams shall be exclusively
provided by postal enterprises.” It was because of strong objection that this provision was
canceled from the final revision. However, this provision is very likely to be adopted in relevant
regulations in the future.
In China, because the constitution is non-actionable, it is unenforceable. In legal systems, the more
general a law is, the more unenforceable it gets. Administrative departments can, for the sake of
their own interests, selectively enforce some laws, regulations or policies. As a result, some
low-level laws are more authoritative than high-level laws. Consequently, department laws are
more enforceable than high-level laws. Such enforcement capability of administrative departments
leads to more comprehensive and complete “department legislation” power. This is the
constitutional reason why SOE managements can use public power to boost “Guo Jin".
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Chapter 8 Nature of SOEs: Perspective of Economics
I. Nature of Enterprises
An enterprise is in nature, as pointed by Professor Ronald H. Coase, an alternative to the market
system. Its function is to organize and allocate resources for productive activities. In market
practice, people negotiate on an equal basis and reach agreements at their will to transfer and
allocate resources between different people for productive activities. But within an enterprise, the
interpersonal and inter-purpose resource allocation activities are replaced by the command and
obedience relations between managers and workers.
In a broader view, Coase’s definition of the nature of an enterprise has another meaning, i.e.
enterprises are only alternatives to market systems rather than government systems. But generally
speaking, market is an effective system for resource allocation in the area of private goods while
government is one for resource allocation in the area of public goods. Therefore, the enterprise is
another effective system different from market for resource allocation in the area of private goods.
From the categorization of areas of private goods and public goods, in each area, there can be
several systems that can effectively allocate the resources, such as the market, enterprises and
families in the area of private goods, governments, religions, NGOs and ancestral shrines in the
area of public goods. Therefore, the broader boundary of enterprises shall not go beyond the area
of private goods.
The boundary between enterprises and the market, or the size boundaries of enterprises, as put by
Professor Ronald H. Coase is exactly located where the marginal costs of market transactions are
equal to those of inner-enterprise management and transactions.
II. Nature of State
The state is a political system which contains spatial and temporal dimensions. In spatial
dimension, the state refers to a group of people and a territory where they inhabit. In temporal
dimension, it refers to the trans-individual social body that is formed by the successions of
generations. It not only includes the succession of blood, but also the succession of history, culture
and traditions. No matter how these people form a society, they are the main source of state power.
Particularly, in modern times, the concept of popular sovereignty is accepted by almost all
countries in the world.
In the society formed by succession of generations, there must be an area of public goods which
needs to be provided through a government system. The government system refers to a system
which collects some resources from social output in the form of mandatory taxes, and provides
public goods in a legislative, judicial and administrative manner. Some of the public goods need to
be provided in the form of violence, such as defense, public security, and execution of court
decisions.
The government is different from the state. The state is comprehensive, trans-generation and
conceptual. In contrast, the government is a concrete system through which the state carries out
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governance in the public area. The concept of popular sovereignty indicates that the government is
an agent of the state, and also an agent of the people.
As a trans-generation system, the state mainly provides public services for society. For its part, the
government is mainly engaged in the area of public goods.
III. Nature of SOEs
If we accept the aforementioned concepts of enterprise and state, we may feel that the concept of
“SOE” is a strange combination. On the one hand, the word “enterprise” requires that it should be
engaged in the area of private goods. On the other hand, the word” state” requires that it should be
engaged in the area of public goods. This gives rise to two questions. The first is whether a society
needs SOEs, and the second is if it does, how SOEs can reconcile the different natures of
enterprise and state to form a system of internal rationality.
Firstly, there is no either-or border between the areas of private goods and public goods. Instead,
there is a transitional zone in which there are private goods for which the market does not work,
including (1) private goods of monopoly nature, such as public utilities, tap water and pipeline gas.
Due to their inherent nature of monopoly, the market pricing system does not work, and no
competition mechanism is present; (2) private goods which reports very low price elasticity and
are necessary for people’s daily life. The fluctuation of supply will result in dramatic in price
changes, and in some cases panic, such as the two oil crisis; (3) private goods which, due to
emergency or geographic monopoly, plunge the demand into a very unfavorable position, cause
the malfunction of market pricing mechanisms, such as emergency treatment services for
critically-ill patients.
Secondly, there are private goods that are of some public nature and public goods of some private
nature, including (1) public goods which are of low public nature, such as public goods with a
small coverage like roads in villages and public facilities in communities; (2) goods that are of
both public and private nature, such as reservoirs which can serve the purposes of irrigation
(private goods) and flood protection (public goods); (3) goods which are of public to some people
and private to others, such as primary education. For families which can afford it, it is actually
private goods. But for families which can’t afford it, to make sure that all the children in society
start equally, compulsory education is required. In this case, it is public goods; (4) goods which
individuals or enterprises are unwilling to undertake as the risk is intolerable to them. At this time,
such goods are of some public nature; (5) goods which are not really valuable from the perspective
of limited lifespan of people (positive discount rate), but very valuable from a trans-generation
perspective (zero discount rate). In the former case, they are private goods, but in the latter case,
they are public goods. There is a transitional zone between them.
Due to the presence of such a transitional zone, it is not appropriate to simply adopt an
“enterprise” system or “government” system. Instead, different combinations of the two systems
should be applied. Such combinations include (1) enterprises that carry out joint sales or
expansion 11 ; (2) enterprises with government regulation; (3) non-governmental non-profit
11
The so-called “enterprises that carry out joint sales or expansion” means that the public goods or adjacent
private goods are bound so that a single enterprise can produce or provide them. The provision of such public
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organizations; (4) enterprises that receive government subsidies for production; (5) enterprises that
receive orders from the government for production; (6) SOEs. For most cases in the
afore-mentioned transitional zone, the first five combinations can be applied. For instance, Hong
Kong MTR Corporation combined the development of metro systems and surrounding land. The
U.S. government regulated the oil price during the oil crisis. In Western countries, the church runs
some non-profit hospitals and churches. TCM traditionally adopts a discriminative pricing system
for people that fall in different income groups. The ancestral shrines of some clans provide study
conditions for children in the clans, including hiring teachers with the clan resources. The Thai
government regulates the prices of emergency treatment services in hospitals. The U.S.
government purchases military goods from enterprises. The government issues education tickets to
low-income families which can choose the schools. The government invites bids from enterprises
for monopolistic right of public utilities and the bid-winning enterprises need to operate under the
government supervision. The Administrative Committee of Zhongguancun Science and
Technology Park provides subsidies and co-investments for venture capital firms. There are very
few cases in which the “SOE” can be applied.
For even purely public goods, the government can first raise funds and then procure the
goods from enterprises. For instance, Arizona even invites bids for the operation of its
jails. A complete chain of economic activities include financing, production, transaction
and consumption. As long as the financing and production of public goods can be
separated, there is no need to establish SOEs. Therefore, the precondition for SOEs is
that the financing and production stages can’t be separated to provide public goods.
That the two stages can’t be separated means that the financiers can’t simply buy the
products. Instead, they need to buy the factors of production for the products and their
combinations, i.e. enterprises.
In the first case, because production technology or management information is peculiar, for
instance, it contains secrets that the buyer deems shall not be disclosed, the buyer will directly
control the production process. That is to say, the buyer will vertically integrate the producer to
become an enterprise.
In the second case, the purchaser of public goods is the only buyer. To produce the goods, the
producer must invest a considerable amount of equipment and human resources. Once the
purchaser cancels the order, these special assets will depreciate significantly. In this case, both the
buyer and the seller may take advantage of this special condition to put pressure on each other,
which leads to unstable contracts. According to Oliver Williamson, in this case, the problem can
be solved through vertical integration, i.e. integration of property rights.
Of course, in both cases, the integration of the buyer and the seller into an enterprise is not the
only solution. In the first case, the technical or managerial secret that the government purchaser
wants to control is limited to a small part. Therefore, it is not necessary to merge a large enterprise.
Instead, the government purchaser only needs to directly supervise the workshop at certain
production stages. In the second case, the purchaser can invest in valuable equipment, and the
goods will cause the appreciation of adjacent goods so that the enterprise can benefit from providing public
goods. For instance, if a company responsible for keeping a section of a river clean builds a residential community
near the river, the clean river will result in rising prices of real estate in the community.
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producer can pay the variable costs. Or both parties can sign a long-term supply contract, such as
the contract between U.S. military and enterprises.
IV. Boundary of SOEs
According to the above section, SOEs are defined to be within the so-called “transitional zone”
between the areas of public goods and private goods. However, in this area, there are other
solutions, which should have precedence over the form of SOEs. Therefore, in this area, SOEs are
applicable to a very small scope.
V. Constitutional Relations between SOEs and the Government
To sum up, SOEs and the government should share common public goals, and they only come in
different forms and have different responsibilities. If not so, when SOEs enter the area of market
transactions, including the area of competitive government procurement, or even the area of
private goods, they will compete with other enterprises in the market. At this time, when the
government acts as the agent of the state to exercise owner rights, it will strive to maximize the
profits of SOEs. The profits of SOEs are affected by not only the competitiveness of SOEs, but
also relevant systems, policies and regulations that are formulated by the government.
Once so, as the provider of public goods, the government will conflict with its identify of SOE
agent. What are the most important for so-called “public goods” include the protection of property
rights, maintenance of market order and fair judgment. If the public power is used to maximize the
profits of SOEs, it is impossible for other market subjects to be treated equal, and the government
will be hindered from providing just and effective public goods. Moreover, the property rights will
be infringed, market order destroyed, and one party will be favored in the judicial process. This
will fundamentally overturn the public nature of the government and derail government behavior
from its original purposes.
Therefore, that “the government should not compete for the gains with the people” and that “in a
state, pecuniary gain is not to be considered to be prosperity, but its prosperity will be found in
righteousness” should be the constitutional principles to define the government (Sheng Hong,
2010). That is to say, the government and SOEs it sets up should not be engaged in for-profit
sectors to ensure their fairness when providing public goods. The legitimate and normal source of
government revenues should be taxes it levies on condition that it provides public goods.
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Chapter 9 Nature of SOEs: Perspective of Law Science
SOE reform is one of the main parts of China’s reform. In the past three decades since the 1978
when China launched the reform drive, a series of exploration and practices have been made for
SOE reform, including power decentralization and profit transfer, contract system, substitution of
tax payment for profit delivery, demutualization and modern enterprise system. We may find that
all these measures are characterized by the separation of government functions from enterprise
management and enhancement of entrepreneurial autonomy. The ultimate goal is to build SOEs
into independent market subjects with corporate capacity. Particularly since mid 1990’s, the
separation of government functions from enterprise management and clarification of property
rights at the macro level, and corporatization and demutualization at the micro level have pushed
the market-oriented and corporation-oriented reform of SOEs to a new height.
There is no denial that such reform measures were positive in certain conditions and contexts.
Nevertheless, although the trial and error empirical approach is undoubtedly important, we can’t
thereby deny the super-organic rational construction. Fundamentally, the reform of SOEs first
needs to answer a fundamental question: what should SOEs be and should not be. Only when this
question is properly answered can we find a way out for SOE reform.
At present, a critical task for China’s reform is to transcend the previous reform on the basis of the
previous SOE reform for a “second revolution” of SOEs. In this “revolution”, to properly define
the nature and position of SOEs is obviously a priority.
I. SOEs as Special Public Institutions
Superficially, SOEs share many common characteristics with regular enterprises. But compared
with regular administrative organs, SOEs are closer to enterprises. This is also why many people
regard SOEs as normal market subjects. However, SOEs should never thereby be taken as regular
enterprises.
1. Characteristics distinguishing SOEs from regular governmental organizations
In the sense of form, SOEs refer to joint ventures or organizations wholly funded, controlled or
dominated by the state. Indeed, only in the sense of form and name, SOEs have many common
characteristics with regular enterprises, and can be categorized into enterprises or economic
organizations, or have the characteristics of enterprises to a large extent, and first of all seem to be
some economic organizations. Specifically, they have the following characteristics:
(1) They differ from regular government organizations in terms of organizational structure. SOEs
normally have organizations similar to the board of directors in enterprises and are relatively
independent;
(2) They are more flexible than regular administrative departments in personnel and finance.
Particularly, the budget of government organizations is strictly controlled in constitutional
democracies. But SOEs are not subject to strict financial systems as regular administrative
organizations:
A. The budget of regular administrative organizations is usually approved by the congress. Unless
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otherwise authorized by the congress, the annual surplus can’t be transferred to the next year.
Instead, it must be turned in to the treasury. The budget of SOEs is determined in a different way.
For instance, the U.S. congress does not approve the budget for federal government companies on
a yearly basis. Instead, it approves the budget for a long time to come. For example, it approves a
15-year budget for the U.S. Postal Service. For a company running in the red, such a long-term
budget system gives the room for the company to carry back its losses.
B. The budget of a government company is more flexible. The congress only examines the overall
plan, and does not examine the specific budget items as it does for the budget of administrative
organizations. The budget of a government company only needs to specify the financial standing
of the company, income, expenses, source and use of expenses, estimated budgets of large
activities, amount that should be paid for the investment of the treasury, and other supplementary
notes on the financial standing and activity of the company. The reason is that it is very difficult, if
not impossible, to predict the expenses of government commercial plans for up to two years in the
future, and this is required by regular budget method.
(3) SOEs are more engaged in civil and commercial activities, and subject to private laws. They
can possess and dispose of assets, execute contracts and institute proceedings in their own names
rather than in the name of the government. In this sense, SOEs are similar to private companies,
and more flexible than regular administrative organizations. (Corporate capacity should be further
discussed)
(4) They possess, control and manage more assets than regular administrative organizations, and
are generally profit-making. Compared with regular administrative organizations, SOEs possess
more assets, especially operational assets. Most SOEs rely less on funds allocated by the congress,
but more on government procurements, lending, fees or revenues from the services they provide,
or other means by which they can get financially independent.
2. Why are SOEs not regular enterprises?
The typical form of administrative organizations is bureaucracy, but this is not the unique form. It
is quite normal that different administrative organizations adopt different structures. Essentially,
the structure decides the functions. What structure and operational mode a public institution
adopts depends on the nature of public functions it assumes. This is an issue concerning
management science and utility analysis. For instance, although independent regulatory agencies
were first denounced for violating the principle of separation of powers and the principle of
responsible government, they still existed and developed. The reason is that the public
responsibilities they assumed required professional knowledge and expertise. Based on the
concept and need of autonomy, public universities are more autonomous.
Similarly, SOEs adopt the form of companies rather than regular government organizations
because the relative independence in organizational structure and relative flexibility in operation
aim to better fulfill public functions. That is to say, when fulfilling tasks that are of corporate
nature, the traditional form of administrative organizations is no longer applicable. Instead, greater
flexibility is required for higher efficiency. Therefore, the organization of private companies is
used as the reference for SOEs.
Also, the public nature of SOEs can’t be denied because they take part in civil activities. Even the
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most typical administrative organizations that use coercive power the most frequently need to take
part in pure civil activities. Moreover, some large administrative organizations possess and
manage considerate assets. In addition, regular administrative organizations can benefit from the
fulfillment of official duties, such as fines, charges and income from asset auctions. In particular,
some regular administrative organizations charge some service fees for specific administrative
services they provide, although the charge items may take up a tiny fraction of their duties.
However, we cannot, for this reason, take administrative organizations as private and independent
market subjects. Instead, they are first public institutions which are bound by relevant public laws.
3. Relative differences between SOEs and regular government organizations
To sum up, SOEs are not diametrically different from other government organizations. Instead,
they are relatively different but fundamentally coherent. Government organizations of different
types are not so distinguished from each other. In addition, since the 1980’s, the New Public
Management movement has become trendy in the world. According to the New Public
Management theory, public and private sectors have no essential differences in management. The
management strategies of private sectors are also applicable to public sectors. This makes it more
difficult to distinguish diametrically different government organizations, especially regular
administrative organizations from SOEs.
This explains why in Western countries, SOEs have many names, and there is no way to
accurately define them and completely differentiate them from regular administrative
organizations. For instance, Tennessee Valley Authority (TVA) which claims to be the largest
government company in U.S., Federal Deposit Insurance Corporation (FDIC), and the famous
inter-state government enterprise Port Authority of New York and New Jersey (PANYNJ) are
superficially more like traditional administrative organizations.
4. In what circumstances should SOEs to be established?
This is a fundamental question concerning SOE reform. However, although nearly all the people
of vision that are concerned about SOE reform have racked their brains for it, they have not
reached any more specific and practical consensus. In the broadest sense, SOES are established to
directly boost and safeguard public interests. But this means almost nothing, because all the public
agencies are established for the same purpose. Moreover, public interest is a very vague concept,
which is subject to different times, regions and specific conditions. Furthermore, fundamentally, it
is in practice very difficult to accurately define in what circumstances SOEs need to be established.
The reason is very simple. The circumstances in which SOES must be established to protect some
public interests should first undergo a public selection process to decide whether they should be
implemented by the government and in what form they should be – SOEs or other forms. To put it
simple, this first depends on a democratic process. That is why democratic countries must have
relevant legislations for the establishment of SOEs and can’t go their own ways.
Of course, this does not mean that it is meaningless to discuss the scope of SOEs. It’s just that the
criterion to judge whether SOEs should be establish is a relative, vague and subjective criterion.
But this criterion is still realistically significant in countries where people are unable to freely
express their opinions.
As to in what circumstances enterprises rather than traditional administrative organizations should
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be established, there is no clear definition. Notably, the four fundamental principles outlined by
President Truman in his 1949 budget message to adopt the corporate form for the administration
of governmental programs merit reference: (1) the governmental programs are predominantly of a
commercial character; (2) such programs are revenue producing and are at least potentially
self-sustaining; (3) they involve a large number of business-type transactions with the public; and
(4) in their business operations such programs require greater flexibility than the customary type
of appropriation budget ordinarily permits. (Quoted from Wang Mingyang, 1995, Page 188)
II. Normative Significance of SOEs as Special Public Institutions
In sum, SOEs are virtually the extension of the government. The nature and functions of the state
decide the nature and functions of SOEs. Modern states are essentially organizations that
implement public functions. SOEs are only one of the many government forms that facilitate the
implementation of public functions. They only adopt an organization similar to enterprises. They
must implement public functions rather than seek profits in the first place, because profits can be
contributed by the private sector. The word enterprise has many other definitions than a
profit-seeking economic organization. This is also why in other Chinese-speaking
countries/regions, such as Taiwan SOEs are called state-run “undertakings” and in Hong Kong
SOEs are called public-run “organizations”. In addition, government functions don’t have to be
fulfilled by bureaucratic organizations or in a traditional way of public power characterized by
coercion and obedience. The relation does not have to public law relation.
In a word, we would rather essentially take SOEs as a special form of administrative organizations.
They are just public agencies in the corporate form different from regular government
organizations, which are established to facilitate the implementation of public function of
safeguarding necessary and important public interests (Lebron v., 1995)
Moreover, some Japanese scholars have made a thorough and insightful summary about the public
attribute of SOEs as follows: (1) public ownership, i.e. owned by the government; (1) public
subject, i.e. all the ultimate subjects are nationals; (3) public purpose, i.e. substantive improvement
in the life structure and economic welfare of nationals; (4) public use, i.e. provision of public
utilities; and (5) public regulation, i.e. public regulation on condition of national participation.
According to the above discussion, the following deductions can be made:
1. Purpose legitimacy and proportionality principle of establishing SOEs
From the perspective of purpose legitimacy, the only justifiable purpose of SOEs is to maintain
and enhance major public interests. Moreover, public interests are the primary, direct and
fundamental rather than secondary, indirect and collateral purpose of establishing an SOE. The
profit of SOEs is only legitimate when SOEs lower their costs and improve their performance
within the legal framework. Therefore, all the SOEs whose direct and primary purpose is profit
rather than public interests should be dismantled. In addition, from another perspective, the
establishment of SOEs should not be affected no matter whether they make profits or suffer losses
as long as they are indispensable for maintaining and enhancing public interests.
From the perspective of proportionality principle, there are two principles. Firstly, SOEs are
necessary. To provide public goods, we don’t necessarily have to establish SOEs. Instead, SOEs
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should only be adopted as a possible alternative when private enterprises and the market
mechanism can’t address the problems. And SOEs are only a possible alternative, because even if
the problems can’t be solely solved by enterprises, there may be many other possible solutions,
such as private enterprises with government regulation, NGOs with government subsidies and
private donations, or government procurement thorough administrative contracts. In a word, the
establishment of SOEs is an absolutely necessary means to maintain and enhance major public
interests. Secondly, we should consider whether the cost of establishing SOEs is proportionate to
the public interests that may be realized by SOEs.
2. Regulation on establishing and dissolving SOEs
SOES can only be established by the congress through legislation rather than by administrative
organizations or SOEs themselves. Only the congress can directly or explicitly authorize the
dissolution of SOEs. Once dissolved, the assets of SOEs should be arranged according to strict
congress approval procedure rather than decisions of the managements who distribute the assets
among themselves. The general and large-scale withdrawal of SOEs and asset distribution should
even be decided through national referendum. Whether the assets should be turned in to the
treasury or equally distributed among the whole people is an issue at another level.
3. Regulation on activity scope
Government companies must carry out their businesses in strict conformance with laws and
regulations. Although they adopt a corporate form, they can never choose their own line of
businesses at will like private companies. Instead, they must act within the scope prescribed by
law like regular administrative organizations. Each SOE should be established according to
legislation and the public interests it needs to realize should be defined. As result, each SOE has
its own business scope. In addition, the funds of SOEs are public funds (shareholding companies
are different stories, in which the public holds shares), which should never be used at will,
especially when the purpose is irrelevant to the statutory business scope, because this may greatly
impact people’s property rights and freedom of operation. Therefore, the principle of law
reservation should be observed.
4. Regulation on organizational structure and personnel
First of all, the organizational structure of SOEs should be subject to legislation and never be
determined at will.
Secondly, even if SOES adopt a corporate structure, their key personnel are public employees who
are subject to the civil service law. In this sense, cross appointment between SOEs and
administrative organizations is not prohibited. For instance, the appointment and dismissal of SOE
employees should be carried out in accordance with the civil service law. The remuneration of
SOE employees except for professional managers that are engaged, must be controlled by the
congress through legislation. But the engaged professional managers should not enjoy the benefits
of civil servants. Moreover, the illegal behavior of SOE employees should be punished according
to regulations of regular administrative organizations on civil servants.
5. Regulation on finance of SOEs: subject to public financial systems rather than responsible
for their own profits and losses
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Firstly, although the budget of and grants to SOEs are more flexible than those of regular
administrative organizations, they are still subject to public financial systems.
Secondly, the profits of SOEs must be turned in to the treasury12, and the legal and normal losses
should be covered by public finance. Therefore, SOEs can’t be responsible for their own profits
and losses. Of course, under the stringent regulation of legislations, operating revenues of
government enterprises can be directly invested in business operations, used to pay for the
expenses or expand the enterprise size, but this should be subject to budgetary and auditing
supervision (U.S.). Nevertheless, the revenues should not be distributed at discretion. In addition,
SOEs do not have to pay taxes and rents. Nowadays, SOEs in China need to pay taxes and some
resource rents, but can distribute their profits and proceeds at discretion.
6. Restricted to basic rights in constitution, and unable to operate and complete freely like
private companies
The private economic administration of SOEs is essentially within the scope of public
administration. The constitution imposes to public agencies the obligation to respect the basis civil
rights and treat all citizens equal, and such obligation does not change fundamentally with the way
that SOEs behave. Once the private law behavior of public agencies does not comply with the
constitutional obligations, public agencies should first fulfill their constitutional obligations.
(Lebron v., 1995)
III. Strategic Significance of Reaffirming the Public Nature of SOEs to China’s
SOE Reform
As SOEs are more like regular enterprises and adopt a flexible corporate form, people often see
their private law attributes, stress their status of autonomous and independent market subjects, but
ignore their public law attributes and due public law restraints they should be subject to. This will
cause SOEs to dissimilate into interest groups which authorize, reproduce and propagate by
themselves, and seek gains for themselves, which in turn will harm the public welfare. Even under
the mature framework of constitutional democracy in some countries, such lessons are not rare.
The famous catchphrase in German laws, i.e. Flucht in das Privatrecht or Flucht in die öffentlichte
Stiftung, describes such a phenomenon and malpractice: Only the private law attributes and status
of independent legal entities are stressed for SOEs and other private economic administrative
organizations. As a result, SOEs evade and extricate themselves from public law attributes and due
restraints they should be subject to.
Specifically, this phenomenon results in the negligence of public tasks, waste and loss of public
resources because administrative organizations evade supervision by adopting a corporate form.
Consequently, SOEs including public institutions become a back garden in which officials can
enjoy a life after retirement, hire relatives and even obtain private gains. The financial obligations
shouldered by the public treasury are not relieved much. The strict disciplines, ethical
requirements and severe criminal punishments for civil servants are no longer applicable to the
12
For instance, according to Article 13 of the Law on State-run Undertakings effective in Taiwan, “The surplus of
state-run undertakings in annual balance sheet shall be turned in to the treasury.”
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employees who are legally relieved of the identity of civil servants. If the legislature fails to
supervise them properly, and the political atmosphere for the collusion between government
officials and business people isn’t eliminated, public functions are bound to fail and treasury
resources to be misused.
Furthermore, SOEs shun government budget, accounting, remuneration, personnel, procurement
and other public law regulation they should be subject to by way of private laws, and turn a blind
eye to individuals encroaching on state assets and over-issue of remuneration and benefits. As a
result, public undertakings become syndicated and privatized, which only benefit certain
individuals.
It was in this context that the US enacted the Government Corporation Control Act in 1945, i.e.
the misuse of corporate forms and severe lack of control over fiscal operation. At that time, many
new institutions were established by the government simply for some possible purchase or sale
activities, or in the hope of securing freedom out of regular control, or because they could obtain
the status of corporation more easily in accordance with the company law of different states than
strict Congress legislation, not based on the case that such institutions were public enterprises
managing financial self-supply issues.
Therefore, for China which is a developing country of constitutional democracy, the review of the
nature and orientation of SOEs based on an internal logic of public functions and public law
attributes is quite significant to the secondary reform of SOEs and even the justice of the whole
society. From this logic, we can still see many logics on SOE reform, which are taken for granted,
irrelevant to, and even contradictory to the right reform direction. Here are a few examples:
1. Is independent market subject status necessary the right reform direction?
In China, maybe because people suffered a lot because SOEs lacked necessary autonomy and
flexibility due to the highly centralized and ossified control which covered all matters in the
planned economy system, the general direction of SOE reform is to enhance the autonomy and
flexibility of SOEs, emphasize their status of private corporations, and eventually transform SOEs
into modern enterprises with independent market status. This seems to be a naturally correct and
self-evident direction in a long run, which wins the agreement of the government and the public.
However, the said SOE reform tactic is only positive in a specific context, for instance, power
decentralization and profit transfer was only meaningful at the stage when SOEs dominated the
national economy and their production and operation were completely subject to administrative
orders.
Moreover, facts have proved that such logic may extricate SOEs from necessary public rein so that
they can act at will. In the immature system of modern constitutional democracy in China, the
consequences will naturally become more severe. On the one hand, SOEs emphasize the status of
“the eldest son of the legal wife in a family” to obtain various privileges and preferential treatment
when necessary and possible. On the other hand, they resort to and emphasize their independent
and autonomous status of market subjects to avoid due restraints and responsibilities. As a result,
they become special interest groups which, under the mask of state ownership and public interests,
consume public resources, exploit the public, and have the government and banks cover their
losses and divide the profits within themselves. It is just because of the logic that SOEs are
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independent market subjects that the recruitment is decided by SOEs themselves. This will
become unavoidably unfair for the underprivileged people who have no social connections.
Also, this approach, to some extent, becomes the potential theory basis for SOEs to expand blindly
(such as “Guo Jin Min Tui” in recent years). Because they are independent market subjects, SOEs
are naturally not subject to any restriction on its business scope and can expand at will. This in
turn causes a series of bad consequences. For instance, due to the extremely loose monetary policy,
nearly 10 trillion yuan of bank loans are mostly extended to SOEs. As a result, some monopolistic
enterprises expand abnormally, and even invest in lucrative real estate business which is irrelevant
to their own businesses. When they invest huge in real estate business, the land and property
prices are increased, which in turn causes rapid price rises, posing negative impacts to the national
economy and people’s livelihood. Furthermore, “Guo Jin Min Tui” weakens the private sector and
also the achievements of economic system reform. It expands the space of monopoly, squeezes
free competition space in market and weakens the role of market system, which undoubtedly
poses potential hazards to the national economy.
It is true that SOEs should be more independent and autonomous than regular administrative
institutions. However, such independence and autonomy should first be built on the precondition
that they are subject to due public law regulation. As set forth, such logic ignores and obliterates
the primary and fundamental public nature of SOEs. It improved the efficiency of SOEs at certain
stages in history. Nevertheless, it also provided a powerful excuse for the “Flucht in das
Privatrecht “of public power to avoid responsibilities, public law and principle regulation. This
logic is most directly responsible for various anomies of SOEs in China, and becomes the
fundamental basis of other mistaken conceptions. Therefore, it is the most dangerous logic for the
reform of SOEs in China.
2. Must government functions be separated from enterprise management?
To separate government functions from enterprise management is one of the mainstream
discourses for SOE reform in China. The positive significance can’t be denied, especially in China.
But in fact, how SOEs that are special public function institutions can be completely separated
from the government (administrative functions)? In other words, to separate government functions
from enterprise management, SOEs don’t have to have corporate capacity. Instead, they can
become subordinates of regular administrative institutions which bear the corresponding public
law and private law obligations. What’s more, under some circumstances, the combination of
government functions and enterprise management is needed. For instance, the U.S. Postal Service
was transformed from the former Post Office Department. Tennessee Valley Authority, the largest
government enterprise in the U.S., not only covers production and operation, but also the
administration of activities in the valley. This can save public resources and enhance the sense of
responsibility of SOE regulators.
The good intention of separating government functions from enterprise management is that in
competitive areas, the separation may give subjects of other ownerships the same market status
and competition opportunities. But facts have proved that this approach may be an expedient
measure, whose role is quite limited. Because under such circumstance, regulators and SOEs they
regulate are originally within the same family. For instance, in the areas of postal service and
telecom, although regulators and SOEs are separated, they are still closely interrelated. In addition,
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even when this factor is ignored, it is easy for them to form an alliance as they are both public
institutions. Consequently, non-SOEs can’t get an equal status and fair competition opportunities.
The problem is that in competitive areas, there should be no SOEs.
3. Angle of property (assets) or public functions
The discussion of SOE reform from the private law angle of property (assets) is another hot spot.
The constructive significance of arguing SOE reform from the angle of state-owned property
(assets) can’t be denied. However, the primary and fundamental goal of SOEs is to fulfill specific
public functions. That is to say, the logic in the sense of public law goes before the logic in the
sense of private law, i.e. SOEs are agents of state-owned property (assets) owners.
According to the latter logic, i.e. SOEs are agents of state-owned assets, SOEs can go their own
ways as long as they maintain and increase the value of state-owned assets, and even make sure
that the assets nominally belong to the state. Also, this logic provides a powerful excuse for SOEs
to ignore the benefits of the people and only strive to maximize their own benefits.
But according to the first logic, the task of SOEs is to fulfill specific public functions rather than
maintain and increase the value of state-owned property (assets). Virtually, state-owned property
(assets) is only a means to fulfill public functions. Some SOEs not only fail to “maintain and
increase the value of state-owned assets”, but also need government subsidies to cover their losses
because they need to implement specific public policies (such as government companies that
provide agricultural subsidy in western countries).
Similarly, the SOE reform strategies of “invigorating large enterprises while relaxing control over
small ones” and “building SOEs larger and stronger” are the inevitable results of the property
(assets) approach. Because from the angle of state-owned property, “invigorating large enterprises
while relaxing control over small ones” is admittedly positive as the primary task of SOE reform
in China at present is still to dissolve and streamline unnecessary SOEs. However, from the angle
of public interests and public functions, it is not necessary so: it is also essential to build small
SOEs into larger and stronger ones, and establish some new enterprises; in contrast, some large
and strong SOEs may need to be downsized or even dissolved.
Therefore, we should first discuss SOE reform from the public law angle that SOEs are material
means by which public functions are fulfilled instead of the private law angle of property of SOE
assets. This is also one of the fundamental reasons why the Interim Regulations on Supervision
and Management of State-owned Assets of Enterprises are denounced.
4. Is it an advance to change “state-run” into “state-owned”?
Similarly, it is deemed a significant advance in SOE reform to “separate the ownership and
control” and change “state-run enterprises” into “state-owned enterprises”. Of course, it is
positively significant. However, in some sense, it is not necessary an advance. “State-run” means
that the state has due responsibilities to well run these enterprises so as to better provide public
goods. SOEs are not only owned by the state, but also should be run and managed by the state. An
extremely possible logic in the “state-owned” concept is that the state becomes the largest “rich
man” in the sense of private law rather than the protector of public interests in the sense of public
law.
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Besides, who can say that “state run” necessarily means rigid and mechanical management in the
planned economy system in China instead of a flexible way in response to the specific public tasks
that SOEs shoulder? Private enterprises are not only privately owned, but also privately run. Then
who should run SOEs? Is it necessarily right for SOEs to independently manage themselves? Isn’t
“indirect management” a management model?
In addition, “state-run” means that the state only runs and does not own SOEs. The real and
ultimate property owners are the whole people. In short, SOEs are owned by the whole people and
managed by the state. Obviously, the latter better complies with the basic concept of modern
politics.
Furthermore, it is reasonable that public enterprises are called public-run undertakings (including
“state-run” undertakings and local “public-run” undertakings) or “public-run organizations in
other Chinese-speaking places, such as Taiwan and Hong Kong. Moreover, do these “public-run”
undertakings and organizations really lack necessary flexibility and suffer low efficiency?
4. Epilogue
In the final analysis, we simply want to reiterate the public law nature of SOEs as special agencies
and means to fulfill public tasks so as to review the basic SOE reform approaches. The
establishment and management of SOEs must comply with the general restraints that public
institutions are subject to, and SOEs should never completely enjoy the autonomy of private law.
The key points are: (1) the establishment of SOEs must comply with the basic principle of limited
and effective government; and (2) the establishment and management of SOEs must comply with
the principles of democratic legitimacy, rule of law and responsible government.
Of course, there is no denial that SOEs should have necessary independence and flexibility. In fact,
the current SOE reform faces two contradictory tasks, i.e. to strengthen the restraint of public law
over SOEs while giving SOEs necessary flexibility and autonomy by denying too centralized,
ossified and mechanical control in planned economy. Obviously, this can’t be effectively solved
simply through SOE reform. It also requires the reform of supportive systems, especially the
political system.
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Chapter X Deepened SOE Reform
I. Reflection and Comments on SOE Reform
Since the reform and opening up, SOE reform in China has undergone the several phrases,
including power decentralization and profit transfer, contract system, substitution of tax payment
for profit delivery, demutualization and modern enterprise system. Such reform of micro subjects
reflects the transition from planned economy to market economy from a certain angle. In the
planned economy system, “state-run enterprises” only received and implemented government
plans. Every state-run enterprise virtually acted as a product workshop in the state factory. The
government directly controlled the production, exchange, allocation and even consumption. In
short, in the planned economy system, the main function of the government was to “produce
for the public” by making and implementing plans.
The establishment of the goal of setting up a socialist market economy system, to a great extent,
changed the “game rules” for different economic subjects. SOEs obtain the qualification as
independent corporations. This fundamentally ensures that SOEs, as interest subjects, can exist,
develop and make profits in all economic areas. In addition, SOE managers are endowed with the
same decision-making and management power as managers in market economy. For its part, the
government is transformed from the original plan maker to SOE capital contributor which thereby
enjoys the statutory rights and interests of a shareholder. In this way, as SOEs are further
defined as “state-funded enterprises”, one of the main functions of the government is
changed from “to produce for the public” to “make money for the public” 13 . Such
government displays an obvious commercialization trend, and can be depicted as a
“revenue-oriented government”, which maximizes its fiscal revenue by controlling and using
social resources (state-owned assets, factors of production, rare resources and public power).
So far, the nature of China’s SOE reform is the capitalization of state-owned assets, i.e.,
making profits through the operation of state-owned assets. Therefore, the government
gradually turns into personalized or institutionalized capital when state-owned assets
constantly show capital attributes. In this sense, the government is virtually the same as a
businessman, and it also needs to build SOEs “larger and stronger”. When there is fierce
competition in industries where SOEs are engaged, which makes SOEs suffer losses and heavy
fiscal burdens, the government will flatly choose to withdraw SOEs. On the contrary, when there
is a structural condition for monopoly in industries where SOEs are engaged, the government will
establish institutional access barriers and impose administrative monopoly on top of market
monopoly for SOEs to make huge profits. This is the nature of “invigorating large enterprises
while relaxing control over small ones”. More importantly, when combining the motive to make
money with the public power it has, the government will control rare resources such as land,
minerals and finance through laws, regulations and even by administrative means so as to make
“The State Council shall perform capital contributor’s duties and responsibilities on behalf of the state
for large-scale state-invested enterprises concerning the lifeline of the national economy and national
security and state-invested enterprises in important infrastructure, important natural resources and other
sectors. For other state-invested enterprises, local people’s governments shall perform capital
contributor’s duties and responsibilities on behalf of the state” (Law of the People’s Republic of China on
the State-Owned Assets of Enterprises, 2008).
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huge profits for SOEs or directly for itself. This explains why after a large-scale “Guo Tui Min
Jin” in the 1990’s, we have seen structural “Guo Jin Min Tui” in recent years.
In this way, as the state-owned assets get capitalized, the government has twofold natures, i.e.
public goods provider (regular government) and institutionalized capital (profit-oriented
government). Such twofold natures are also reflected by the goal function and way of act of SOEs.
Firstly, on the one hand, SOEs, as carriers or platforms for the operation of state-owned assets,
need to maximize their profits in market in the form of independent corporations. This complies
with the general nature of enterprises. On the other hand, SOES are endowed with public goals
such as employment, social stability, macro control, ruling foundation and national security under
some circumstances. Secondly, as assets managers, SOE managers are virtually the same as
regular agents. In the mean time, as government goal implementers, they belong to the
government and can change between enterprise managers and government officials. Thirdly, in
market operation, SOEs (managers) will emphasize the public nature SOEs are endowed with, and
obtain some special conditions and advantages through “in-house lobbying” so as to get
illegitimate interests. When SOEs need to fulfill their public targets, they will claim the statutory
rights and interests as business entities for preferential interests.
The government consists of officials at different levels. SOEs also need to be managed and run be
specific people. Therefore, the government’s goal to make money through the operation of
state-owned assets also needs to be fulfilled by concrete people. Consequently, the principal-agent
relations between the government and SOEs on state-owned assets (governance) are transformed
into complicated and diversified interpersonal relations. When the information is asymmetric,
there will emerge some interest groups consisting of SOE managers and some government
officials that claim to “make money for the public (the state) but actually seek personal gains
through state-owned assets. Such interest groups will not only make the wish of “making
money for the public” come to nothing, but also control important social resources through
their public power to constitute the socio-economic characteristics of bureaucrat capitalism
or crony capitalism.
Because of the too many principal-agent links and too long agent chains, the low efficiency of
SOEs will not be fundamentally improved with the change in the competitiveness of industries
where SOEs are engaged. Although in recent years, splendid book data is used as the
“advertisement column” by some groups to publicize the so-called high efficiency of SOEs, under
this nominal performance, after deducting the payable resource rent, land rent,
underestimated financial costs, government subsidies and administrative monopoly profits
are deducted from the book profit, and also the real costs is restored, the real performance of
SOEs will be far lower than the average market level. Therefore, as long as SOEs still retain
the fundamental “gene” and don’t really withdraw, except for a few cases, even if their
performance is improved after restructuring, SOEs are still in an unfavorable position as compared
with private enterprises. More importantly, due to the inherent low efficiency of SOEs and their
presence and expansion in fundamental or resource areas, the operation of China’s macro
economy is still quite “fragile”, i.e. the inflation cost for per unit economic growth is quite high.
It is true that as the main content of China’s market-oriented reform, the reform orientation choice
of state-owned assets capitalization had both logically inevitable and historically progressiveness,
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especially at the primary stage of China’s economic transition. The transition of original
productive state-owned assets (in the period of planned economy) into operational state-owned
assets, and incompatibility with the market economy system into compatibility boosted the
gradual establishment of the market mechanisms and the constant development of the market
system, vigorously promoting the comprehensive development of market economy represented by
private enterprises. The large-scale withdrawal of state-owned capital (or SOEs) from competitive
areas also provided abundant production factors and necessary market space for the growth of
private economy. As a result, China was able to improve the structure and efficiency of its national
economy, and achieve long-term stable and rapid economic growth. However, with the
establishment of market economy in our country, the historical mission of SOE reform
characterized by state-owned assets capitalization is about to come to an end. The reason is
that SOEs are relatively less efficient, and more importantly, the continuous existence of
state-owned capital in for-profit factors (i.e. private goods areas, including competitive and
monopolistic sectors) has constituted and will constitute a severe threat and harm to the
driving force of China’s economic growth – adequate and fair competition – and social
justice. In a word, state-owned capital is showing more and more diseconomy for the whole
society.
Therefore, the end of the reform characterized by the capitalization of state-owned assets does not
mean that the SOE reform is finally accomplished. On the contrary, it only marks a new historical
beginning. The subsequent reform will be more critical, difficult and significant. Then, how to
deepen the reform of SOEs?
II. Short-term SOE Reform Plans
Short-term SOE reform plans should be designed around two major objectives, namely, breaking
the administrative monopoly of SOEs, and regulating the behavior of SOEs. The significance is
that this will promote adequate and fair competition between different economic subjects, thus
better facilitate social justice and improve economic efficiency.
1. Break administrative monopoly
(1) Check administrative regulations and regulate government behavior
In fact, “administrative legislations” or “departmental legislations” are rampant in China. In
practice, various rules, measures, provisions and guiding opinions issued by administrative
organizations often take precedence over laws adopted by the People’s Congress in effect. As
administrative legislations are unavoidably mixed with interests and wills of these departments,
they will easily contain contents of administrative monopoly which turns out to be primary factors
hindering adequate and fair competition between different economy subjects in China.
Actually, regulations on competition and monopoly should be basic economic systems. According
to the Law of Legislation, “basic economic system and basic systems of finance, taxation, customs,
banking and foreign trade” are subject to legislation, which shall not be formulated or revised by
any administrative organization, including the State Council. Therefore, important regulations on
competition and monopoly must be confirmed through legislation or revision by the supreme
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power organ (the National People’s congress). This is the requirement of procedural justice. In the
same way, even clauses in Several Opinions on Encouraging and Guiding the Healthy
Development of Private Investment (2010), which are conducive to anti-monopoly effort, should
be legislated by the People’s Congress. Otherwise, China will be plunged into the economic
disorder caused by the opportunism of administrative organizations. In view of this, these
administrative regulations must be checked and the behavior of government organizations must be
regulated.
To this end, regulations issued by administrative organizations, which harm substantial justice and
procedural justice, must be abolished, including but not limited to the following:

Opinions on Checking up and Rectifying Small Refineries and Regulating the
Distribution Order of Crude Oil and Petroleum Products (No. 38 Document of the State
Economic and Trade Commission, etc., 1999)

Opinions on Further Checking up, Rectifying and Regulating the Market Order of
Petroleum Products (No. 72 Document of the General Office of the State Council, etc.,
2003)

Tie Yun Han No. 150 Decree (Ministry of Railways, 2003)

Extension Plan of the Pilot Program of Vehicle-use Ethanol Gasoline
Document of NDRC, 2004)

Administrative Measures for the Popularization and Use of Vehicle-use Ethanol
Gasoline in Heilongjiang Province (2004)

Notice on Issues Regarding Further Accelerating Merger & Reorganization of Coal
Mine Enterprises (Shanxi Provincial People’s Government, April of 2009)

Opinions on Newspaper Distribution and Ban on Sales of Other Newspapers and
Magazines in Subway Stations (Public Transport Security Corps of Beijing Municipal
Public Security Bureau, January 4 of 2010)

Regulations on the Monopoly Business Scope of Postal Service Enterprises (Draft)
(2009)

Measures for Salt Monopoly (No. 197 Decree of the State Council, 1996)

Circular of the General Office of the State Council on Forwarding the Guiding Opinions
of SASAC on Promoting the Adjustment of State-owned Capital and the Reorganization
of State-owned Enterprises (2006)
(No. 230
In addition, the judicial branch should be instructed to investigate and punish the encroachment on
private capital in coal in Shanxi and steel in Shandong so as to protect the legitimate rights and
interests of private capital.
(2) Examine and revise the existing laws, including but not limited to the following:

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According to this report, the tobacco industry does not have adequate reasons for
administrative monopoly. Therefore, the Tobacco Monopoly Law (1992) should be abolished
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through proper procedures.

The Postal Law (April of 2009) should be revised. For instance, the part “no express delivery
enterprise shall provide the correspondence delivery service which shall be exclusively
provided by postal enterprises or deliver the official documents of state organs” should be
deleted.

The most severe problem in China is the administrative monopoly. The existing
Anti-monopoly Law (2007) not only ignores this problem, but also provides protection for
such monopoly. Article 7 of the law – “with respect to the sectors controlled by the
State-owned economy and concerning the lifeline of national economy and national
security or the sectors lawfully enjoying exclusive production and sales, the State shall
protect these lawful business operations conducted by business operators therein, and
shall supervise and control these business operations and the prices of these
commodities and services provided by these business operators, so as to protect the
consumer interests and facilitate technological advancements” makes article 8 – “the
administrative organs or instrumentalities empowered by laws and regulations to
administer public affairs are prohibited from abusing their administrative power to
exclude or limit competition” - exist in name only.
(3) Break administrative barriers and enhance fair competition

Change the slogan “help SOEs grow larger and stronger” into “let SOEs fairly compete in
market”.

Narrow the business scope of SOEs, and consolidate state-owned assets. However, the
following policy contents must be eradicated: The state-owned economy must keep
absolute control over important sectors and key areas concerning the national security
and the lifeline of the national economy, including defense, grid and power, petroleum
and petrochemical, telecommunication, coal, civil aviation and shipping. The
state-owned economy must keep strong control over backbone enterprises in
fundamental and pillar sectors, including equipment manufacturing, automobile,
electronic information, construction, steel, nonferrous metal, chemical, survey and
design and technology.
The so-called control of state-owned economy refers to the monopoly of state-owned
economy. The so-called absolute control is actually complete administrative monopoly,
which ordains that the private economy can’t be engaged in these sectors.

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China should break administrative barriers without any condition, rather than “to guide the
entry of private economy or private capital”. “To guide” means that private capital can only
exists in areas where there is not much profit. For instance, Article 8 of the Several Opinions
on Encouraging and Guiding the Healthy Development of Private Investment stipulates that
“the participation of private capital in the construction of oil and natural gas shall be
encouraged. The entry of private capital in the field of exploration and exploitation of
oil and natural gas in the form of cooperation with the state-owned oil enterprises
should be supported. The participation of private capital in the construction of facilities
and networks for the storage, transportation and pipeline transport of crude oil, natural
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gas and petroleum products in the form of non-controlling shareholding shall be
supported.” But why not encourage the private capital to engage in refinery and sales
businesses? Isn’t the safety of “facilities” more important than sales?
2. Regulate the behavior of SOEs
(1) Improve the governance structure of SOEs

Increase the proportion of social elites in the board of directors and supervisory board of
SOEs. This can help restrain insider control and guarantee the public interests to some extent.
To this end, the Company Law (2005) and the Law of the People’s Republic of China on the
State-Owned Assets of Enterprises (2008) should be revised accordingly. For instance,
Article 3 of the Law of the People’s Republic of China on the State-Owned Assets of
Enterprises can by revised into “the state-owned assets shall be owned by the state, i.e.
owned by the whole people. At present, upon the authorization of the National People’s
Congress, the ownership right of state-owned assets shall be mainly exercised by the State
Council on behalf of the state.”14 Article 4 can be revised into “the capital contributor’s
duties and responsibilities for large-scale state-invested enterprises concerning the lifeline of
the national economy and national security and state-invested enterprises in important
infrastructure, important natural resources and other sectors shall mainly be performed by the
State Council. For other state-invested enterprises, the capital contributor’s duties and
responsibilities shall mainly be performed by local people’s governments on behalf of the
state”. This can also improve the composition of SASAC decision makers.)

Limit the proportion of directors serving in SOE managements (such as general manager,
CEO or vice general manager) to contain insider control.

Restrain incumbent or retired government officials from serving as SOE managers or board
members by law.

Set up an expert panel in SOEs for more scientific and cost-effective decision-making.
(2) Improve the distribution systems in SOEs

SOEs should turn in their income in the forms of rent, tax or profit according to income
sources to ensure the rights and interests of capital contributors and faithfully reflect the costs
of SOEs. The rent and taxes should be turned in without any condition, while the rate of
profit to be turned in should be decided by capital contributors. Therefore, the Land
Management Law and the Law of the People’s Republic of China on the State-Owned Assets
of Enterprises should be revised.

The rent and profit (like taxes) turned in by SOEs should be incorporated into the national
budget like state-owned assets.

Although SASAC recently issued a new “total salary budget management” system for central
enterprises – to adopt “dual control” over salary of employees of central enterprises, i.e.
control of total salaries and average individual salaries. Moreover, it also issued the Interim
14
The current clauses are unconstitutional and cause the lack of a clear line between the functions of the
government and enterprises.
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Measures for Assessment of the Operational Performance of Persons in Charge of Central
Enterprises (2009), which linked the economic value added to the remuneration of senior
executives of central enterprises for the first time. However, it is still quite defective to use
the unprocessed nominal performance as the assessment indicator. In terms of economic
performance, the real net investment income rate should be used as the major assessment
indicator.
(3) Strengthen the supervision of SOEs

Whether they go public or not, SOEs should become more transparent and intensify
mandatory information disclosure. This is an important prerequisite for enhancing public
oversight.

SASAC should represent the interests of the public. While complying with the development
and reform trends, it shall strengthen the supervision of SOEs. The supervision should focus
on whether the behavior of SOEs complies with fair competition, whether the managers
observe laws, and whether the management of SOEs meets the wishes of the public (Clearly,
the public won’t be satisfied with enterprises that only make profits by raising the prices of
petroleum products).

Intensify the supervision from the public and media.
Efforts should be made to complete these short-term SOE reform plans within 3-5 years.
III. Ultimate Goals of SOE Reform
1. Establishment and definition of SOE reform goals
There are two ultimate goals for the reform of SOEs. The first goal is to change SOEs into
non-profit public law enterprises, and the second one is to establish a constitutional governance
framework for state-owned assets.
(1) Change SOEs into non-profit public enterprises
SOEs will not aim to make profit but to serve public interests. This defines the scope and
boundary of SOEs, and establishes the nature of SOEs as public enterprises. They must be
founded, managed, operated and withdrawn under public oversight in accordance with specific
legal procedures. Accordingly, SOE managers are deprived of the function of assets managers, and
completely become implementers of public interests. If SOEs need to enter for-profit sectors (or
exist in for-profit sectors) for special reasons, they must first get approval from the supreme
authority (the People’s Congress).
(2) Establish a constitutional governance framework for state-owned assets
The state-owned assets belong to the public. Therefore, the People’s Congress (rather than
administrative organizations) should exercise the ownership of state-owned assets on behalf of the
public. By this time, the governance of state-owned assets falls into the scope of public
governance. The People’s Congress needs to make laws regarding the governance of state-owned
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assets to regulate the establishment, expansion and withdrawal of public enterprises, approve the
budget of SOEs, and also instruct regulators of state-owned assets to perform the functions of
public enterprise regulators in a legal and effective way, hence the structure consisting of the
People’s Congress, regulators of state-owned assets and public enterprises for the governance of
state-owned assets.
To this end, we need to:
(1) Change the revenue-oriented government into a service-oriented government
The SOE reform can’t be deepened without the transition of the government. Specifically, the
revenue-oriented government should be changed into a service-oriented government. In
terms of target, the revenue-oriented government emphasizes the maximization of GDP growth
rate and fiscal revenues, while the service-oriented government pays more attention to boosting
public welfare. In terms of economic development ways, the revenue-oriented government often
directly becomes a economic activity subject by controlling or monopolizing social resources,
while the service-oriented government pays more attention to improving the soft and hard
environment and providing public goods so as to boost socio-economic development. Therefore,
the nature of the transition is to change the existing government duality, eradicate (or
weaken) the institutionalized capital characteristic of the government (i.e. de-capitalization),
and build it into a government that serves the people and aims provides public goods to
maximize social welfare rather than fiscal revenues.
(2) Withdraw state-owned capital (SOEs) from for-profit sectors
To eradicate the institutionalized capital characteristic of the government and change SOEs
into non-profit public enterprises, state-owned capital must withdraw from for-profit sectors.
In other words, the government won’t have to own operational state-owned assets. Obviously, the
original target of “withdrawing SOEs from competitive sectors” is based on the de-capitalization
of state-owned assets. Although it is objectively conducive to the economic development in China,
it helps SOEs exist in monopolistic sectors and secure administrative monopoly. In contrast, the
“withdrawal of SOEs from for-profit sectors” fundamentally negates the capital attribute of
state-owned assets, and also the validity of the market monopoly and administrative monopoly of
SOEs, creating conditions for adequate and fair competition.
(3) Change SASAC into regulators of public enterprises
When the state-owned assets are capitalized, SASAC performs the duties of capital contributors
(appoints managers, holds shares, etc.), and fulfils the mission of supervising SOEs, confusing the
management and operation. In the future, SASAC will only act as the supervisors of public
enterprises so that SOEs can operate in a legal and effective manner.
2. Detailed arrangements for the withdrawal of state-owned capital (SOEs) from for-profit
sectors
(1) Prerequisite and time for withdrawal

SOEs gradually withdraw from for-profit sectors on condition of fair competition.

SOEs should withdraw from for-profit sectors after administrative barriers are broken and
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private economy has grown to a certain size.
(2) Way of withdrawal

The state-owned capital can be withdrawn through equity transfer. Therefore, the withdrawal
of state-owned capital does not necessarily mean the extinction of enterprise entities.

State-owned equity can be allocated to the social security funds and the ordinary shares
transformed into preference shares. Although this will deprive owners of the business
decision-making power, it will guarantee secure and stable returns (similar to the government
interest system in modern China). Moreover, it can bring huge benefits to the public.

State-owned equity can be assigned to private enterprises and the public. However, strict
restrictions should be made on the assignment to foreign companies and foreign natural
persons.

In principle, the government should not invest in for-profit sectors to contend for profit with
the people. This can also prevent state-owned capital from withdrawing from some sectors
and entering other sectors at the same time. The Law on State-owned Assets of Enterprises
can be revised to add provisions on conditions, scope and limits of government investment.
Alternatively, a law on government investment can be adopted, which should include
provisions that each government investment (not only total investment amount) must be
examined and approved by the People’s Congress.
(3) Assistant measures

Equity incentives can be given to SOE managers according to the real performance of SOEs
so that their entrepreneurial expertise can be properly evaluated and some outstanding
entrepreneurs can continue to work in management after the withdrawal of state-owned
capital.

Apply laws to safeguard the legitimate rights and interests of laid-off workers.

Significantly increase the remuneration of government officials to mitigate the resistance to
reform.
The withdrawal of SOEs (state-owned capital) from for-profit sectors should be completed
within 5-10 years.
3. Detailed arrangements for establishing a constitutional framework for governance of
state-owned assets
(1) Constitutional principle

Principle of general government: The government should not aim to make profits or engage
in profit-making activities.

Non-operation principle: The state-owned assets should be non-operational.

Public principle: SOEs are public enterprises and the management of state-owned assets falls
into the scope of public governance.
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
Special principle: Private capital can enter for-profit sectors without any reason; state-owned
capital must present the reason to the legislature (the People’s Congress) to enter for-profit
sectors.
(2) Detailed arrangements

Revise the Constitution and delete the part “keep the public ownership as the dominant
player”.

Revised the Constitution and confirm the nature and status of SOEs as non-profit public
enterprises.

Revise the Constitution and confirm that the People’s Congress should exercise ownership
over state-owned assets on behalf of the whole people.

Confirm that the governance (operation and management) of state-owned assets should fall in
parallel with jurisdiction and administration to be the third authority subordinate to the
People’s Congress through the Constitution. Administrative organizations should not be
involved in the governance of state-owned assets. Instead, they should only act as suppliers
of general public goods (public services). Government organizations can purchase public
goods and sub-public goods produced by public enterprises through statutory procedures.

Establish a state-owned assets governance committee within or under the People’s Congress
(in parallel with the State Council and the Supreme Court) to be the special organization for
governance of state-owned assets.

Regulators of state-owned assets should be directly responsible to the People’s Congress or
indirectly through the state-owned assets governance committee, perform its regulation
functions according to the law, but should not engage in the operation of state-owned assets.

Board members of SOEs, as agents of state-owned assets, should be appointed and dismissed
by the People’s Congress, in the same way that main government officials are appointed or
dismissed. The tenure of board members should be specified.

There should be no relationship of administrative subordination between non-profit SOEs
and regulators of state-owned assets. Instead, they just have different functions. Both of them
should be directly responsible to the People’s Congress or indirectly through the state-owned
assets governance committee. As a result, a flat framework for the governance of state-owned
assets is established.
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People’s
Congress
Governance of
state-owned
assets
Regulator
Public
enterprise
Jurisdiction
Administration
Judiciary
authority
Administrative
department
A constitutional framework for the governance of state-owned assets should be established in
10-15 years.
It can be seen that the above plan to deepen SOE reform basically follows the steps of changing
administrative regulations, revising laws and then the constitution. This will be conducive to
coordinating reform and stability.
In addition, although this part does not specifically cover the dynamics of reform, we firmly
believe that the issue and recognition of the reform orientation and plan will play its due role in
history evolution. Otherwise, we will be plunged into the mire of historical nihilism.
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Sub-report 1: Comments on SOE Missions
Since the Westernization Movement at the end of Qing Dynasty, SOEs stepped onto the arena of
history in different forms. Whether government-run, jointly run by the government and business
people, wholly state-owned and shareholding, SOEs are always thought to assume many important
missions. In the current SASAC system, these missions gradually become the main reasons why
SOEs are necessary. To fulfill these missions, SOEs can even sacrifice other national interests.
These missions can be summarized into the following six aspects: enriching the country and
strengthening the military, improving national economy and people’s livelihood, ensuring national
security, increasing international competitiveness, fulfilling social responsibilities and
consolidating ruling foundation. For a state or a nation, these missions are self-evidently important,
and require the joint efforts of all the people. However, to endow SOEs with these missions needs
to be discussed. From the historical experience, their real performance and the mechanism to
ensure the fulfillment of these missions, SOEs can hardly fulfill these tasks. On the contrary, due
to ubiquitous SOEs, people in China encounter many difficulties and setbacks when trying to
fulfill these missions. Combining history and current reality, this article will analyze and comment
why SOEs can’t fulfill these missions, and try to find a real way out for the fulfillment of such
missions.
I. Theory of “Enriching the Country and Strengthening the Military”
To enrich the country and strengthen the military means to make the country rich and build
up the military strength. If a country maintains strong economic, political and military
strength in peacetime, it can have a solid foundation to defend itself and defeat the enemy
in war time. The book Guanzi gave a systematic discussion on the idea of enriching the
country and strengthening the military. “To base on a rich country and a strong army, take
agriculture as the foundation and combine politics, economy and military” is the main
content of the book. Both in traditional agricultural society and modern industrial and
commercial society, a rich country and a strong army is always the goal pursued by rulers
of any country. The understanding on how to achieve this goal varies from time to time.
According to Guanzi, enriching the people goes before enriching the country and
strengthening the military. “To govern a country, it is of first importance to enrich the people.
When the people are well off, they are easily governed”, and “the rich country can build up a
strong army. The country that has a strong army can win a war. The country that wins a war can
occupy a larger area of land” (from Zhi Guo). But in reality, the practice of “ignoring enriching the
people” and directly “enriching the country” so as to “strengthen the military” can be found
everywhere. However, such practice normally fails to achieve the goal of enriching the country
and strengthening the military.
1. Road of “Self-renewal” at the end of Qing Dynasty
After the Second Opium War that broke out in 1860, to reverse the situation of internal revolts and
foreign invasions, the Qing Government, officials and gentry raised a revolutionary slogan of
“self-renewal”. People that advocated “self-renewal”, represented by Li Hongzhang, Zhang
Zhidong and Sheng Huaixuan, and the reformers did their best to implement various economic
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plans so as to enrich the country and strengthen the military. According to Li Hongzhang, “Only
guns and gunboats are not sufficient to make a country strong. To use them and operate them, we
still need the support of manufacturing, mining and modern transportation. Industry will create
new wealth that increases the national strength.” (Cambridge History of China, 1977).
Government officials of late Qing Dynasty that advocated modern industry positively recognized
the importance of modern industry.
Since ancient times, China has seen a dispute on whether the state should take part in major
economic activities. The orthodox Confucianism, which combined frugality, merciful rule and
economic self-sufficiency, always opposed this idea. In contrast, the Fajia ideology which paid
particular attention to practical results upheld active interference. But in reality, this dispute often
focused more on the level and nature of state control, and less on whether the state control was
necessary. Government officials and scholars in Qing Dynasty had a deep-rooted mindset of
national prerogative. They had a blind faith that modern industry could produce wealth and wealth
could generate power. Therefore, they believed that modern industry could never fall into the
hands of private entrepreneurs, and instead could only be developed under government
supervision. Merchants in this era also agreed with the idea of state interference, because they
realized that for any large modern enterprise, especially when it faced the competition of foreign
companies with strong financial strength, state support and protection was indispensable.
Therefore, on the road of “self-renewal” at the end of Qing Dynasty, the government and officials
were predestined to play important roles. Under the objective of developing modern industry,
officials of the Qing government first acted as supervisors, then managers, investors and in the end
some government officials became bureaucratic business owners.
2. From government-run enterprises to enterprises jointly run by the government and
business people
In the 1860’s, as the government-run manufacturing bureaus and shipyards invested by the Qing
government had a direct bearing on national defense, they did not seek any private investment and
were not managed by individuals. However, when official advocates came to a broader range of
profit-oriented industrial sectors, the “government-run” model couldn’t work effectively. In this
context, enterprises “jointly run by the government and business people” emerged. During this
transition, it was not that the Qing government wanted to open these sectors, but that the
government could not monopolize these sectors and run them well. Firstly, although the
government monopoly had a long history, such monopoly was mainly limited to salt, copper and
china. In contrast, tea, sugar, grain, textiles and shipping businesses were mostly run by
individuals. Secondly, government officials lacked professional managerial and technical expertise
to run modern enterprises. Thirdly, the national strength was insufficient for large-scale
establishment of large modern enterprises.
In 1872, because of the advocacy of Li Hongzhang, China built the first non-military modern
enterprise, China Merchants Steam Navigation Company. When the company was initially
established, Li Hongzhang didn’t plan to change the company into a government-monopolized or
a completely government-run enterprise. For joint government-business cooperation, Li
Hongzhang called it a government-supervised and business-run enterprise. The company attracted
capital and managerial expertise of merchants and retained complete government control. It also
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drew on the management model of modern Western enterprises. By adopting the same
establishment and management model of China Merchants Steam Navigation Company, Li
Hongzhang set up two other famous enterprises, i.e. Kaiping Mining Administration (1877) and
Shanghai Mechanical Textile Bureau (1878). The three enterprises had common features in terms
of governance structure. Firstly, they were managed by managers with business background, and
these managers bought official titles or had semi-official statuses. Secondly, as the representative
and protector of capital contributors, Li Hongzhang granted these business people independent
management power as business owners while retaining the control over these enterprises. Thirdly,
like traditional business owners, these government shareholders didn’t intervene in the affairs they
had no right to manage. Li Hongzhang not only protected these enterprises from overdue
government extortion, but also repeatedly lent government funds to them in a timely manner, a
benefit beyond the reach of other enterprises.
However, this model didn’t last long. The participation enthusiasm of business people faded due to
several reasons. Firstly, the modern industry gradually became a control target of government
officials because of its large capital and huge profitability. Secondly, some government officials
like Sheng Huaixuan gradually gained rich experience in managing these enterprises, raising and
using government loans. Thirdly, these officials also found that in addition to government loans,
they could invest with the money of other officials. Because of this reason, these officials
controlled many enterprises at the same time, so they could borrow and lend money between
different enterprises, and transfer funds from well-managed and financially-strong enterprises to
newly-established and financially-weak enterprises. Eventually, these officials changed from
original representatives and protectors of capital contributors into real official managers. As the
first managers born out of business people left, other private investors lost their interest and faith
in government-run enterprises.
Although founders of government-run enterprises tried different means to attract investors to make
up insufficient government capital and government loans, the “government-supervised and
business-run” model gradually was transformed into the “business-invested and official-run”
model. In this new model, as the situation in which government officials intervened in enterprise
management was not fundamentally changed, and there was no practical law to protect the
interests of business people and investors, cases in which investors couldn’t regain their original
investment due to official corruption and poor management could be found everywhere. The most
famous example was the building of railroads at the end of Qing Dynasty. Because railroads
required large investments to build, the Qing government didn’t have enough money. It had to
issue railroad bonds and borrow money from foreign banks. While raising money and building
railroads, the Qing government thought that railroads, which were of strategic significance,
couldn’t be run by private entrepreneurs. In the 1890’s, Zhang Zhidong, who supervised the
building of the first railroad in China, vehemently argued that railroads had a bearing on national
interest and sovereignty. He admitted that private capital could make up insufficient government
loans or foreign loans, but at the same time insisted that government officials should have the final
say. However, while denying domestic capital the right to build railroads, the Qing government
granted the right to foreign investors, spawning widespread resent among domestic investors. In
May of 1911, because the Qing government declared the railroad nationalization policy and
refused to return the share capital of domestic investors, the “Railway Defending Movement”
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broke out, and the “business-invested and official-run” model came to an end.
3. Enlightenment from “self-renewal” movement at the end of Qing Dynasty
The original intention of Qing government officials to vigorously advocate modern industry and
commerce, i.e. to change impoverished and weak China, should be positively recognized. From
the traditional role of the state in economy, it seems hard to find fault in the pontifical idea of
officials on state control over enterprises. However, while maintaining control over enterprises,
these officials gradually deviated from the basic proposition of Li Hongzhang that they should
only supervise and help enterprises, and directly intervened in the management. Meanwhile,
because they concurrently acted as official managers and private investors, they were prone to
confuse national interest and bureaucratic interest, retreating from serving the state to pursuing
personal gains. As more and more officials had connections with modern enterprises, such trends
got exacerbated. When they gradually formed the road for industry development in China, the
term “self-renewal” which was originally used to rally reform forces became a slogan that served
the group of vested interest, i.e. bureaucrats.
Whether “government-run” or “government-supervised and business-run”, large enterprises
established at the end of Qing Dynasty were invested and controlled by the government to a large
extent. Therefore, they completely had the nature of “SOEs”. Although the initial founders of
“SOEs” at the end of Qing Dynasty had a glorious dream of “enriching the state and strengthening
the military”, the bureaucratic agents of these enterprises failed to bring into play the advantages
of the state or business people. Instead, they used the power in their hands to change state interest
into individual and group interest. It was because they had the power to supervise and manage the
“SOEs”, the property right representatives and protectors of “SOEs” finally controlled the
state-owned assets and formed a powerful interest group of bureaucratic enterprise owners. It has
been proven by history that the bureaucratic enterprise models under the cover of “enriching the
country and strengthening the military” and “self-renewal” not only failed to change impoverished
and weak China, but also exacerbated the social conflicts and inflicted untold disasters to the
Chinese people.
II. “Theory of “National Economy and People’s Livelihood”
In China, the term “national economy and people’s livelihood” is frequently used by the
government, academia and media. This shows that the term has become an issue of wide concern.
Specifically, this term refers to the national finance, food, clothing, shelter and transportation for
people. In modern society, no government can run smoothly without revenues, and no one can
survive without food, clothing, shelter and transportation. Therefore, any sector that concerns the
national income and people’s daily life is extremely important. It is just because of this reason that
all governments and peoples are doing their best to improve the national economy and people’s
livelihood. However, they are divided on how to ensure the national economy and people’s
livelihood. Some people think that as long as normal market transactions can proceed, there won’t
be a problem for national economy and people’s livelihood. Others think that national economy
and people’s livelihood is so important that the state and government must intervene and control
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the important sectors.
1. National economy and people’s livelihood in planned economy
Before the reform and opening up, China adopted a planned economy system which completely
controlled economic operation and material distribution. In the planned economy system, the
market price mechanism was replaced by administrative orders. The product demands and
payment wills of economic subjects were all covered. As a result, information couldn’t be
transmitted and plans couldn’t be realized. In industrial areas, as production enterprises were only
attachments that followed the production plans made by government departments, their
performance was completely shown by the fulfillment of the plans and the satisfaction of the
preferences of authorities. Therefore, their operational efficiency couldn’t be guaranteed. In the
area of agricultural production, as China adopted a planned purchase and supply policy, the
economic interest of farmers couldn’t be protected. As a result, the enthusiasm of farmers for
production was severely impaired. Both the short supply of industrial products and insufficient
production of agricultural products affected the national economy and people’s livelihood.
Due to the insufficient production and supply, China could only establish a system to centrally
distribute and allocate materials according to plans. Among all materials subject to the plan, steel,
petroleum and other materials that were thought to concern the national economy and people’s
livelihood were centrally allocated by the state. Some special materials were allocated by
competent authorities of the central government. However, as the planned economy system was
widely adopted, more and more materials were centrally allocated, and the gap of short supply
was widened year after year. As the planned economy system couldn’t provide enough products to
meet people’s ever-growing material and cultural needs, the ration system was widened. In the end,
people could only buy what they needed with coupons for grain, cloth, meat, subsidiary foodstuff,
etc.
2. National economy and people’s livelihood after the reform of market economy
system
After China kicked off the reform and opening up drive, as the government regulation gradually
phased out, domestic market grew rapidly. Generally, in sectors that were first opened, the
problem of product shortage was solved at the earliest time. Moreover, in sectors that were
thoroughly opened, the problem of product shortage was completely eradicated. The output-based
rural household contracted responsibility system was the reform that saw the earliest and most
significant influence on the national economy and people’s livelihood. Because after the land was
allocated on the household basis, farmers only needed to pay a fixed amount of grain tax to the
government and could keep the rest of the harvest at their disposal, the enthusiasm of farmers to
increase the output was greatly motivated. Consequently, the problem of food shortage in China
was solved. For fear that the national economy might go completely out of control, China adopted
a double-track model for its market reform. While retaining some resource allocation models of
the planned economy, it established a free trade market. Although the double-track system
spawned a lot of corruption and prerogative-based economy, it finally gave way to complete
market economy, and as a result, the government opened some sectors that were once strictly
regulated.
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As more and more sectors that concerned the national economy and people’s livelihood were
returned to the market, China’s national economy posted a rapid growth and people’s livelihood
underwent significant changes. In the ten years from the kick off the reform to the end of 1980’s,
coupons for food, cloth, meat, subsidiary foodstuffs and other daily necessities which represented
the ration system gradually phased out. Most Chinese people bid farewell to poor times of short
supply. By the end of 1990’s, China had not only basically solved the problem of providing
adequate food and clothing for its people, but also made material preparations for building a
moderately prosperous society. From the perspectives of national economy and people’s livelihood,
the market-oriented reform is obviously conducive to the national economy and people’s
livelihood than complete market economy. This is proven by China’s reform and opening up
practice. However, the market-oriented reform is far from finished, because many sectors that
concern the national economy and people’s livelihood are still controlled by governments at
different levels in the capacity of SOES. Senior SOE executives and their interest representatives
are unilaterally interpreting the meaning of national economy and people’s livelihood to justify
their monopoly and eventually gain group and individual interest.
3. Monopoly of SOEs with the excuse of “national economy and people’s livelihood”
Although China’s market-oriented economic reform continues to deregulate more sectors, as the
national economy pulls back to “important sectors and key areas that concern the lifeline of the
national economy and national security”, SOEs are strengthening their control of and expansion in
many fundamental and resource sectors. Guided by the conception that “the state can better ensure
the national economy and people’s livelihood than the market”, some people use the national
economy and people’s livelihood as an excuse for SOEs to carry out monopolistic operation on
behalf of the government: because petroleum and petrochemical, power and coal concern the
national economy and people’s livelihood, they need to be monopolized by SOEs; because water,
heat and gas supplies concern the national and people’s livelihood, they need to be monopolized
by SOEs; because railroads, aviation, post an telecommunication concern the national economy
and people’s livelihood, they need to be monopolized by SOEs. Even some of these sectors can be
conditionally opened to private capital under government guidance, it is still thought that they
should be strictly controlled by SOEs. After the SASAC system was established in 2003, in the
trend of structural “Guo Jin Min Tui”, monopoly of SOEs with the excuse of national economy
and people’s livelihood gets increasingly conspicuous.
Can the monopoly of sectors concerning the national economy and people’s livelihood by SOEs
on behalf of the government really improve economic development and bring tangible benefits to
the people? The reality gives an opposite answer: sectors monopolized by SOEs are characterized
by low efficiency, short supply, poor service, rampant corruption and unfair distribution; in
contrast, deregulated sectors feature higher efficiency, better service and adequate supply. Due to
the monopoly of SOEs, when the international oil price drops dramatically, oil price in China
often remains unchanged. When the international oil price goes up, oil price in China would rise at
a greater margin. As a result of the monopoly of SOEs, people can hardly get a train ticket every
year during the Spring Festival peak season. There is no adequate transport capacity for coal, grain
and other materials. The low efficiency and poor service of public utilities can hardly be improved.
Moreover, telecom service rate in China is much higher than that in market economies. In contrast,
in catering, textile, clothing, household appliance and other sectors that are open, consumers can
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enjoy good quality, low price, many choices, rapid and convenient products and services.
Moreover, products in these sectors have already gone to the international market and competitive
brands built. Therefore, a competitive market rather than SOEs that rely on government monopoly
can better ensure the national economy and people’s livelihood.
Monopoly can bring huge profits to monopolists. Therefore, both SOEs and non-SOEs are
actively seeking this power for themselves. There are two ways to gain monopoly power. The first
way is to establish a monopolistic position through market competition and such monopoly can be
called market monopoly. The second way is to secure a monopolistic position through government
redemption, and such monopoly can be called administrative monopoly. It is proven by facts that
SOEs don’t have any advantages in market competition, but have inherent advantages in
government redemption. As the market competition does not exclude challenge from existing and
potential competitors, such a monopoly pattern is unstable. Monopolistic enterprises must
constantly improve their efficiency to cope with potential challengers. In the area of government
redemption, because government-controlled SOEs virtually share the same interests with
government organizations, SOEs are naturally granted market access qualifications. Theoretically,
non-SOEs can also “purchase” administrative monopoly power from the government.
Nevertheless, because non-SOEs are not legally controlled by the government, such transactions
can only be carried out in the form of money. On the one hand, the price of administrative
monopoly power that can be redeemed from the government is so high that non-SOEs can hardly
accept. On the other hand, such transactions are virtually bribery to the government, which are not
allowed under the current legal framework. Therefore, SOEs have inherent advantages in securing
administrative monopoly from the government. Although in the reform of market economy, to
break the monopoly has become a consensus, to ensure “the national economy and people’s
livelihood” still remains one of the important excuses with which SOEs exercise monopoly.
III. Theory of “National Security”
In general sense, national security refers to the guaranty for the existence and development of the
social system established by the state machine as a political power organization. It includes
national independence, integrity of sovereignty and territory, security of state power, social system
and state organs. Specifically, it involves security in defense, diplomacy, politics, economy,
culture and secret fronts. In this part, we will mainly expound the role of SOEs in ensuring
national economic security and social security through illustration and analysis, and further
discuss the important roles of other factors in these security areas.
1. National economic security
The so-called national economic security refers to state and ability of a country to ensure effective
supply of resources necessary for the survival and development of its economy, independent and
stable operation of its economic system, and prevent its social welfare from malicious
infringement and force majeure damages in an era of economic globalization. It is a state in which
the national economic growth and strength is free of any fundamental threat. It requires the
national economy to have a foundation for sound operation, stable growth and sustainable
development, the ability to compete and defend in international economy, to withstand or avoid
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any local or global crisis.
(1) Control of SOEs over national economy
In industrial sectors, enterprises, departments and resources that can significantly impact
socio-economic development are said to “concern the lifeline of national economy”, and strictly
controlled by the government with the excuse of ensuring national economic security. According
to Article 4 of the Law on the State-owned Assets, “The State Council shall perform capital
contributor’s duties and responsibilities on behalf of the state for large-scale state-invested
enterprises concerning the lifeline of the national economy and national security and state-invested
enterprises in important infrastructure, important natural resources and other sectors.” These
sectors mainly involve machinery manufacturing, infrastructure and natural resources, including
petroleum and petrochemical, power, defense, communication, transportation, mining, metallurgy
and machinery sectors.
To ensure the control in these sectors, on May 26 of 2006, the standing meeting of the State
Council decided that the SOE reform and the supervision and administration of state-owned assets
should focus on promoting the concentration of state-owned assets in important sectors concerning
the national security and lifeline of the national economy. Subsequent laws and regulations
prescribed more exclusive operating privileges for SOEs. According to Article 7 of the
Anti-monopoly Law, “With respect to the sectors controlled by the state-owned economy and
concerning the lifeline of national economy and national security or the sectors lawfully enjoying
exclusive production and sales, the state shall protect these lawful business operations conducted
by the business operators therein, and shall supervise and control these business operations and the
prices of these commodities and services provided by these business operators, so as to protect the
consumers’ interests and facilitate technological advancements.” According to the statistics of
SASAC as of September of 2008, 82.8% of the assets of central enterprises are concentrated on
petroleum and petrochemical, power, defense, communication, transportation, mining, metallurgy
and machinery sectors; the number of central enterprises in key national economic sectors and key
areas accounts for 25% of the total of central enterprises, their assets take up 75% of all central
enterprises, and profits 80% of the total. In addition, about 73% of the companies listed in China’s
Share-A market have state-owned shares. The number of companies listed in Hong Kong, New
York, Singapore and other overseas capital markets, which are controlled by central enterprises
has reached 78. Currently, the overall development of central enterprises is characterized by
“further decrease in number, expansion of assets, increase of industry concentration and growth of
profits”.
(2) Actual role of SOEs in national economic security
● Checking inflation
Stable prices and economic growth are fundamental for the sound growth of a national economy,
and also necessary for constant improvement in people’s living standards. SOEs should constitute
an important basis for ensuring safe, stable, sound and sustainable growth of national economy.
But in reality, their performance is far from satisfactory.
The withdrawal of SOEs is subject to some institutional barriers. When the macro economy is in
recession, the deflation and excess production capacity will be exacerbated, which is adverse to
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price stabilization and economic recovery. During the financial crisis, there was a shrink in market
demand, which called for the elimination of excess production capacity and low-efficient
enterprises. However, because it is “very difficult” for SOEs to withdraw, a large number of SOEs
remain in the market even if they suffer losses because of low efficiency. The breach of market
rules by SOEs not only causes huge economic losses for the government, but also exacerbates the
pressure of deflation (PPI) through low-cost competition. The loss of three major oil companies in
China totaled 168 billion yuan in 2008. Meanwhile, China Petroleum & Chemical Corporation
received 50.3 billion yuan from the treasury in the name of subsidies. When the economy begins
to pick up, SOEs would increase their revenues by raising the prices on strength of their monopoly
of basic resources, which in turn would trigger inflation. Therefore, SOEs fail to stabilize the
prices. On the contrary, they aggravate price fluctuation, which goes against the sound
development of the national economy and the improvement of people’s livelihood.
Figure 1 China’s quarterly CPI, PPI and GDP since 2000
中国2000年以来各季度CPI、PPI和GDP走势情况
China’s
quarterly CPI, PPI and GDP since 2000
20.00%
15.00%
10.00%
CPI
PPI
GDP
5.00%
2010Q1
2009Q3
2009Q1
2008Q3
2008Q1
2007Q3
2007Q1
2006Q3
2006Q1
2005Q3
2005Q1
2004Q3
2004Q1
2003Q3
2003Q1
2002Q3
2002Q1
2001Q3
2001Q1
2000Q3
-5.00%
2000Q1
0.00%
-10.00%
中国 2000 年以来各季度 CPI、PPI 和 GDP 走势情况：China’s quarterly CPI, PPI and GDP since
2000
Source: National Bureau of Statistics of China.
● Safeguarding the security of strategic resources
Steel is the foundation of industry, and energy is the lifeline of economic operation. The security
of strategic resources is significant to national economic security. Since its accession to WTO,
China has established itself as a world manufacturing center in less than 10 years. However, due to
huge resource consumption, it can hardly get rid of the shortage of strategic resources. It is now
the world’s largest iron ore consumer and the second largest oil consumer. Due to the lack of
natural resources at home, China’s degree of independence on foreign iron ore and oil is both over
50%. The huge consumption and supply gap brings both risks and opportunities for China. To
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ensure its national economic security, China needs to establish a long-term resource supply
guaranty system. On the other hand, it needs to get a pricing say in the international market on
strength of its large purchase quantity. Presently, only SOEs are allowed to operate in sectors of
strategic resources in China. Therefore, the responsibility to address the opportunities and avoid
risks falls on SOEs. The question is: Can SOEs really shoulder such a major responsibility?
The international iron ore market is now dominated by Rio Tinto, BHP Billiton and Companhia
Vale do Rio Doce. They have a strong ability to influence iron ore price in negotiations. China,
Japan and Korea are major iron ore importers in the world. Particularly, China’s import of iron ore
accounts for 50% of the world’s total. Although it contributes over 50% of the demand, China has
a weak say when it comes to the price in international market. There are many reasons behind this.
But the main reasons can be found from the Stern Hu (employee of Rio Tinto) case: Some SOEs
use their iron ore trade privileges, disclosing “national secrets” to foreign companies and
“oppressing” domestic companies that don’t have the privileges. As a result, China Iron and Steel
Association (CISA) barely has the ability to negotiate iron ore price. This not only brings huge
economic losses to China, but also causes a very bad impact on the whole industry. If these SOEs
really had strived to safeguard the national economic security or improve their business
performance, such scandals as the Stern Hu case wouldn’t have happened.
To ensure national economic security, large-scale reservation of strategic resources has become a
strategic measure. There are two ways to reserve strategic resources. One is to import from
international market, and the other is to carry out M&A in overseas markets. Before the
international financial crisis broke out, Chinese government had realized the importance of
overseas M&A, and encouraged SOEs to do so. However, the attempt of China National Offshore
Oil Corporation to buy Unocal Corp, and effort of Aluminum Corporation of China to by Rio
Tinto were all blocked. Many countries think that SOEs have a very strong government
background, and their overseas M&A attempts are manipulated by the government. Therefore, the
M&A by SOEs in overseas markets often arouses the insecurity sense of the country where the
target is, and eventually fails15. As the international oil price continues to grow, to control the
strategic oil and gas resources, maximize economic profits and political benefits, many countries
try to nationalize their oil industries. For instance, the U.S. once tried to nationalize its oil industry.
However, because of the fear that state-owned oil companies would be politically boycotted when
carrying out overseas M&A, the intention to nationalize oil companies was vetoed and the U.S.
government gave up the nationalization plan in the end.
2. Social security
Some people think that SOEs have inherent advantages in ensuring social employment, food
safety and public utilities safety, and therefore, it is necessary to further exert the leading role of
SOEs in these areas. Such opinion seems to be reasonable because on the one hand, it unilaterally
perceives or exaggerates the role of SOEs, and on the other hand, confuses the functions of the
government and enterprises. Many facts have shown that SOEs fail to support this assertion.
15
The attempt of China National Offshore Oil Corporation to buy Unocal Corp aroused violent reaction in the U.S.
because of the “China Threat Theory”. As a result of the strong opposition of the U.S. Congress, this acquisition
plan was finally aborted. The attempt of Aluminum Corporation of China to buy Rio Tinto triggered high alert of
relevant countries and the plan eventually failed. The large purchase of rare earth products by Japan from China
also spawned great objection that this would compromise the national security of China.
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(1) Guarantee social employment
For a long time, SOEs employed the largest number of urban employees. However, after laying off
and redirecting laid-off workers, increasing efficiency by downsizing staff and other reform
Collectively-owned
enterprises
Share-holding
Cooperative
Enterprises
Joint
Ownership
Enterprises
Limited
Liability
Companies
Limited
Joint Stock
Companies
Year
Total
SOEs
2007
29350
6424
718
170
43
2075
788
2008
30210
6447
662
164
43
2194
840
2009
31120
6420
618
160
37
2433
956
measures, SOEs were gradually replaced by other economic subjects as the largest employers.
According to the employment data of the National Bureau of Statistics of China for 2007-2009,
the number of employees in private and individually-owned companies kept rising, and the
proportion of employees in these companies reached 31.45% in 2009. Data in the following table
indicates that SOEs are no longer the most important contributors of employment.
Figure 1 Classified Statistics of Urban Population Employment in China 2007-2009 (Unit:
10,000)
Year
Total
SOEs
Private
Companies
Enterprises with
Investment from
Hong Kong, Macao
and Taiwan
Foreign-owned
Enterprises
Individually-ow
ned enterprises
2007
29350
6424
4581
680
903
3310
2008
30210
6447
5124
679
943
3609
2009
31120
6420
5544
721
978
4245
Source: National Bureau of Statistics of China
Despite the dramatic decrease in jobs SOEs offer, some people still think that SOEs remain major
contributors of employment. In some areas, when the employment pressure or unemployment
exceeds a certain level, SOEs are required to absorb some unemployed people to ease the
government’s administrative pressure. In return, SOEs that absorb surplus laborers can gain some
preferential policies from the government, including tax rebates and concession of profits. In such
transactions, functions displayed by SOEs can’t provide that SOEs can better ensure employment
than non-SOEs. If other enterprises can get tax rebates, subsidies or other preferential policies
from the government, they can also reduce the unemployment to some extent. Moreover,
compared with non-SOEs, the employment system of SOEs which only employ and never dismiss
people will cause other negative impacts. A conspicuous impact is the “lack of a clear line
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between the functions of the government and enterprises”: when SOEs are poorly managed or
required to turn in their profits, they often use the excuse of “fulfilling some government
responsibilities” to exonerate themselves.
When offering job opportunities, SOEs will not only reduce the government’s fiscal revenues, but
also cause other social costs. The consequence of SOEs “growing larger and stronger” in sectors
concerning lifeline of the national economy is that official employees of these SOEs enjoy
comfortable incomes, which in turn attracts more people to SOEs. However, not everyone has the
opportunity to enter an SOE. Except for a few excellent talents that can enter SOEs through public
recruitment, most people enter SOEs by using their social connections or paying an admission fee.
Otherwise, they can hardly have an opportunity. According to a survey, in some SOEs that offer
good economic benefits, the admission fee has been monetized. Each quota will cost tens or even
hundreds of thousands of yuan. The quality of people that are admitted to SOEs can hardly be
guaranteed. This employment system in which the prices are clearly marked is a great satire on the
opinion that SOEs can better ensure social employment.
(2) Ensure food safety
Food safety not only concerns people’s individual health, but also bears on the physical quality of
the whole nation. Therefore, it is one of the major concerns of the public. In recent years, there
have been many reports on food additives, genetically modified food, food contamination and fake
commodities. How to ensure food safety since it is so important? Some people think that because
SOE managers don’t have very strong impulses but a relatively better credibility in terms of food
safety, it is necessary to exert the leading role of SOEs in ensuring food safety. In fact, there is no
logical relation between the nature of ownership and food safety. SOEs may do better or worse
than non-SOEs, depending on the credibility of SOEs themselves, government regulation and
public supervision.
For any food producer, to ensure food safety is its due responsibility. Many food producers choose
to disobey food safety requirements in violation of laws, because they can get more profits. Apart
from food producers, only regulators have professional expertise to judge whether the food is up
to safety standards, while consumers don’t have such luxury. Therefore, how to exert the role of
regulators is critical. However, food safety regulators in China are confronted with many problems
in practice. Firstly, many regulators lack necessary means to identify food safety problems.
Secondly, some regulators are unable to carry out normal regulation due to the pressure from
superior authorities. Thirdly, some regulators accept the bribery from food producers and indulge
them in their illegal and irregular behavior. Of course, food safety regulators in China are
improving their professional expertise, and have made more and more achievements in ensuring
food safety.
The melamine accident is a huge scandal in China’s dairy industry. Behind the collapse of Sanlu
Milk Powder Company are many problems relating to food safety. As one of the largest dairy
product producers in China and an SOE, Sanlu Milk Powder Company should have strictly
fulfilled its food safety obligations. However, when other dairy product producers “cautiously’”
added a small amount of melamine into the milk powder they made, Sanlu Milk Powder Company
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chose to add a huge amount of melamine into the milk powder16. Therefore, people said jokingly
that “the company added milk powder into melamine”. After a series of infants were poisoned, the
company repeatedly shirked its responsibilities. To make matters worse, some government
departments even stood out to “refute the rumors” for it. The melamine accident cast a shadow on
China’s dairy industry. As one of the most famous SOEs in China, Sanlu Milk Power Company
completely subverted the image of SOEs in ensuring food safety.
IV. Theory of “International Competitiveness”
International competitiveness refers to the ability of a country to sell its products in international
markets (Orlowski, 1982), or the ability to maintain trade surplus or trade balance. At the level of
enterprises, international competitiveness is mainly embodied by technologies, equipment,
innovation ability and market exploitation ability. SOEs in China, especially more than 100 large
central enterprises under SASAC, are generally considered to be very competitive in international
markets. This is also one of the excuses that SOEs should continue to grow larger and stronger.
However, compared with private companies, the advantages that SOEs have in terms of
technology and equipment are mainly caused by historical and political reasons. This can’t prove
the competitiveness advantages of SOEs. Instead, as they monopolize natural and administrative
resources and basically shake off the existence pressure, SOEs are in great short of innovation and
market exploitation impetus. If things go on like this, these SOEs will gradually lose their
temporary competitiveness advantages. In addition, compared with strong foreign companies,
SOEs not only lag far behind in terms of equipment, technology, share in medium and high-end
markets, but also have a long way to go to improve their innovation and management.
1. Display of competitive advantages of SOEs
SOEs have relative competitive advantages mainly because of two reasons. Firstly, the long-term
public ownership decided that only SOEs can have high-end talents and control high-end
technologies. Secondly, SOEs control major economic and political resources in China with their
large-size advantages. Such competitive advantages do not result from good management, but are
endowed by government departments due to the SOE identity. Because such competitive
advantages are protected by the government with its administrative power, other enterprises in
China can hardly compete with SOEs.
However, when facing challenges from world-famous companies, SOEs often become less
competitive. The competitiveness of world-famous companies include not only the enormous size,
but more importantly, the strong technical, innovation, management and market exploitation
abilities. When studying the relative competitiveness against world-famous companies,
administrative authorities of SOEs will not take all the factors into consideration. The typical
practice is to highlight some factors so as to mislead the people. For instance, relevant people with
SASAC have always emphasized that SOEs are not very competitive simply because they are not
large enough, and lag far behind world-famous companies in terms of scale. Therefore, it is
16In
the melamine accident which was unveiled in 2008, the content of melamine in some batches of products
from Sanlu was found to be up to 2563mg/kg. At the same time, the content of melamine in the products of
Mengniu, Yili and Bright Dairy was found to be no more than 10mg/kg.
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necessary to carry out merger and reorganization to increase the competitiveness of SOEs.
Administrative means can quickly increase the size of SOEs, and the size increase has become an
important means for officials to improve their achievements and senior SOE executives to expand
their power. Therefore, competent authorities of SOEs are keen on merger and reorganization.
Even if the reorganization can’t necessarily improve the efficiency of SOEs, some officials would
still do their best to push it. Although improvement in Innovation, management and market
exploitation can really enhance the competitiveness, because they can’t bring many administrative
benefits, and even the cultivation of these factors may bring risks to relevant executives, SOEs
only chant some slogans and haven’t put them into practice. More importantly, SOEs have already
got unshakable resource and policy advantages, and solved the pressure of survival. Therefore,
they lack the impetus to innovate, improve the management and exploit the market.
2. Loss of SOEs’ competitive advantages
Because they monopolize resources and administrative power, SOEs generally don’t have any
survival pressure. Therefore, they lack the impetus to innovate, improve their management
improvement and market exploitation. Consequently, they are gradually losing their competitive
advantages. Although their assets are generally more than 100 billion yuan, these SOEs don’t have
real international competitiveness.
In telecom, aviation and other sectors, SOEs have been under administrative protection for a long
time and enjoying various privileges. Compared with other sectors, these sectors report more
advanced equipment and technologies and large enterprises because of government support.
However, SOEs in these sectors lag much behind international companies in terms of
competitiveness. Although many SOEs are now among the Fortune 500 companies, all of them are
monopolistic enterprises which are much less competitive than famous international companies.
The gap is not smaller size, but lower efficiency and profitability. At present, most SOEs are keen
on blind expansion, but not interested in real competitiveness.
While monopolistic SOEs are gradually losing international competitiveness, many non-SOEs
having strong international competitiveness emerge in sectors where there is competition, and they
can even compete with famous international companies. Household appliance is one of such
sectors. Many Chinese companies are close to or even reach advanced international levels in terms
of product quality, service, innovation, R&D, market exploitation and strategic management.
Some companies have built up very strong core competence and may join the rank of most
competitive companies in the world. In addition, some non-state-owned companies such as
Huawei in the communication sector, BYD and Geely in automobile manufacturing sector have
shown strong international competitiveness in innovation and market exploitation.
V. Theory of “Social Responsibilities”
Social responsibilities often refer to the social obligations that an organization assumes, which are
higher than the goals of the organization, including environmental protection, social morality and
public interests. It consists of economic responsibility, sustainability responsibility, legal
responsibility and moral responsibility. Corporate social responsibility (CSR) means that in
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addition to creating profits and assuming legal liabilities to shareholders, a company should also
assume responsibilities to employees, consumers, communities and environment. A company must
go beyond the traditional concept that focuses only on profits, and underline the value of human
beings, and the contribution to consumers, environment and society during production.
As people pay more and more attention to CSR performance, to improve their images, Chinese
companies begin to publicize their CSR performance through reports in recent years. They
incorporate donation, environmental protection, emergency response and special responsibility
into their CSR, and vigorously publicize their efforts in these regards. Because SOEs control most
resources and get rich profits, much attention is paid to their CSR performance. Although, SOEs
have done much work to fulfill their social responsibilities, this does not prove that SOEs do better
than other economic subjects. Moreover, SOE managements are suspected of “gaining benefits for
small groups at the expense of the state”, and their performance is not as pure as private
companies that bear the expenses of social responsibilities by themselves. In addition, as most
SOEs still have very high administrative levels, and because of the local protectionism, when a
safety accident happens, SOEs are still likely to shirk their responsibilities.
1. Social responsibilities and return to shareholders
It is the most fundamental social responsibility for enterprises to create profits for shareholders.
SOEs have the due responsibility to turn in profits to the state, because the major shareholder of
SOEs is the state. At the standing meeting of the State Council on November 3 of 2010, it was
decided that from 2011, 5 central departments (organizations) and 1,631 enterprises subordinate of
2 enterprise groups should be incorporated into central state-owned capital management budget,
and the ratio of proceeds of state-owned capitals turned in by central enterprises should be
increased. In fact, the trial of the central state-owned capital management budget system started as
early as 2007. But according to the data released by the Ministry of Finance, in 2007-2009, the
balance of proceeds turned in by central enterprises only totaled 1.9 billion yuan. (Daily Economic
News, November 9)
For quite a long time, central enterprises have been enjoying high policy-based profits by
leveraging monopoly while claiming that they suffered policy-based losses. Therefore, even if
they turned in some proceeds, such proceeds would be refunded to them in the name of subsidies.
Take China Petroleum & Chemical Corporation as example, its policy-based profits amounted to
about 70 billion yuan in 2007 (Information Times, February 27 of 2008), and it still received 12.3
billion yuan of policy-related subsidies (Shanghai Securities News, March 20 of 2008).Even if it
turned in the proceeds at the highest rate after adjustment (15%), it only needed to turn in 10.5
billion yuan. We can see that the public finance didn’t benefit from the proceeds. Instead, it “lost”
nearly 2 billion yuan. Moreover, the rate of proceeds that central enterprises turned in was much
lower than 15% at that time.
According to the data released by the Ministry of Finance, in 2010, the revenue of central
enterprises was expected to be 42.1 billion yuan. Plus the 1.9 billion yuan that was transferred
from the previous year, the total reached 44 billion yuan. In terms of expenditures, the budget of
central enterprises was set to be 44 billion yuan. This indicates that in the four years between 2007
when the trial of the central state-owned capital management budget system began and 2010,
although central enterprises turned in some proceeds to the state, such proceeds were refunded to
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central enterprises in various forms. In the proceeds switch game, the state which is the
shareholder and the whole people that are the ultimate owners actually didn’t get any profit from
the maintenance and increase of the value of state-owned assets. In terms of creating profits for
shareholders,
SOEs
performed
quite
poorly.
(Source:
China
Youth
Daily,
http://zqb.cyol.com/content/2010-11/10/content_3441581.htm)
2. Social responsibilities and donations
“When a disaster strikes, help comes from all sides”. This is the traditional virtue of the Chinese
nation, and also the code of conduct advocated by all walks of life in society. Whenever a natural
disaster strikes, ordinary people, enterprises and government organizations would extend a helping
hand. After the Wenchuan earthquake happened on May 12 of 2008, donation upsurges could be
seen everywhere both at home and abroad. Donations from enterprises were quite striking. Within
one week after the earthquake (as of May 18), the number of enterprises that donated more than 1
million yuan reached over 200, among which non-SOEs accounted for 55%, and SOEs 45%. This
shows that in the face of natural disasters, non-SOEs are more active than SOEs in terms of social
responsibilities. What’s more commendable is that non-SOEs donate their own money while SOEs
donate the money of the state in their hands.
3. Social responsibilities and safety accidents
If we say that SOEs do something in helping relieve natural disasters, their performance in
environmental protection and safe production is quite unsatisfactory. SOEs were involved in many
major industrial disasters that happened in China in recent years. These SOEs which caused
destructive environmental and production safety accidents neglected precautions, and showed
their disrespect for life and environment and their pride in dealing with the aftermath. Due to their
administrative levels, relations with the government and economic strength, regulators could
hardly pose any effective penalty to them. Therefore, some people say that SOEs take a lead in
causing pollution and mine accidents with their dominant positions in an irresponsible manner.
(1) Environmental pollution and safety accidents
According to some saying, because they don’t aim to maximize their profits, SOEs have more
advantages in fulfilling social responsibilities. Moreover, the positions of senior SOE executives
are directly connected with production safety. Therefore, SOEs should be more active in this
regard. However, SOEs were involved in a series of disastrous accidents unveiled in media reports,
and each accident could be related to the negligence and malpractice of SOEs. These disastrous
accidents include but are not limited to the pollution of Songhua River by chemical material
barrels of a chemical factory in Jilin, blast at a plastic factory in Nanjing, oil leakage and pipeline
explosion in Dalian, pollution by Zijin Mining Group and the water inrush accident at a coal mine
in Shanxi Province. These disastrous accidents not only dismiss the saying that SOEs have a better
awareness of social responsibilities, but also subvert the “Guo Jin Min Tui” campaign launched by
competent authorities in coal mine sector in the name of safety.
● Pollution of Songhua River by chemical material barrels
On July 28 of 2010, due to the floods, more than 1,000 barrels of Xinyaqiang Chemical Factory at
Yongji County of Jilin City in Jilin Province, which contained trimethylchlorosilane flew
downward the Songhua River, polluting water in the valley.
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(Source: www.sina.com.cn, http://news.sina.com.cn/green/2010-08-02/130120807696.shtml)
● Blast at a plastics factory in Nanjing
On July 28 of 2010, a blast occurred at No. 4 Plastic Factory in Qixia District of Nanjing. The air
blast engulfed the surrounding areas instantaneously, injuring more than 300 people, battering the
houses of more than 2,700 families, and causing severe property damages. As of July 29, the death
total had risen to 13. Nanjing No. 4 Plastic Factory is a local SOE under Nanjing Light Textile
Group, which was closed for a long time due to poor performance. The blast occurred during the
removal of some factory facilities.
(Source: CCTV Economic Information Broadcast,
http://space.tv.cctv.com/video/VIDE1280327093943885)
● Oil leakage and pipeline explosion in Dalian
On the evening of July 16, 2010, an oil pipeline of China National Petroleum Corporation
exploded and caught fire near Dalian New Port. Some oil leaked into the sea. According to the
surveillance of maritime authority, more than 50 km2 of sea surface was polluted near Dalian New
Port, including 10 km2 of surface which was severely polluted. The thickness of oil on water was
up to 30 cm. By July 19, more than 400 km2 of sea surface was directly polluted by the crude oil.
According to the investigation of Greenpeace, a total of 60,000-90,000 tons of oil leaked into the
sea, much more that the 1,500 tons reported by the government. The leakage severely affected
aquaculture and tourism in the area. The economic loss caused by the accident was estimated to be
more than US$ 10 million. The project owner was Dalian New Port Bonded Oil Depot, an
enterprise controlled and run by China National Petroleum Corporation. China National Petroleum
Corporation issued an internal circular, claiming that a contractor called Huishengda Petroleum
Technology Co., Ltd. should be mainly responsible for the accident while itself should only
assume secondary liability.
(Source: http://news.ifeng.com/mainland/special/dalianyouguanbaozha/)
On the afternoon of October 24, 2010, No. 103 tank at Dalian New Port oil storage facility
exploded during construction. This accident happened at the same place as the oil blast and
leakage accident that occurred on July 16. After the accident, Dalian municipal government held a
special meeting of the municipal production safety committee and organized a rectification
campaign to prevent the occurrence of similar accidents. Information on the loss and
compensation was yet to be released.
(Source: http://www. tianjinwe.com/rollnews/201010/t20101025_2251897.html)
● Pollution by Zijin Mining Group
On July 3 of 2010, water leaked from the wastewater basin of a plant at Zijinshan mine in
Shanghai County of Fujian Province, causing a major environmental pollution accident. The mine
was subordinate to Zijin Mining Group. More than 9,100 m3 of waste water flew into the Ting
River along the drainage culverts, polluting a section of Ting River and killing a large number of
fish raised in cages. The group didn’t release any information until 9 days later, claiming
continuous heavy rain was to blame.
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Zijin Mining Group has caused many environmental pollution accidents in recent years. At the end
of 2006, a dam breach accident occurred at the gold mine subordinate to Zijin Mining Group at
Shuiyindong of Zhengfeng County, Guizhou Province. About 200,000 m3 of waste water which
contained potassium cyanide and other toxic substances leaked from the tailing pond, polluting
two downstream reservoirs. In February of 2008, due to its poor environmental records, Zijin
Mining Group became one of the 10 enterprises that “was disqualified or temporarily disqualified”
for the first “Green Securities” policy. At the end of April, 2009, water leaked from the water
return system at the tailing pond of an old mine of Zijin Mining Group at Chongli County,
Zhangjiakou of Hebei Province. Consequently, some local residents called for the shutdown of
this mine. At the end of 2009, the Municipal Environmental Protection Bureau of Longyan City of
Fujian Province received two letters of complaint, which said that “the water of Xiacun Village at
Wuping County was severely polluted by a mine of Zijin Mining Group, and even fish in ponds
died because of the pollution.” In May of 2010, due to its severe environmental problems and
failure to rectify within a given time, Zijin Mining Group was again criticized by the Ministry of
Environmental Protection.
(Source: www.ifeng.com, http://finance.ifeng.com/stock/special/zjky/; Economic Information
Daily (republished at http://news.qq.com/a/20100721/000358 htm)
● Water inrush at Wangjialing Coal Mine
On the afternoon of March 28, 2010, a water inrush accident happened at Wangjialing Coal Mine
in Shanxi Province. When the accident happened, there were 261 workers in the mine. 108 of the
workers managed to escape and 153 workers were trapped. Thanks to the rescue efforts, 115
people were saved, and the remaining 38 workers died. Wangjialing Coal Mine is subordinate to
Huajin Coking Coal Co., Ltd. a state-owned shareholding company. The shareholders include
China National Coal Group Corp. and Shanxi Coking Coal Group Co., Ltd. The coal mine was
listed as a key state project during the 11th Five-Year-Plan Period.
(Source: www.ifeng.com, http://news.ifeng.com/mainland/special/xiangningkuangnan/)
● Coal mine explosion at Hegang of Heilongjiang Province
On the early morning of November 21, 2009, a gas explosion accident happened at Xinxing Coal
Mine of Hegang Branch of Heilongjiang Longmei Mining Holding Group Co., Ltd. When the
accident happened, there were 528 workers in the mine, and 108 workers died in the accident. The
company is a wholly-state-owned enterprise restructured from Hegang Mining Bureau upon the
approval of Heilongjiang provincial government, and also one of the 520 key SOEs.
(Source: www.sina.com.cn, http://news.sina.com.cn/z/hljhgmkbz/)
(2) Punishment to SOEs for safety accidents
The reason why SOEs caused so many accidents is that the punishment measures are not effective.
The root cause is still the lack of a clear line between the functions of the government and
enterprises. Although the administrative levels of SOEs are abolished, as they are governed by the
government, SOEs still have some implicit administrative levels which depend on the levels of
their administrative authorities. Even though SOEs have become economic entities that operate
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independently and assume sole responsibility for their own profits or losses, competent authorities
can still control them by personnel, taxation, approval and other means. SOEs and government
organizations (or officials in charge) virtually form an interest community that shares successes
and failures. Due to the existence of administrative levels, regulators can’t punish some
“high-level” SOEs. Otherwise, management staff of the regulators may lose their jobs and the
behavior of the SOEs may remain the same as before. Because SOEs and government
organizations share common interests, in case of safety accident, the penalty will often be
minimized or reduced to nothing at all. To make matters worse, the accidents will be concealed or
the responsibility will be shifted to a third party. Therefore, SOEs are subject to very small
restriction in terms of production safety, and their disrespect for social responsibilities and
arrogance will be natural.
VI. Theory of “Ruling Foundation”
The ruling foundation, i.e. whom to rely on and with what to rule is fundamental for the ruling
party to maintain and consolidate its ruling position. Specifically, it can be divided into political
foundation (class foundation and mass foundation), economic foundation, ideological and cultural
foundation, social foundation and organizational foundation. As a one of the major characteristics
of Chinese economy and the “eldest son” of the republic, SOEs have dominated the development
of China’s national economy for a long time. Therefore, they are considered to be an important
ruling foundation of CPC. However, history and current realities convey a message to people, i.e.
SOEs are not and can’t be the ruling foundation. Only when people live and work in peace and
contentment, accept and support it can CPC solidify its ruling position.
1. Why are SOEs considered to be the ruling foundation?
The wording “parallel development of various economic sectors with the public ownership as the
mainstay and state-owned economy playing the leading role” has been taken as a fundamental
principle for the socialist economic system, which is written into the meeting reports of the central
government and CPC national congress. As an important carrier of this principle, SOEs are
naturally regarded as one of the ruling foundations of CPC.
In the early time after the People’s Republic of China was founded, the leading role of
state-owned economy was soon established through the confiscation of bureaucrat capital and
redemption of national industry and commerce capital. In the first Five-Year-Plan period, China’s
national economy soon picked up thanks to the boost of SOEs. From then on, commodity supply
in China began to rise, prices gradually got stabilized, unemployment rate decreased and social
order returned to normal. SOEs were thought to have played an important role in this process.
In the next several decades, SOEs remained a dominant part of the national economy. This was
also an important reason why SOEs were thought to be the ruling foundation of CPC. On the one
hand, SOEs employed most (or even all) urban industrial workers, thus the political foundation.
On the other hand, SOEs played a dominant role in the development of national economy, thus the
economic foundation. In addition, SOEs were an important front for socialist ideology and culture,
which formed the ideological, cultural and organizational foundations together with the CPC
branches and organizations in SOEs. These characteristics of SOEs seem to prove that in their
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history, SOEs really constituted the ruling foundation of CPC.
Nevertheless, no matter what factors constitute the ruling foundation, the most fundamental part
should be the people. Only when the people accept, authorize and support it can CPC rule the
country and rule the country well. As Chinese economy and society advances, the status of SOEs
as ruling foundation becomes increasingly weakened. But at the same time, CPC is supported by
more and more people, and its ruling foundation grows increasingly solid. Therefore, a more
appropriate conclusion can be drawn, i.e. the ruling foundation of CPC is not SOEs, and SOEs
don’t have much to do with the ruling foundation.
2. Reality proving SOEs are not ruling foundation
(1) Disintegration of the Soviet Union
A simple logic is that solidification of the ruling foundation will surely consolidate the party it
serves. Similarly, if SOEs were the ruling party of CPC, the development of SOEs would surely
enable CPC to rule for a long time. However, the disintegration of the Soviet Union gave a counter
example. Before the Soviet Union collapsed, the Communist Party of the Soviet Union had an
absolute control over SOEs in the country. Industrial workers in SOEs were the mass foundation
of the Soviet regime. The government appointed senior SOE executives, made production plans
and guided the ideology of the people, thus establishing the organizational, economic and
ideological foundations. However, the SOEs that had these elements of ruling foundation didn’t
save the Communist Party of the Soviet Union, and the Soviet Union was eventually disintegrated.
In contrast, CPC successfully avoided the fate of the former Soviet Union. Since the beginning of
the reform and opening up, China chose a more practical way of development. In rural areas, it
abolished the state monopoly for purchase and marketing, and adopted the land contract and
responsibility system, which greatly motivated the enthusiasm of farmers. In urban areas, it
allowed and encouraged the development of private sectors, reformed the system of SOEs and
adopted the policy of “invigorating large enterprises while relaxing control over small ones”,
facilitating the rapid growth of national economy. The change in CPC’s policies directly resulted
in continuous and rapid improvement of people’s living standards. In this process, although the
proportion of state-economy declined year after year and the private economy rose rapidly, the
ruling position of CPC didn’t see any challenge. Instead, CPC was supported by more people, and
its ruling foundation grew more and more solid.
(2) Changes in special identifies of SOEs and employees
SOE employees are the major representatives of the working class and an important part of CPC’s
ruling foundation. However, the identity of SOE employees is experiencing a change in nature,
and SOE employees are gradually losing the advanced characteristics of the working class. This
change is not unique to individual SOE employees. Instead, it happens as the characteristics of
SOEs change.
“Service outsourcing” is a form of cooperation favored by many enterprises, because it can bring
the advantages of work specialization into full play, lower the cost and reduce the risk of project
operation. “Labor outsourcing” is another form of outsourcing. Employees can hire other people
to finish their work at a lower cost. Both service outsourcing and labor outsourcing exist in SOEs.
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Many services are outsourced by SOEs, not because they require specialized work. Instead, they
are outsourced in order to avoid physical labor and industrial accidents. Currently, SOEs are
mostly distributed in machinery and equipment, infrastructure and natural resources. Because they
have monopolistic advantages, SOEs can normally get considerate economic returns. The
development of SOEs not only brings high salaries and benefits for the employees, but also frees
them from physical work. According to a survey, power grid companies have outsourced most of
the infrastructure construction and maintenance work. As a result, employees of power grid
companies do not need to climb power poles or install power transmission and distribution
equipment by themselves. Liberation of SOE employees from heavy physical work is only one of
the benefits of service outsourcing. More importantly, service outsourcing can significantly reduce
safety accidents for SOEs. The current statistics on safety accidents of SOEs in fact does not
reflect the real scenario, because many accidents are passed over to the third parties. For instance,
after the oil blast and leakage accident happened in Dalian on July 16 of 2010, China National
Petroleum Corporation defined the accident as a “contractor accident”, shifted the primary liability
to Huishengda Petroleum Technology Co., Ltd. and claimed that it should only assume secondary
liability.
Although labor outsourcing has some potential safety hazards, it happens from time to time. There
are mainly two reasons. On the one hand, salaries of SOE employees are normally higher than
those of non-SOE employees (In some regions, the gap can be up to five times). As a result, these
employees have enough money to outsource the physical labor they don’t want to do. On the other
hand, nepotism is rampant inside SOEs, and their corporate cultures normally emphasize
“harmony”. Therefore, the punishment to employees that outsource their labor is rather weak. As a
result, we can often see the strange phenomenon that employees can get salaries without going to
work in SOEs. SOE employees that choose to outsource their labor profit from other people's toil.
Consequently, they completely lose the advanced characteristics of the working class.
Through service and labor outsourcing, SOEs transfer the production risks. While receiving high
salaries, SOE employees also free themselves from heavy physical work. However, their identity
is fundamentally changed in this process. The identity of SOEs can not only ensure lifelong secure
jobs, but also be used for profits and transactions. Therefore, the condition for the working class to
be the ruling foundation is changed.
(3) Identity exchange between government officials and senior SOE executives
Identity exchange between government officials and senior SOE executives is a major
characteristic of China’s planned economy system. Government officials can temper themselves at
SOEs with their posts retained and senior SOE executives can be transferred to the government.
Although this mechanism of identity exchange was abolished during the SOE reform, it is still
quite common in reality. The identity exchange between central enterprise management staff and
ministry/commission officials and between local senior SOE management staff and local
government officials is never ceased. Currently, the identity exchange can’t be explained simply as
the tempering of government officials at SOEs with their posts retained or senior SOE executives
being transferred to the government. That senior SOE executives enter the government to get
policies and resources, and government officials enter SOEs to cash economic benefits seems to
be a more appropriate explanation.
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A resume survey of officials of ministries and commissions under the State Council shows that
among 183 officials above vice ministerial level of 19 ministries and commissions, 56 people have
working experiences in SOEs, the proportion being as high as 30.6%. As the resume of officials
below vice ministerial level can’t be obtained, it’s hard to compile the statistics. In addition, a
resume survey of senior management staff of 123 central enterprises shows that 115 senior
executives of 47 enterprises which disclose information have government working background,
that is, each enterprise has an average of 2.45 people with such background. Both surveys show
that identity exchange between senior SOE executives and government officials is still quite
common.
The case of Zijin Mining reveals the interest factor behind the identify exchange between
government officials and senior SOE executives, and further explains that the role of SOEs are
gradually losing their role of the ruling foundation.
(4) Identify exchange at Zijin Mining
In 2009, Zijin Mining contributed nearly 60% of the fiscal revenues of Shanghang County.
According to the work report of the local government, fiscal revenues totaled 685 million yuan.
Local government officials and Zijin Mining are interrelated in innumerable ways. Most retired
officials of the county are hired by the company and receive hundreds of thousands of yuan every
year by assuming extremely light and easy jobs.
According to the information released by the PR Department of Zijin Mining, Liu Xiaochu, vice
chairman of the company used to be the senior staff member, vice chief and chief of a department
at Fujian Provincial Committee for Economic Restructuring. Huang Xiaodong, vice president of
the company used to be an engineer at Fujian Computer Technology Research Institute, vice chief
and chief of a department at Fujian Science & Technology Committee. Li Side, vice president of
the company was one of the first senior gold investment analysts in China, working as deputy
division chief, division chief, director of investment department, director of consultancy
committee, and vice chief engineer successively at the former State Gold Administration Bureau,
Gold Administration Bureau of the Ministry of Metallurgical Industry and Gold Administration
Bureau of the State Economic and Trade Commission respectively. From 2003 to 2005, he worked
at China National Gold Group Corporation as chief engineer and vice director of investment
decision, safety and budget evaluation committee successively. Several independent directors also
used to work at the government. Independent director Chen Yuchuan used to serve as chief
engineer of the former Ministry of Geology and Mineral Resources and president of Chinese
Academy of Geological Sciences. Independent director Lin Yongjing used to be director of Fujian
Provincial Assets Appraisal Center, chief of Fujian Provincial State-owned Assets Administration
Bureau and vice chief of Fujian Provincial Department of Finance.
In recent years, many local government officials take a temporary post (in order to temper
themselves) or work at Zijin Mining. Some officials obtain some shares of the company through
various channels.
According to the information provided by the PR Department of Zijin Mining, Lin Shuiqing,
chairman of supervisory board used to be a standing member of CPC Shanghai Committee and
head of United Front Department of CPC Shanghang Committee. He joined the company in
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November of 2009. Supervisor Lin Xinxi used to be the deputy secretary of Discipline Inspection
Commission and standing member of CPC Shanghai Committee. He joined the company in
November of 2009. Lin Jintian, former director of Shanghang County People’s Congress, used to
be deputy secretary of CPC Zijin Mining Committee and later standing member of CPC Zijin
Mining Committee. Wen Wenbiao, chairman of the People’s Political Consultative Conference of
Shanghang County currently serves as deputy secretary of CPC Zijin Mining Committee.
According to insiders, Wen Wenbiao will soon retire from the People’s Political Consultative
Conference of Shanghang County. Before retiring, he managed to secure the position as deputy
secretary of CPC Zijin Mining Committee. After retiring from the People’s Congress of
Shanghang County as vice chief, Fan Zhixi serves as a standing member of CPC Zijin Mining
Committee. Guo Wensheng, former president of Party School of Shanghang County serves as
director of President’s Office of the company.
As early as June 18 of 2009, Zijin Mining issued a statement, saying that supervisor Zheng Jinxing
resigned due to work change. Several days before that, Zheng received 1 million shares at a price
of 9.15 yuan per share, transferred from Chen Jinghe, chairman of Zijin Mining. Also on June 18
of 2009, the Standing Committee of People’s Congress of Wuping County appointed Zheng as
deputy chief of Wuping County. Zheng used to be a civil servant at Wuping County government,
and later worked as deputy chief of Shanghang County. In August of 2006, he resigned and then
worked at Zijin Mining as a supervisor. After working at the company for nearly 3 years, he went
back to work at the government at the same rank and post.
(Source: www.ifeng.com, http://finance.ifeng.com/stock/special/zjky/; Economic Information
Daily (republished at http://news.qq.com/a/20100721/000358.htm)
Reference
CCTV Economic Information Broadcast,
http://space.tv.cctv.com/video/VIDE1280327093943885;
Chen Qiang, July of 2010: Pollution Accidents by Zijin Mining: Natural Disasters or Man-made
Calamities, China Youth Daily;
Anti-monopoly Law, Standing Committee of the National People’s Congress, August 1 of 2008;
Fei Zhengqing, etc., 1977: Cambridge History of China;
www.ifeng.com, http://news.ifeng.com/mainland/special/dalianyouguanbaozha/;
www.ifeng.com, http://news.ifeng.com/mainland/special/xiangningkuangnan/;
www.ifeng.com, http://finance.ifeng.com/stock/special/zjky/;
Guo Xu, 2010: With an Annual Pay of Tens of Thousands, Several Leaders of Zijin Mining Used
to Work at Local Government, Economic Information Daily (republished at
http://news.qq.com/a/20100721/000358.htm);
Jin Bai, 2002: Changes in and Trends of International Competitiveness of Medium and
Large-sized State-owned Enterprises, Journal of Chinese Academy of Social Science;
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Li Guanggui, 2009: Cash Dividend Payout of State-holding Listed Companies: Practice Summary,
Research on Economics and Management, Issue 11 of 2009;
Tan Yimin, 2010: Industrial Disasters Put State-owned Enterprises under Question: Major
Polluters and Hard-to-Punish Giants, www.ifeng.com;
www.tianjinwe.com, http://www.tianjinwe.com/rollnews/201010/t20101025_2251897.html;
www.sina.com.cn, http://news.sina.com.cn/green/2010-08-02/130120807696.shtml;
www.sina.com.cn, http://news.sina.com.cn/z/hljhgmkbz/;
Xu Xuhong, 2010: New State-owned Enterprises: Leaders of China’s Competitiveness, China
Entrepreneur;
Yuan Enzhen, 2004: Public Ownership: Economic Foundation for the Ruling of the Communist
Party of China, Journal of Shanghai Administration Institute;
Law of the People’s Republic of China on the Management of State-owned Assets, Standing
Committee of the National People’s Congress, May 1 of 2009;
China Youth Daily, 2010: Dividend Payout to the State Mustn’t Become Number Games,
November 10 of 2010, http://zqb.cyol.com/content/2010-11/10/content_3441581.htm.
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Sub report 2: Function and Role Conflicts of SASAC
I. Foreword
After 2003, the establishment of state-owned assets supervision and administration authorities at
the central and local governments gave rise to enormous changes in the management system of
SOEs, and also the rules and consequences of their behavior. In the past, the operation and
management of SOEs were subject to administrative intervention from multiple government
authorities, ministries and commissions. Severely distorting the behavior of enterprises, the
overlapping management became one of the important factors causing low operational efficiency
of SOEs. After SASAC was established, the power to manage SOEs was gradually converged to
SASAC, bringing an end to overlapping management. However, the problem of “SASAC acting
both as the administrator and owner” arose, and the trouble caused by the lack a clear line between
the functions of the government and enterprises still existed. Because cooperation is easier to
reach with the presence of fewer participants, it is evident that SASAC which acts as the only
“administrator and owner” has such a tacit understanding with SOEs. Under the historical
circumstances where SOEs would either go privatized or monopolistic, SASAC created the
operation conditions for SOE monopoly, and gradually institutionalized such conditions. In return,
in addition to maintaining and increasing the value of state-owned assets, SOEs also fulfill other
economic and non-economic tasks for SASAC.
Under the new state-owned assets supervision and administration model, SOEs not only eliminate
the long-term widespread losses, but also begin to grow larger and stronger. In this sense, the
SASAC system is quite an advance as compared with the overlapping management model.
Therefore, the system proves to be quite effective. However, given the great potential productivity
that the state-owned assets can achieve in competitive market economy, and the destructive effect
that the SASAC system may bring to the rules of market economy, it may be concluded that the
SASAC system is not worth a fig. The following parts will expound the position and function of
SASAC in an effort to unveil the essence of the SASAC system.
II. Process of SASAC Establishment
1. Reform background
Since 1978, SOE reform underwent the practice of power decentralization and profit transfer,
substitution of tax payment for profit delivery, responsibility system of assets management,
contract system and demutualization. By 2003, a modern enterprise system for SOEs had been
established. In the 25 years of SOE reform prior to this, despite the great achievements that SOEs
made in separating ownership from control and cultivating the entrepreneurial competence, the
fundamental problems of unclear property definition and lack of a clear line between the functions
of the government and enterprises were not effectively solved. Because of this, SOEs showed poor
performance in the competition with foreign and private companies, giving rise to the
embarrassing situation in which “one third SOEs report explicit losses and one third SOEs report
hidden losses”. Due to the unclear property definition and lack of a clear line between the
functions of the government and enterprises, on the one hand, SOEs continue to shoulder some
social burdens, and on the other hand, no property owners that are really responsible for
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state-owned assets have emerged. Although the strategy of “invigorating large enterprises while
relaxing control over small ones” defines the development direction of SOEs to some extent, as
long as the problem of state-owned assets management is not solved, i.e. the subject that can really
be responsible for state-owned assets does not emerge, the large-scale asset depreciation and loss
of state-owned assets will be unavoidable.
Before SASAC was established, there were many authorities that had the power to intervene in the
decision-making of SOEs, including the Ministry of Finance which managed the property rights of
state-owned assets, the State Planning Commission which managed the large investment activities
of SOEs, the State Economic and Trade Commission that managed the business operations of
SOEs, and the Central Work Committee for Large Enterprises that controlled the personnel power
of SOEs. In addition, the administrative authorities, such as the ministries and bureaus of power,
coal, metallurgy, machinery, chemical and textile industries had the power to issue orders to SOEs
in respective industries. These administrative departments, ministries and bureaus were originally
established for the purpose of assisting enterprises in fulfilling the production and development
plans made by the state. However, they turned out to bring totally different results. Therefore, as
was summarized by Guo Songhai, a member of the national committee of CPPCC, many
departments scramble for the control of SOEs when it is profitable, and shift responsibilities onto
each other when it is time to assume responsibilities, ultimately leading to the low operational
efficiency of SOEs, and the lack of state-owned assets owners.
2. Exploration of state-owned assets management theories
In the Decisions of the CPC Central Committee Regarding Issues on Establishing the System of
the Socialist Market Economy adopted at the Third Plenary Session of the 14th Central Committee
of CPC, new ideas were proposed to establish a modern enterprise system and corporate property
rights, and separate the capital contributor’s ownership from corporate property rights. These
reformative ideas brought new implications to the practice of the ownership and control separation
theory. As one of the guiding ideas for the SOE reform theory, the ownership and control
separation theory does not remain unchanged. Instead, it underwent the transition from “separation
of ownership and management right” to the “separation of state ownership and enterprise
ownership”.
The separation of ownership and management right mainly occurred in the first half of SOE
reform. The most typical effort was the contract system which aimed to mobilize the enthusiasm
of internal people so as to improve the operational efficiency of SOEs by transferring the
management right and some residual claim without changing the framework of SOE property
rights. The ownership and control separation model in which the ownership of SOEs is controlled
by the state and the management right controlled by SOE managements failed to fulfill the real
goal of separating the ownership and control. Property owners would always try to realize their
own benefit appeals in various ways. Therefore, the state or government departments would
certainly intervene in the daily operation of SOEs. In particular, in case of severe insider control, it
was inevitable that SOEs would be completely taken over. Consequently, a new ownership and
control separation theory was raised, i.e. separation of state ownership and enterprise ownership.
The new theory was represented by the establishment of a modern corporate governance structure
in SOEs and enterprise legal entities to distinguish the role of state owners so as to define the
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property boundary of state-owned assets. In the new ownership and control separation model,
SOEs not only had the management right but also became the legal owners, which assumed
limited liabilities for their own operation. As the capital contributor, the state no longer intervened
in the daily operation, but still exerted its influence on major decisions.
The new ownership and control separation reform seemed to achieve the goal of “separating
government functions from enterprise management”. However, it was proved by subsequent
practice that the SOEs still didn’t get rid of administrative interference from government
departments after the corporation system reform. Although SOEs became nominally independent
corporate organizations, finance, industry and commerce administration, taxation, organization
and other administrative authorizes still grasped the control over them. In the new state-owned
assets management model, SOEs played an embarrassing role. On the one hand, they needed to
deal with the administrative interference from government departments. On the other hand, they
needed to confront the market competition from rising private and foreign companies. Plus the
problem of insider control, it was natural that SOEs could hardly improve their operational
efficiency. Despite the many nominal government departments that exercised the ownership of
state-owned assets on behalf of the state, the vacancy of real state-owned assets owners was still
severe. In this context, two different solutions were proposed. Firstly, to enhance the restructuring
of SOEs and privatize SOEs engaged in competitive areas. Secondly, to establish real management
authorities that would supervise and administrate state-owned assets on behalf of the state.
The reform practice proved that because they emphasize different areas, there is no severe conflict
between the privatization of SOEs and the establishment of a state-owned assets management
system. The effort to “invigorate large enterprises while relaxing control over small ones” focused
on the privatization of loss-making SOEs in competitive areas, while the strategic contraction of
SOEs was shown by further consolidation of control over monopolistic areas. During this reform
process, the guiding idea that insisted on the dominance of public ownership made it impossible to
choose complete privatization for the reform of SOEs. That is to say, it was impractical to
completely solve the vacancy of state-owned assets owners through privatization. Therefore, to
restructure or build a special organization became an inevitable option. To this end, a scheme was
designed, which combined a management department and several management companies for
state-owned assets. In this scheme, a special management department would exercise the
ownership of state-owned assets on behalf of the state. To address the lack of a clear line between
the functions of the government and enterprises, several management companies would be
engaged for the operation of state-owned assets, and the detailed operation of state-owned assets
would be assigned to the enterprise managements by the management companies. This scheme
aimed to solve the lack of a clear line between the functions of the government and enterprises by
establishing a special state-owned assets management department which would supervise the
operation of state-owned assets so as to distinguish from the existing administrative departments.
However, the new department was in nature a government organization, whose way of behavior
and operational objectives couldn’t get rid of the behavioral characteristics of the government.
Therefore, this scheme received much criticism.
However, to gain more supervision and administration power, SASAC made a backward choice on
solving the lack of a clear line between the functions of the government and enterprises.
According to the design of the theory circle, the supervision and administration system of
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state-owned assets should consist of three layers: at the top is the management department of the
state-owned assets, which supervises the assets management companies; in the middle are several
assets management companies, which are responsible for the assets operation of SOEs; and at the
bottom are SOEs, which take charge of the operation and management of state-owned assets and
participate in market competition. The existence of assets management companies should have
severed the government-enterprise relationship between the government (management department
of state-owned assets) and enterprises to some extent. However, in the new management system,
the layer of assets management companies was abandoned, and the management department
directly supervised and administrated SOEs. The SASAC system institutionalized in 2003 was
such a management system. SASAC directly supervised and administrated SOEs in its portfolio.
Therefore, the new management system didn’t virtually solve the lack of a clear line between the
functions of the government and enterprises.
Figure 1 Ideal and real-world state-owned assets management systems
Ideal state-owned assets
management system
Real-world state-owned assets
management system
State-owned assets
Management department
Assets
Management
Company
Assets
Management
Company
SASAC
Assets
Management
Company
SOE
SOE
3. Establishment of SASAC
SOE
SOE
SOE
The exploration of state-owned assets management system can be traced back to the early phrase
of SOE reform. As early as 1986, the State-owned Assets Administration Bureau was established
and governed by the Ministry of Finance. It can be seen as the predecessor of SASAC which was
set up in 200317. As a special organization under the Ministry of Finance, the State-owned Assets
Administration Bureau was mainly responsible for the management of state-owned assets in
state-owned and state-holding enterprises. However, its function scope excluded natural resources
such as land, mines and rivers, and state-owned assets in the form of railways, roads and civil
aviation infrastructure. In short, the function scope of the State-owned Assets Administration
Bureau was limited to competitive sectors, while other sectors such as resource and monopolistic
sectors were controlled by other government organizations.
From the perspectives of department functions and development, the State-owned Assets
17
As early as the period of the Republic of China, a state-owned assets management department was
established, which was called “Administration Committee of State-owned Resources”.
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Administration Bureau proposed its own ideas on the distribution of power and responsibilities in
the state-owned assets management system as early as 1993. According to the State-owned Assets
Administration Bureau, in terms of macro socio-economic control18, management departments of
state-owned assets could distribute the proceeds of SOEs, manage the formulation of proceeds
distribution systems and the use of profits turned in by SOEs. To ensure that SOEs could operate
in accordance with the rules of market economy, the roles of SOEs in fulfilling the social targets
set by the government and the roles of SOEs in acting as other government management means
should be distinguished, all the administrative intervention in SOEs from the government should
be severed, and all the powers to supervise and administrate SOEs should be converged to the
state-owned assets management department. In addition, with regard to the ownership of central
and local state-owned assets, to maintain the consistency of ownership, the state-owned assets can
be managed in accordance with the principle of “ownership unification and hierarchical
management”. The study of the State-owned Assets Administration Bureau on the state-owned
assets management system, and its idea on power and responsibility distribution virtually set the
stage for the system in which the state-owned assets management department exclusively
supervises and administrates the operation of state-owned assets.
In March of 2003, the First Plenary Session of the Tenth National People’s Congress adopted the
plan for restructuring the State Council, setting up SASAC and dissolving the State Economic and
Trade Commission. Then the standing meeting of the State Council discussed and approved the
“Three Fix19” scheme of SASAC. The new SASAC would be authorized by the State Council to
perform capital contributor’s duties and responsibilities on behalf of the state, supervise the
state-owned assets, ensure the value maintenance and appreciation of state-owned assets and
further revitalize SOEs. In addition, a CPC committee was set up in SASAC to fulfill the duties
stipulated by CPC Central Committee. From the original organization background, SASAC
mainly incorporates some functions of the then Central Work Committee for Large Enterprises,
State Economic and Trade Commission, Ministry of Finance and Ministry of Labor, including all
the functions of the Central Work Committee for Large Enterprises, functions of the State
Economic and Trade Commission to guide the reform and restructuring of SOEs, functions of the
Ministry of Finance to register and dispose of state-owned assets, and later the total salary
management function of the Ministry of Labor. As the assets supervised and administrated by
SASAC are huge in size (which totaled more than 10 trillion yuan when SASAC was established),
a state-owned capital management budget system was set up, which was supervised by the
people’s congress of the same level. According to the disclosed functional settings, 12 of the 20
bureau-level organizations under SASAC are responsible for the supervision and administration of
state-owned assets20. The bureau-level organizations mainly include the Bureau of Policies, Laws
and Regulations, Bureau of Financial Supervision and Evaluation, Bureau of General Affairs,
Bureau of Property Right Management, Bureau of Planning and Development, Bureau of
Enterprise Reform, Bureau of Enterprise Restructuring, Bureau of Enterprise Remuneration,
Bureau of Capital Returns Management, Working Bureau of Supervisory Panels, First Bureau for
the Administration of Corporate Management Staff and Second Bureau for the Administration of
18 According to the definition of the State-owned Assets Administration Bureau, macro socio-economic
control consists of plan control, finance control and finance control.
19 “Three Fix” refers to fix the functions, the organizations, posts and staff size.
20 See Appendix 1 for the detailed functions.
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Corporate Management Staff.
III. Functions of SASAC
1. Legal documents defining the functions of SASAC
Since the State-owned Assets Administration Bureau was established in 1986, the role and
functions of state-owned assets management department were defined in many legal documents.
In August of 1988, the State Commission for Public Sector Reform adopted the “Three Fix”
Scheme of the State-owned Assets Administration Bureau. According to the document, the
State-owned Assets Administration Bureau “should exercise the right endowed by the state to
represent state-owned assets owners, supervise and administrate state-owned assets, and dispose
of the state investment, income and assets.” In July of 1990, the State Council issued the Notice of
the State Council on Strengthening the Administration of State-owned Assets. According to the
document, “the Ministry of Finance and the State-owned Assets Administration Bureau shall
exercise the administration function of state-owned assets owners. The State-owned Assets
Administration Bureau shall be responsible for relevant work, and governed by the Ministry of
Finance.” According to Article 41 of the Regulations on Transforming the Management
Mechanism of Industrial Enterprises Owned by the Whole People issued by the State Council in
July of 1992, “the enterprise property is owned by the whole people, i.e. the state, and the State
Council exercises the ownership of enterprise property on behalf of the state.” From these early
government documents we can see that the state-owned assets management department, as a
special organization under the Ministry of Finance, only fulfilled the tasks assigned by superior
government departments, and did not have the function of a state-owned assets property right
subject.
In March of 2003, the Tenth National People’s Congress approved the restructuring scheme of the
State Council and the Notice of the State Council on Structural Establishment, formally
establishing SASAC. The notice confirmed that SASAC would be a special ministerial-level
organization directly under the State Council to perform the responsibilities of state-owned assets
owners on behalf of the state. In May of the same year, the State Council issued the Interim
Regulations on Supervision and Administration of State-owned Assets of Enterprises (hereinafter
referred to as the “Interim Regulations”), which clearly defined the role and responsibilities of
SASAC. The Interim Regulations first confirmed objectives of the state-owned assets supervision
and administration system, i.e. to “better run SOEs, push forward the strategic adjustment to the
distribution and structure of the state-owned economy, develop and expand the state-owned
economy, maintain and increase the value of State-owned assets.” The Interim Regulations
specified that the state-owned assets supervision and administration cover state-owned assets in
SOEs, state-owned holding enterprises and enterprises with state-owned equity, excluding
state-owned assets in financial institutions. The superior departments of the state-owned assets
supervision and administration authorities are the State Council and local people’s congress at
different levels. Upon the authorization of competent authorities, SASAC can perform capital
contributor’s duties and responsibilities, adopting a management system that “combines the
administration of assets, personnel and affairs”. In addition, the Interim Regulations also
stipulated that the six major responsibilities of state-owned assets supervision and administration
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authorities: (1) perform capital contributor’s duties and responsibilities for invested enterprises in
accordance with the Company Law and other related laws and regulations; (2) guide and push
forward the reform and restructuring of SOEs and state-owned holding enterprises; (3) dispatch
supervisory panels to invested enterprises pursuant to relevant regulations; (4) appoint or remove
the responsible persons of invested enterprises, evaluate their performance, and grant rewards or
impose punishments based on the evaluation results; (5) supervise and administrate the value
maintenance and appreciation of state-owned assets of enterprises; and (6) perform other capital
contributor’s duties and responsibilities and undertake other tasks assigned by the government at
the corresponding level. To ensure the smooth operation of SASAC, the Interim Regulations also
endowed SASAC with the power “to formulate rules and bylaws on state-owned assets
supervision and administration.”
In October of 2008, the Fifth Plenary Session of the Standing Committee of the Eleventh National
People’s Congress adopted the Law of the People’s Republic of China on the State-Owned Assets
of Enterprises (hereinafter referred to as the “Law on the State-owned Assets”), legally defining
the framework of state-owned assets management system in China. According to Article 4 of the
Law on the State-owned Assets, “the State Council and local people’s governments shall, pursuant
to relevant laws and administrative regulations, respectively perform capital contributor’s duties
and responsibilities on behalf of the state and shall be entitled to capital contributor’s rights and
interests. The State Council shall perform capital contributor’s duties and responsibilities on
behalf of the state for large-scale state-invested enterprises concerning the lifeline of the national
economy and national security and state-invested enterprises in important infrastructure, important
natural resources and other sectors. For other state-invested enterprises, local people’s
governments shall perform capital contributor’s duties and responsibilities on behalf of the state”.
Although SASAC was not specified in the Law on the State-owned Assets, the classification of
state-owned assets and the definition of regulation systems provide a support to rationalize
SASAC as a special organization.
2. Authority relations between SASAC and relevant subjects
To define the rights and responsibilities of relevant government departments, the Interim
Regulations stipulated that “people’s governments at all levels shall strictly abide by the laws and
regulations on state-owned assets management, persist in the separation of government functions
from the functions of capital contributors of state-owned assets, persist in the separation of
government functions from enterprise management and separation of ownership from
management”, and that “SASAC shall not perform the social and public administration function of
the government. Other institutions and departments under the government shall not perform
capital contributor’s duties and responsibilities for state-owned assets of enterprises.” With regard
to the rights and responsibilities of the government and enterprises, the Interim Regulations
stipulated that “the invested enterprises and the enterprises set up with the investment of such
invested enterprises shall enjoy autonomy in their operation set forth in relevant laws and
administrative regulations. The state-owned assets supervision and administration authority shall
support the independent operation of enterprises according to law, and shall not interfere in their
production and operation activities, apart from performing capital contributor’s duties and
responsibilities.” Because of such provisions, great changes took place in the relations between the
government and enterprises. The original pattern in which many government departments could
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interfere with the production of operation of SOEs was transformed into one in which almost only
SASAC could do so. Originally, SOEs needed to face many administrative authorities. But now, it
only needs to face SASAC, and the administrative interference in daily operation of SOEs from
government departments is significantly restrained.
Figure 2 Supervision and administration of SOEs before and after the establishment of
SASAC
Enterprises were subject
to the supervision of
many authorities before
SASAC was established
Government
departmentⅠ
Government
department Ⅱ
Enterprises are only
subject to the supervision
of SASAC after SASAC
was established
Government
department Ⅰ
SOE
Government
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department Ⅲ
Government
department Ⅱ
SOE
State-owned
assets
authorities
Government
department Ⅲ
SASAC
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The establishment of the SASAC system, on the one hand, changed the relations between SASAC
and other government departments, and on the other hand, reshaped the relations between SASAC
and SOEs. By integrating the functions of other government departments, SASAC rapidly
expanded its power and gradually formed an exclusive supervision and administration power.
Within this system framework, as long as they don’t materially disobey the orders of SASAC,
SOEs don’t have to accommodate to the policies of other government departments. As SASAC
has the enthusiasm to “protect” SOEs to grow larger and stronger through independent operation,
many problems arise, including too insufficient profits turned in by SOEs, too partial income
distribution to SOE employees, and SOE behavior free from control. Under this system
framework, the relationship between SASAC and SOEs still can’t get rid of the predicament of
incentive and control: Too strong control will greatly compromise the enthusiasm of SOEs, and
too loose freedom will cause SOEs to be out of control. Unlike what happened at the early time of
reform, the one-to-one relationship between SASAC and SOEs prevents the situation that “once
the control is tightened, SOEs would be dead, and once the control is loosened, there would be
chaos.” SOEs can get insider benefits within the range tolerant to SASAC, and SASAC creates
necessary monopolistic resource advantages for SOEs to achieve its supervision and
administration objectives.
IV. Role Conflicts of SASAC
As SASAC is transformed from a special organization subordinate to the Ministry of Finance to a
state-owned assets supervision and administration authority, which has extensive power from
making major decisions on the operation of SOEs to formulating relevant bylaws and regulations,
the role of SASAC is changed accordingly. However, with the power expansion, conflicts between
different roles inevitably emerge, which in turn will impair the sound development of the
state-owned economy and even the whole national economy. These conflicts mainly stem from the
mixture between the functions of the government and enterprises, between the property right
subjects and operating subjects in the SASAC system. Because they have different goals and
operating rules, in case of conflict, it is inevitable that one goal is sacrificed for the other, and even
both goals come to nothing.
1. Role conflicts between market subject and regulator
Both the Interim Regulations and the Law on the State-owned Assets confirmed the dual identity
of SASAC as a market subject and a regulator from the institutional level. The identity of market
subject is mainly showed by the role of capital contributor, including the appointment, dismissal
and evaluation of senior SOE managers, directors and supervisors, examination and approval of
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development strategies, merger, restructuring and other major decisions of SOEs, determination of
remuneration and profit distribution. The identity of regulator is mainly showed by the role of rule
maker. According to the Interim Regulations, SASAC may formulate rules and bylaws for the
supervision and administration of SOEs so as to achieve the goals of maintaining and increasing
the value of state-owned assets, and enabling SOEs to grow larger and stronger. However, once
SASAC combines the roles of capital contributor and rule maker, the lack of a clear line between
the administrator and between the functions of the government and enterprises”21 would be
inevitable.
As a representative of state-owned assets contributors specifically established by the state,
SASAC would naturally first aim to get SOEs to grow larger and stronger. Nevertheless, no matter
how its organizational structure and behavioral rules are like, SASAC is still a government
department. Because of the behavioral consequences of SASAC, SOEs can’t possibly become real
market subjects in the SASAC system. Although the current SASAC system has separated the
government duties of social and public administration from capital contributor’s duties and
responsibilities for state-owned assets, SOEs, on the one hand, have to cooperate with the
government to fulfill some social duties and responsibilities, and on the other hand, receive
government subsidies and protection when they are poorly managed. This problem is not
fundamentally solved. The current SASAC system fails to weaken such government characteristic
of SOEs. Moreover, it institutionalizes the characteristic by formulating some rules and
regulations. This goes against the goals of changing SOEs into subjects in market economy which
operate independently and separating government functions from enterprise management.
With regard to the role of capital contributor, the behavioral characteristic of SASAC is largely
shown through SOEs. In the past 30 years of SOE reform, the lack of a clear line between the
functions of the government and enterprises has remained a major issue that troubled the
reformers. In the SASAC system, this problem is changed into another form. “When asked to turn
in their profits, SOEs often show themselves as non-market subjects. When preparing to enter
highly-profitable areas for economic benefits, SOEs choose to show themselves as market
subjects.” The nature of dual personality of SOEs to go after profits and avoid disadvantages
institutionally stems from the dual identities of the administrative authority. As the capital
contributor needs to maximize economic returns, SASAC incites SOEs to seek active economic
expansion. As the regulator has the power to make rules, SASAC tends to establish a system that
can help SOEs shun the restraints of laws and regulations. The current SASAC system fails to
make sure that SOEs truly serve the ultimate property owners (the state and the people), but
endows SOEs with too much market participation right. Unavoidably, the interests of other market
participants and the ultimate property owners would be harmed. When this role conflict
deteriorates to a certain level, the relationship between the regulator and objects will be changed
accordingly. Their interests will gradually become unified and ministries and commissions will
inevitably become economic substantialized.
2. Conflicts between social justice and real results
The economic substantialization of ministries and commissions is mainly shown by the fact that
regulators and objects become interest communities, which get benefits by offering each other
21
This problem is often called “owner and administrator”.
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convenience. In the SASAC system, SOEs can not only enjoy preferential credit policies,
low-price land and materials, but also gain administrative monopoly power from the system. It is
just because of the administrative monopoly power that poorly-managed SOES can get huge
profits. Some SOEs shake off the long-term losses, and even show a sign of prosperity. In return,
SOEs fulfill the political tasks assigned by SASAC, and offer economic rewards to government
officials. In contrast, the interests of other economic subjects and ultimate property owners are
harmed in this process, hence the conflicts between social justice and real results.
In addition to the administrative monopoly power and other “protection”, SOE managers and
employees also gain huge benefits from the economic substantialization of ministries and
commissions. Compared with their counterparts in other economic subjects, especially the private
economy, SOE employees enjoy conspicuously too high salaries and benefits. The salary incomes,
duty consumption and other political gains of SOE managers are beyond the reach of other
subjects. In addition, SOE managers have dismissal immunity when SOEs are poorly managed.
Even if their wrong management decisions result in huge losses, and their criminal responsibilities
are investigated, as long as they don’t break the organization principles, they can still retain their
jobs or get transferred to other SOEs. This is unimaginable in other economic subjects which seek
to maximize the benefits for shareholders. However, this model is quite common in SOEs in the
SASAC system. Corresponding to this model, many posts in the management, board of directors
and supervisory board of SOEs are established for government officials. Once leaving the
government, these officials can work in SOEs. China’s civil service system limits the economic
benefits of government officials. Therefore, government officials have to monetize their benefits
through SOEs because only SOEs can provide high salaries for them. Since SOEs are potential
good places for them, it is natural for government officials to design systems to protect the
interests of SOEs.
The economic substantialization of ministries and commissions in nature manifests the lack of a
clear line between the functions of the government and enterprises, which obviously harms the
interests of other economic subjects and the ultimate property owners of state-owned assets, and
severely impairs social justice.
V. Summary
The analysis of the establishment process and functional power of SASAC shows that in the
SASAC system, SOEs still fail to solve the lack of a clear line between the functions of the
government and enterprises, and the problem becomes more covert and causes more severe
consequences in the new economic situation. By institutionalizing the interest community between
regulators and objects, SOEs gain huge economic privileges, which will be gradually enhanced
and stabilized as the state-owned economy grows stronger. Although this pattern is characterized
by increasingly larger and stronger state-owned economy, it virtually causes untold harm to the
market economy by breaking the principle of fair competition and creating severe injustice to
other economic subjects. As the system gets further institutionalized and stabilized, it is more and
more difficult to further grow the market economy. Moreover, the effort to change this established
pattern will encounter mounting pressure, which in turn will increase the cost of reform.
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Exhibit 1: Functions and responsibilities of SASAC bureaus supervising and
administrating state-owned assets
Bureau of Policies, Laws and Regulations: draft laws and regulations related to the supervision
and administration of state-owned assets, coordinate the draft and revision of relevant laws and
regulations; study law-related problems in the reform and development of SOEs; guide the legal
consultancy for SOEs, and undertake legal affairs for SASAC organizations.
Bureau of Financial Supervision and Evaluation: draft and implement responsibility systems for
the management of state-owned assets; study and improve the authorized management system and
supervise the authorized enterprises; put forward performance contracts and other methods to
manage the goals of maintaining and increasing the value of SOE assets, and organize the
implementation of such methods; evaluate the operation performance of supervised enterprises,
and put forward measures to investigate major decision-making responsibilities.
Bureau of Statistics and Evaluation: gather statistics on state-owned assets, and document the
financial statements of supervised enterprises; set up a statistics and information network on
state-owned capital and disclose statistical information in accordance with relevant regulations;
establish and improve methods of evaluating the maintenance and increase of the value of
state-owned assets; draft the evaluation criteria, establish and improve an enterprise performance
evaluation system and organize the implementation of the system; draft policies, regulations and
methods for the appraisal of state-owned assets, organize the assets appraisal of supervised
enterprises, and cancel off assets losses of supervised enterprises in accordance with relevant
regulations.
Bureau of Property Right Management: propose ideas on reforming the management methods and
systems of state-owned assets, draft regulations and management methods on property definition,
registration, transfer, disposal and dispute resolution for state-owned assets; take charge of
property definition, registration, transfer, disposal and dispute resolution for state-owned assets of
supervised enterprises; approve and document the assets appraisal projects for supervised
enterprises; manage the budget of state-owned assets of supervised enterprises, and supervise the
use of capital gains; examine the plans to change the capital of supervised enterprises, transfer the
equity and issue bonds; supervise and regulate state-owned property transactions.
Bureau of Planning and Development: propose policies on the distribution and strategic
restructuring of state-owned economy, guide the restructuring of supervised enterprises; examine
the development strategies and plans of supervised enterprises; perform capital contributor’s
duties and responsibilities on major investment decisions of supervised enterprises, and carry out
post-decision evaluation for the investment when necessary.
Bureau of Enterprise Reform: propose guiding policies on SOE reform; guide SOEs to establish a
modern enterprise system and improve their corporate governance structure; study the merger,
shareholding reform, listing, joint venture and other restructuring plans for supervised enterprises
and the plans to establish state-owned assets management companies, and raise ideas on issues
that need to be decided by state-owned shareholders.
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Bureau of Enterprise Restructuring (Office of Enterprise Merger and Bankruptcy and Employee
Re-employment): formulate and implement SOE merger and bankruptcy plans, make plans for
writing off the loss of creditor’s rights and employee resettlement; organize and coordinate the
debt-to-equity swap; organize and coordinate the merger, division, dissolution, liquidation,
shutdown and bankruptcy of supervised enterprises, and the reorganization of enterprises in
difficulty, and solve major problems in enterprise restructuring.
Bureau of Enterprise Remuneration: draft guiding suggestions on the reform of income
distribution systems in SOEs; control salary levels in supervised enterprises in accordance with
relevant regulations, make and implement remuneration systems and incentive mechanisms for
management staff of supervised enterprises; guide the supervised enterprises on splitting social
undertakings, separating secondary lines of business from core business and dispersing redundant
staff, and render coordination to relevant departments for resettlement of laid-off workers.
Working Bureau of Supervisory Panels (Working Office of Supervisory Panels for SOEs): take
charge of the routine management of supervisory panels in accordance with the Interim
Regulations on the Boards of Supervisors in SOEs.
First Bureau for the Administration of Corporate Management Staff and Second Bureau for the
Administration of Corporate Management Staff: inspect the leaders of supervised enterprises and
put forward appoint and dismissal proposals in accordance with relevant regulations; inspect and
recommend candidates for directors, supervisors and independent directors.
Reference
Guo Yuanxi, 1997: On Separation of Government Functions from Enterprise Management and
Separation of Government from Capital, Economic Research Journal, Issue 2 of 1997;
Research team of State-owned Assets Administration Bureau, 1993: Several Issues regarding
Rationalizing Property Right Relations and Establishing New Management Systems for
State-owned Assets, Economic Research Journal, Issue 9 of 1993;
SASAC, 2006: Work Regulations of the State-owned Assets Supervision and Administration
Commission of the State Council, November 9 of 2006;
State Council, 2003: Interim Regulations on Supervision and Administration of State-owned
Assets of Enterprises, May 27 of 2003;
Ni Jixiang, 1992: Thoughts on How to Regulate the Relations between Ownership and
Management Right of State-owned Enterprises, Economic Research Journal, Issue 10 of 1992;
National People’s Congress, 2008: Law of the People’s Republic of China on the State-Owned
Assets of Enterprises, October 28 of 2008;
Xiao Jincheng, Chang Jingzhou, 1996: Several Tentative Plans for Establishing Management
Companies for State-owned Assets, Economic Research Journal, Issue 4 of 1996;
Zhang Jixiang, 1993: Probe into Several Issues regarding Local Governments and Enterprise
Property Rights, Economic Research Journal, Issue 7 of 1993.
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Sub report 3: Lack of Rent for Land for Industrial and Commercial
Purposes in China
I. Calculation of Rent of State-owned Land for Industrial and Mining Purposes
and Land of State-owned Industrial Enterprises
1. Size of state-owned land for industrial and mining purposes
The size of state-owned land for industrial and mining purposes in China totaled 27,700 km2 in
1996, which grew for about 3.19% annually to 43,000 km2 in 2010 (Shang Qianming, Wang
Rengui, 2010). On this basis, the size of state-owned land for industrial and mining purposes in
1989 was about 22,230 km2.
Table 1 Size of state-owned land for industrial and mining purposes in 1989-2010
Unit: km2
Year
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Size
22230
22943
23675
24430
25210
26014
26844
27700
28584
29497
30439
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Size
31411
32414
33449
34517
35619
36756
37930
39141
40391
41680
43011
Source: Data for 1996 and 2010 comes from Much Land for Industrial and Mining Purposes Is
Idle and Wasted in China (Outlook Weekly, March 7 of 2010). Data for other years is calculated
according to the average growth rate of state-owned land for industrial and mining purposes
between 1996 and 2010.
According to the report of National Land Use Planning Committee (2008), at the end of 2005, the
size of land for industrial and mining purposes in urban areas totaled 7.27 million hectares,
growing by 0.206 million hectares per annum on average between 1997 and 2005. From this we
can see that the size of land for industrial and mining purposes reached about 5.62 million hectares
in 1997. The land for industrial and mining purposes includes not only state-owned but also
collectively-owned land for industrial and mining purposes. Therefore, according to the data of
China Statistical Yearbook that the total industrial output excluding collectively-owned, township
and individually owned enterprises accounted for about 52.9% of the total in 1997, the size of
state-owned land for industrial and mining purpose in the year was estimated to be about 29,730
km2. The size of state-owned land for industrial and mining purposes was calculated to be about
28,584 km2 in 1997 according to the first method. The two figures are quite close.
Due to the lack of accurate data of land occupied by state-owned and state-holding enterprises, the
land rent of SOEs is estimated according to the available data. Because the available data comes
from different sources, two figures are used to calculate the size of state-owned land for industrial
and mining purposes to prevent large deviations. In this report, the smaller figures, i.e. the figures
in Table 1 are used for the calculation.
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2. Size of land assigned by means of allocation and agreement in state-owned land for
industrial and mining purposes
Before 1990, allocation was the only means of land supply in China. The land used by other
enterprises than SOEs, such as foreign funded enterprises, was used with payment in two major
ways: (1) the land use right was used as the investment of Chinese investors; (2) if the land use
right was not as part of the investment of Chinese investors, the joint ventures needed to pay use
fee to the Chinese government. If the land use right was acquired in the first way, the land
earnings were still obtained by the enterprises. If the land use right was acquired in the second way,
the land use fee was too low to fully reflect the land earnings. In some parts of China, the land use
fee was exempted or reduced. Moreover, enterprises got land use right mainly through allocation.
The proportion of allocated land in total land supply was 97.2% in 1992. (Wang Yonghong, 2008).
Therefore, this report uses the size of state-owned land for industrial and mining purposes in 1989
as the base of state-owned land allocated for industrial purposes.
In 1990, China enacted the Interim Regulations of the People’s Republic of China Concerning the
Assignment and Transfer of the Right to Use State-owned Land in Urban Areas, stipulating that
the land use right can be assigned by means of agreement, bid tendering and auction. From then
on, state-owned land began to be onerous. The system of bid tendering, auction and quotation
originated from the Rules on the Assignment of the State-owned Land Use Right by Means of Bid
Tendering, Auction and Quotation issued by the Ministry of Land and Natural Resources in 2002.
However, agreement was still the dominant way of land assignment for industrial purposes before
2008. According to the statistical yearbook of the Ministry of Land and Natural Resources, in the
land supply for industrial purposes between 2003 and 2007, the proportion of land assigned by
means of allocation and agreement remained quite stable at above 86% in total. In 2003, the land
assigned by means of allocation and agreement accounted for 6% and 81% of the total land supply
respectively in 2003.
Figure 1 Proportion of land assigned by different means for industrial, mining and storage
purposes in 2003-2008
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Source: Ministry of Land Resources, China Land and Resources Statistical Yearbook (2004-2009).
Because it was not until 2003 that the China Land and Resources Statistical Yearbook began to list
the sizes of land assigned by different means for industrial purposes, the sizes of land assigned by
means of allocation and agreement for industrial purposes before 2003 were estimated, i.e. based
on the assumption that the proportion of state-owned land assigned by means of allocation for
industrial purposes in newly-increased land supply decreased by 6.71% every year from 1989 to
6% in 2003, while the proportion of land assigned by means of agreement increased by 5.79%
annually to 81% in 2003. In this way, the sizes of state-owned land for industrial purposes
assigned by means of allocation and agreement in 1990-2002 were estimated.
The annual increase in land assigned by means of allocation and agreement in 2003-2008 was
calculated according to the data in China Land and Resources Statistical Yearbook. Because from
2009, China Land and Resources Statistical Yearbook no longer listed the sizes of land for
industrial and mining purposes assigned by means of allocation and agreement, it is assumed that
the land was completely assigned by means of bid tendering, auction and quotation in 2009 from a
conservative perspective and according to the development trend in means of land assignment. See
Table 2 for the results.
Table 2 Sizes of state-owned land for industrial and mining purposes assigned by means of
allocation and agreement in 1989-2009
Unit: km2
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Year
Allocation
Agreement
Year
Allocation
Agreement
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
22230
22895
23529
24132
24702
25236
25732
26186
26595
26956
27265
0
41
126
257
437
670
958
1305
1714
2190
2734
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
27519
27714
27846
27917
27960
28065
28123
28158
28190
28190
3353
4049
4828
5775
6629
7491
8888
9892
9907
9907
Note: See Attached Table 2 for data calculation.
3. Size of land for state-owned industrial enterprises
In 1989, SOEs, some individual-owned enterprises in urban and rural areas and other industrial
enterprises occupied state-owned land for industrial and mining purposes. This report assumes that
the total outputs of individual-owned enterprises in both urban and rural areas accounted for 50%
of their total respectively. In 1989, the total industrial output of SOEs accounted for 90.56% of the
total of SOEs, individual-owned enterprises in urban and rural areas and other enterprises.
According to this proportion, the size of land for SOEs was calculated to be 20,130 km2 in 1989.
In 1990, the land leasehold system was established. After the land supply became onerous instead
of free of charge, land for state-owned industrial enterprises was mainly acquired by means of
allocation and agreement. Each year, the newly allocated land was assigned to SOEs for free. The
proportion of new land assigned by means of agreement for state-owned industrial enterprises was
estimated according to the proportion of state-owned industrial enterprises in urban industrial
economy22. See Table 3 for the results.
Table 3 Sizes of land assigned to state-owned industrial enterprises by means of
allocation and agreement in 1989-2009
Unit: km2
Year
1989
22
1990
See Attached Table 1.
220
1991
1992
1993
1994
1995
1996
1997
1998
1999
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Allocation
20130
20795
21429
22032
22602
23136
23632
24086
24495
24856
25166
37
110
219
356
507
679
866
1063
1316
1593
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
25420
25615
25746
25817
25860
25965
26023
26058
26091
26091
1934
2281
2629
3011
3293
3592
4041
4346
4350
4350
Agreement
Year
Allocation
Agreement
Note: See Attached Table 2 for data calculation.
4. Selection of land rent levels
The unit price of land for industrial purposes is calculated according to the payments and sizes of
land assigned by different means in China Land and Resources Statistical Yearbook. The unit price
of land assigned by means of auction was the highest, which reached 300 yuan/m2 in 2003-2008,
followed by the price of land assigned by means of quotation, which amounted to 284 yuan/m2,
and then by the price of land assigned by means of bid tendering, which was 176 yuan/m2. The
price of land assigned by means of agreement was the lowest, which stood at 130 yuan/m2. In this
report, the prices of land assigned by means of bid tendering, auction and quotation were thought
be close to market prices.
Figure 2 Prices of land for industrial purposes assigned by different means in 2003-2008
Unit: yuan/m2
Source: Calculated according to China Land and Resources Statistical Yearbook (2004-2009).
Figure 3 Average price of land for industrial purposes assigned by means of bid tendering,
auction and quotation
Unit: yuan/m2
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Source: Calculated according to China Land and Resources Statistical Yearbook (2004-2009).
The price of land for industrial purposes in 105 major Chinese cities monitored by China Urban
Land Price Dynamic Monitor is higher than the price indicated in the China Land and Resources
Statistical Yearbook.
Figure 4 Price of land for industrial purposes in 2003-2009
Source: China Urban Land Price Dynamic Monitor (http://www.landvalue.com.cn/).
The land rent calculated according to the data from China Land and Resources Statistical
Yearbook is lower than the one calculated according to the data from China Urban Land Price
Dynamic Monitor. The China Land and Resources Statistical Yearbook covers all cities in China
while the latter covers only 105 major cities. So which one should be chosen? We think that it is
more appropriate to use the land rent calculated according to the data from China Urban Land
Price Dynamic Monitor because of the following reasons:
(1) “SOEs” in this report refer to medium and large-sized enterprises, mostly central enterprises,
which are concentrated in medium and large cities. The concentration of state-owned land for
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commercial purposes is more obvious. Therefore, the price of land they use is more concentrated
on a high range;
(2) The land prices derived from China Land and Resources Statistical Yearbook does not tally
with the basic trend of land transaction prices in China Statistical Yearbook. The latter
demonstrated an obvious rise trend in the first decade of the 21st century, while the former showed
an irregular fluctuation. In contrast, the data on China Urban Land Price Dynamic Monitor tallies
with this trend. See the following figure.
Figure 5 Comparisons of land price indexes from different sources
2.5
2
1.5
1
0.5
0
2003
2004
Land transaction
price index
2005
2006
2007
2008
Data index in China Land and Resources
Statistical Yearbook
Data index on China Urban Land Price Dynamic Monitor
Source: Calculated according to the data in China Statistical Yearbook, China Land and Resources
Statistical Yearbook and on China Urban Land Price Dynamic Monitor.
(3) According to the National Standards for Minimum Prices of Land for Industrial Purposes for
2006, land for industrial purposes in China is classified into 15 grades, whose minimum prices are
60-840 yuan/m2. Amongst, land below Grade 12 is basically in county-level regions. According to
the land assignment prices calculated in China Land and Resources Statistical Yearbook, the
average price of land assigned by means of bid tendering, auction and quotation for industrial
purposes in 2006 was about 186 yuan/m2, lower than the price of Grade-9 land. Obviously, this
price was too low. According to China Urban Land Price Dynamic Monitor, the price of land
assigned for industrial purposes in 2006 was 485 yuan/m2. This data came from the monitoring of
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land for industrial purposes in 105 medium and large-sized cities.
Table 4 National Standards for Minimum Prices of Land for Industrial Purposes in 2006
Unit: yuan/m2
Grade
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Minimum price
standard
840
720
600
480
384
336
288
252
204
168
144
120
96
84
60
Source: Ministry of Land Resources, National Standards for Minimum Prices of Land for
Industrial Purposes (2006).
Because of aforementioned reasons, the prices on China Urban Land Price Dynamic Monitor are
closer to market prices.
5. Lack of rent of state-owned land for industrial and mining purposes
When calculating the rent of state-owned land for industrial and mining purposes, the report uses
data from China Urban Land Price Dynamic Monitor as the market price and calculates the rent of
land for industrial purposes at a rate of 3% of the land price. The 3-year deposit interest rate
remained above 3% after 2004 in China. From the perspective of opportunity cost of funds, this
rent rate is appropriate. As the data from China Urban Land Price Dynamic Monitor covered the
period between 2000 and 2009, the report only calculates the land rent in this period. According to
the calculation, the lack of rent of state-owned land for industrial and mining purposes amounted
to more than 510 billion yuan every year between 2001 and 2009.
Table 5 Lack of rent of state-owned land for industrial and mining purposes
2001
2002
2003
2004
2005
2006
2007
2008
2009
27714
27846
27917
27960
28065
28123
28158
28190
28190
461
465
471
481
469
485
561
588
597
Lack of rent of land
assigned by means of
allocation (100 million
yuan)
3833
3885
3945
4035
3949
4092
4739
4973
5049
State-owned land assigned
by means of agreement for
industrial and mining
purposes (km2)
4049
4828
5775
6629
7491
8888
9892
9907
9907
Gap between price of land
assigned by agreement and
331
335
357
362
339
368
415
433
467
State-owned land assigned
by means of allocation for
industrial and mining
purposes (km2)
Land price (yuan/m2)
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market price (yuan/m2)
Lack of rent of land
assigned by means of
agreement (100 million
yuan)
402
485
619
720
762
981
1232
1287
1388
Total
4235
4370
4564
4755
4711
5073
5971
6260
6437
Note: China Land and Resources Statistical Yearbook only contains the price of land for industrial
purposes assigned by agreement in 2003-2008. The weighted average of 2003-2008 is taken as the
price of land assigned by agreement in 2001, 2002 and 2009, i.e. 150 yuan/m2.
6. Lack of rent of land for state-owned industrial enterprises
According to the rent of land for state-owned industrial enterprises calculated from the data on
China Urban Land Price Dynamic Monitor, the lack of rent was about 440 billion yuan every year
on average in 2001-2009.
Table 6 Lack of rent of land for state-owned industrial enterprises
2001
2002
2003
2004
2005
2006
2007
2008
2009
25615
25746
25817
25860
25965
26023
26058
26091
26091
461
465
471
481
469
485
561
588
597
Lack of rent of land
assigned by means of
allocation (100 million
yuan)
3543
3592
3648
3732
3653
3786
4386
4602
4673
Land assigned to
state-owned industrial
enterprises by means of
agreement (km2)
2281
2629
3011
3293
3592
4041
4346
4350
4350
Gap between price of land
assigned by agreement and
market price (yuan/m2)
331
335
357
362
339
368
415
433
467
Lack of rent of land
assigned by means of
agreement (100 million
yuan)
227
264
322
358
365
446
541
565
609
Land assigned to
state-owned industrial
enterprises by means of
allocation (km2)
Land price (yuan/m2)
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Total
3769
3856
3970
4089
4019
4232
4927
5168
5282
Note: China Land and Resources Statistical Yearbook only contains the price of land for industrial
purposes assigned by agreement in 2003-2008. The weighted average of 2003-2008 is taken as the
price of land assigned by agreement in 2001, 2002 and 2009, i.e. 150 yuan/m2.
Moreover, during the reorganization of SOEs, a lot of state-owned land assets were lost. Land,
property and other fixed assets were converted into shares at their original prices, excluding their
appreciations. Some SOEs directly converted the land allocated to them into their own shares
without any payment. During the shift from labor-intensive industry to service economy, some
SOEs gained huge profits from the price gaps by directly transforming the land assigned to them
for industrial purposes into land for commercial and residential purposes. In addition, the value of
some land was underestimated during the disposal of land assets due to illegal land leasehold.
Such practices resulted in huge losses of land assets during the transformation of land originally
allocated free of charge into land used with payment. However, there is no accurate data on such
losses.
II. Calculation of state-owned land for commercial and Service purposes
1. Size of state-owned land for commercial and service purposes
According to China Urban Construction Statistical Yearbook, land for public facilities accounted
for 12% of the total built-up area on average in 1994-2009. The size of land for public facilities
every year can be estimated according to the data in Table 2 - Number of Cities, Population and
Size (1978-2009) in China Urban Construction Statistics Yearbook (2009).
Moreover, according to China Land and Resources Statistical Yearbook, the land assigned for
commercial and service purposes in 2003-2008 accounted for about 73% of the total land assigned
for public facilities (land for commercial and service purposes plus land for public construction).
It can be estimated that state-owned land for commercial and service purposes accounted for
8.76% of built-up area in urban areas in 1989-2002. The size of state-owned land for commercial
and service purposes is calculated according to the increase in land for commercial and service
purposes in China Land and Resources Statistical Yearbook in 2003-2009. See Table 7 for the
results.
Table 7 Size of land for commercial and service purposes 1989-2009
Unit: km2
Year
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Size
1092
1126
1227
1310
1453
1572
1688
1771
1821
1873
1886
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Size
1966
2105
2275
2734
3112
3371
3652
3954
4204
4454
Note: See Attached Table 3 for data calculation.
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2. Sizes of state-owned land assigned by means of allocation and agreement for commercial
and service purposes
In 1989, the size of state-owned land for commercial and service purposes was about 1,092 km2,
which is taken as the base for the land assigned for commercial and service purposes by means of
allocation, i.e. stock allocated land.
According to China Land and Resources Statistical Yearbook (2003), the land assigned for
commercial and service purposes by means of allocation and agreement accounted for about 13%
and 35% of the total supply of land for commercial and service purposes respectively. Supposing
the proportion of land assigned by means of allocation for commercial and service purposes in the
increased supply of land declined by 6.2% annually from 1989 to about 13% in 2003, and the
proportion of land assigned by means of agreement increased by 2.5% every year to 35% in 2003,
we can calculate the size of state-owned land for commercial and service purposes. See the
following table.
Table 8 Estimated size of state-owned land for commercial and service purposes
Unit: km2
Year
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Allocation
1124
1213
1280
1388
1469
1542
1589
1615
1638
1642
1124
1
6
12
27
41
59
73
83
95
98
Agreement
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Allocation
1668
1703
1736
1804
1844
1871
1898
1931
1962
1962
120
162
217
413
560
629
692
741
771
771
Agreement
Note: See Attached Table 4 for data calculation.
3. Selection of land price
According to China Land and Resources Statistical Yearbook, the unit price of land assigned by
means of bid tendering for commercial and service purposes was the highest, which reached 1,512
yuan/m2 and then rose to 3,118 yuan/m2 in 2006, 8 times as high as the price of land allocated by
means of agreement. The unit price of land assigned by means of auction was the second highest,
amounting to 977 yuan/m2. The unit price of land assigned by quotation was 710 yuan/m2. The
unit price of land assigned by agreement was the lowest, which was 443 yuan/m2.
Figure 6 Transfer price of land for commercial and service purposes provided by different
means in 2003-2008
Unit: yuan/m2
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Source: Calculated according to China Land and Resources Statistical Yearbook (2004-2009).
Figure 7 Average price of land for commercial and service purposes assigned by means of
bid tendering, auction and quotation
Unit: yuan/m2
Source: Calculated according to China Land and Resources Statistical Yearbook (2004-2009).
According to the data for 105 major cities on China Urban Land Price Dynamic Monitor, the price
of land for commercial purposes was much higher than the transfer price of land for commercial
and service purposes in China Land and Resources Statistical Yearbook.
Figure 8 Price of land for commercial purposes in 2003-2008
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Source: China Urban Land Price Dynamic Monitor (http://www.landvalue.com.cn/).
4. Lack of rent of land for commercial and service purposes
For reasons similar to those for price of land for industrial purposes, data on China Urban Land
Price Dynamic Monitor was used as the market price of land for commercial and service purposes.
According to the trace analysis of rent-price ratio of property in six cities including Beijing from
the Conditions of Land Price in Cities in China 2009 issued by the Ministry of Land Resources,
the rent-price ratio of commercial property in 2005-2009 was 5.73%-9.32%. As this ratio reflected
the rent in large cities, the report takes the lower limit of 5% to calculate the rent of land for
commercial and service purposes in China. The lack of rent of land for commercial and service
purposes was calculated according to this land price. See Table 9. According to the calculation
results, the lack of rent of land for commercial and service purposes amounted to more than 510
billion yuan annually in 2001-2009.
Table 9 Lack of rent of land for commercial and service purposes
Unit: 100 million
Land assigned by means
of allocation (km2)
229
2001
2002
2003
2004
2005
2006
2007
2008
2009
1703
1736
1804
1844
1871
1898
1931
1962
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Price of land for
commercial purposes
(YUAN/m2)
1650
1735
1864
1988
2371
2480
2742
4465
4712
Lack of rent of land
assigned by means of
allocation (100 million
yuan)
1405
1506
1681
1833
2218
2354
2648
4381
4623
Land assigned by means
of agreement (km2)
162
217
413
560
629
692
741
771
771
Gap between price of
land assigned by
agreement and market
price (YUAN/m2)
1253
1338
1616
1435
2047
2102
2260
3793
4315
Lack of rent of land
assigned by means of
agreement (100 million
yuan)
101
145
334
402
644
728
838
1463
1664
Total
1506
1651
2015
2235
2862
3082
3486
5844
6287
Note: China Land and Resources Statistical Yearbook only contains the price of land for
commercial and service purposes assigned by agreement in 2003-2008. The weighted average of
2003-2008 is taken as the price of land assigned by agreement in 2001, 2002 and 2009, i.e. 776
yuan/m2.
III. Rent of state-owned land for industrial and mining purposes and rent of land
for commercial and service purposes
According to the land prices of 105 major cities monitored by China Urban Land Price Dynamic
Monitor, the lack of rent of land for industrial, mining, storage and commercial purposes
amounted to more than 830 billion yuan annually in 2001-2009, and rose to more than 1.2 trillion
yuan in 2009.
Figure 9 Lack of rent of land for industrial, mining, storage, commercial and service
purposes in state-owned construction land
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Attached Table 1
Total output and relevant proportions of SOEs
Unit: 100 million yuan
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Total
23924
26625
34599
48402
70176
91894
99595
113733
119048
126111
SOE
13064
14955
17824
22725
26201
31220
28361
29027
33621
35571
Collectively
owned
enterprises
8523
8783
12135
16464
26472
33623
39232
43347
45730
44607
Collective joint
ownership
enterprises
-
-
-
-
-
-
-
-
-
-
Township and
individually
owned
enterprises
645
644
1003
1931
3541
5911
7710
10188
10186
11464
Total with
collectively
owned
enterprises,
collective joint
ownership
enterprises,
township and
individually
owned
enterprises
deducted
14756
17198
21461
30007
40163
52360
52653
60198
63132
70040
Proportion of
state-owned
economy in other
economies (%)
88. 53
86. 96
83. 05
75. 73
65. 24
59. 63
53. 86
48. 22
53. 26
50. 79
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total
85674
95449
110776
142271
222316
251620
316589
405177
507448
548311
SOE
40554
42408
45179
53408
70229
83750
98910
119686
143950
146630
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Collectively
owned
enterprises
11908
10053
9619
9458
9819
9497
9175
10170
8956
9587
Collective
joint
ownership
enterprises
245
193
177
173
175
189
203
183
179
200
Township
and
individually
owned
enterprises
-
-
-
-
-
-
-
-
-
Total with
collectively
owned
enterprises,
collective
joint
ownership
enterprises,
township and
individually
owned
enterprises
deducted
73521
85203
100981
132640
212322
241933
307211
394824
498313
538524
Proportion of
state-owned
economy in
other
economies
(%)
55. 16
49. 77
44. 74
40. 27
33. 08
34. 62
32. 20
30. 31
28. 89
27. 23
Source: Calculated according to China Statistical Yearbook (1996-2010). Amongst, the total
output of township and individually owned enterprises accounted for 50% of the output of individually
owned enterprises in urban and rural areas.
Attached Table 2:
State-owned land assigned by means of allocation for industrial and mining purposes
Unit: km2
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Year
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
22943
23675
24430
25210
26014
26844
27700
28584
29497
30439
713
732
755
779
804
830
856
884
913
942
93. 29
86. 57
79. 86
73. 14
66. 43
59. 72
53. 00
46. 29
39. 57
32. 86
665
634
603
570
534
496
454
409
361
309
Land assigned for
industrial and mining
22230
purposes by means of
allocation
22895
23529
24132
24702
25236
25732
26186
26595
26956
27265
In which: size of
land assigned to
20130
SOEs by means of
allocation
20795
21429
22032
22602
23136
23632
24086
24495
24856
25166
State-owned land for
industrial and mining 22230
purposes
Annual increment
In
which:
proportion of land
assigned by means
of allocation (%)
100
Annual increase in
land assigned by
means of allocation
Year
2001
2002
2003
2004
2005
2006
2007
31411
32414
33449
34517
35619
36756
37930
39141
40391
41680
972
1003
1035
1068
1102
1137
1174
1211
1250
1290
In
which:
proportion of
land assigned
by means of
allocation (%)
26. 15
19. 43
12. 72
-
-
-
-
-
-
Annual increase in
land assigned by
254
195
132
43
105
58
35
32
0
State-owned land
for industrial and
mining purposes
Annual increment
234
2000
71
2008
2009
Unirule Institute of Economics
means of allocation
Land assigned for
industrial
and
mining purposes by
means of allocation
27519
27714
27846
27917
27960
28065
28123
28158
28190
28190
In which: size
of
land
assigned
to
SOEs
by
means
of
allocation
25420
25615
25746
25817
25860
25965
26023
26058
26091
26091
Note: The data on increased land assigned by means of allocation for industrial and mining
purposes in 2003-2008 came from China Land and Resources Statistical Yearbook (2003-2008).
The increase in land assigned by means of allocation for industrial and mining purposes was zero
in 2009.
State-owned land assigned by means of agreement for industrial and mining purposes
Year
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
State-owned land
for industrial and
mining purposes
22230
22943
23675
24430
25210
26014
26844
27700
28584
29497
30439
713
732
755
779
804
830
856
884
913
942
Annual increment
In
which:
proportion
of
land assigned by
means
of
agreement (%)
0
5. 79
11. 58
17. 37
23. 16
28. 95
34. 74
40. 53
46. 32
52. 11
57. 9
Annual increase in
land assigned by
means
of
agreement
0
41
85
131
180
233
288
347
409
475
545
88. 53
86. 96
83. 05
75. 73
65. 24
59. 63
53. 86
48. 22
53. 26
50. 79
41
126
257
437
670
958
1305
1714
2190
2734
In
which:
proportion
of
land assigned for
SOEs (%)
Land assigned for
industrial
and
mining purposes
235
0
Unirule Institute of Economics
by
means
agreement
of
In which: size of
land assigned to
SOEs by means
of agreement
37
110
219
356
507
679
866
1063
1316
1593
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
State-owned land for
industrial and mining
purposes
31411
32414
33449
34517
35619
36756
37930
39141
40391
41680
972
1003
1035
1068
1102
1137
1174
1211
1250
1290
In
which:
proportion
of
land assigned by
means
of
agreement (%)
63. 69
69. 48
75. 27
Annual increase in land
assigned by means of
agreement
619
696
778
948
853
862
1398
1003
15
0
In
which:
proportion of
land assigned
for SOEs (%)
55. 16
49. 77
44. 74
40. 27
33. 08
34. 62
32. 20
30. 31
28. 89
27. 23
Land
assigned
for
industrial and mining
purposes by means of
agreement
3353
4049
4828
5775
6629
7491
8888
9892
9907
9907
In which: size
of
land
assigned
to
SOEs
by
means
of
agreement
1934
2281
2629
3011
3293
3592
4041
4346
4350
4350
Annual increment
Note: The data on increased land assigned by means of agreement for industrial and mining
purposes in 2003-2008 came from China Land and Resources Statistical Yearbook (2003-2008).
The increase in land assigned by means of agreement for industrial and mining purposes was zero
in 2009.
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Unirule Institute of Economics
Attached Table 3:
Size of land for commercial and service purposes
Unit: km2
Year
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Size of built-up
area
12462
12856
14011
14959
16588
17940
19264
20214
20791
21390
21525
Land for
commercial and
service
purposes
1092
1126
1227
1310
1453
1572
1688
1771
1821
1873
1886
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Size of built-up
area
22440
24027
25973
28308
30406
32521
33660
35470
36295
38107
Land for
commercial
and service
purposes
1966
2105
2275
2480
2664
2849
2949
3107
3179
3338
Note: (1) Data on built-up area came from the China Urban Construction Statistics Yearbook
(2009);
(2) The size of land for commercial and service purposes in 1989-2002 was calculated according
to the proportion of land for commercial and service purposes in built-up area, which was 8.76%;
(3) The size of state-owned land for commercial and service purposes in 2003-2008 was
calculated according to the annual increase in land for commercial and service purposes in China
Land and Resources Statistical Yearbook.
Attached Table 4:
State-owned land assigned by means of allocation and agreement for commercial and service
purposes
Unit: km2
Year
Size
of
land
237
for
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
1092
1126
1227
1310
1453
1572
1688
1771
1821
1873
1886
Unirule Institute of Economics
commercial and service
purposes
Annual increment
34
101
83
143
118
116
83
51
52
13
Proportion of land
assigned by means of
allocation (%)
100
93. 8
87. 6
81. 4
75. 2
69
62. 8
56. 6
50. 4
44. 2
38
Proportion of land
assigned by means of
agreement (%)
0
2. 5
5
7. 5
10
12. 5
15
17. 5
20
22. 5
25
Increase in land assigned
for
commercial
and
service purposes by means
of allocation
32
89
68
107
82
73
47
25
23
5
Increase in land assigned
for
commercial
and
service purposes by means
of agreement
1
5
6
14
15
17
15
10
12
3
1124
1213
1280
1388
1469
1542
1589
1615
1638
1642
1
6
12
27
41
59
73
83
95
98
Land
assigned
for
commercial and service
purposes by means of
allocation
1092
Land
assigned
for
commercial and service
purposes by means of
agreement
Year
2000
Size of land for commercial and
service purposes
2001
2002
2003
2004
2005
2006
2007
2008
2009
1966
2105
2275
2480
2664
2849
2949
3107
3179
3338
80
139
170
459
378
259
281
302
250
250
Proportion
of
land
assigned by means of
allocation (%)
31. 8
25. 6
19. 4
Proportion
of
land
assigned by means of
agreement (%)
27. 5
30
32. 5
Annual increment
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Unirule Institute of Economics
Increase in land assigned for
commercial and service purposes
by means of allocation
26
36
33
68
40
27
27
33
31
0
Increase in land assigned by
means
of
agreement
for
commercial and service purposes
22
42
55
196
147
69
63
49
30
0
Land assigned for commercial and
service purposes by means of
allocation
1668
1703
1736
1804
1844
1871
1898
1931
1962
1962
Land assigned for commercial and
service purposes by means of
agreement
120
162
217
413
560
629
692
741
771
771
Note: The data on increased land assigned by means of allocation and agreement for commercial
and service purposes in 2003-2008 came from China Land and Resources Statistical Yearbook
(2003-2008). The increase in land assigned by means of allocation and agreement for commercial
and service purposes was zero in 2009.
Reference:
National Land Use Planning Committee, 2008: “Reasons and Means to Control Excessive
Expansion of Land for Industrial and Mining Purposes in Urban Areas”, China Land and
Resources News, 2008-11-26.
Wang Yonghong, 2008: “Climbing to New Heights - 30 Years of Reform on Onerous Land Use
System in China”, China Land and Resources News, 2008-12-19.
Shang Qianming, Wang Rengui, 2010: “Much Land for Industrial and Mining Purposes Is Idle and
Wasted in China”, Outlook Weekly, 2010-03-07.
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Unirule Institute of Economics
Sub report 4: Evolution of SOE-related Policies
I. Definition of SOEs
The property rights refer to the rights of possession, use, usufruct and disposition. Such rights can
be separated to some extent and in space. From the policies in more than 2 decades, we can see
that the definition of SOEs has experienced three stages, from the initial emphasis on the
ownership possession of production means, to the separation of possession right from use right in
the 1990’s to the current definition of state-invested enterprises from the perspective of usufruct.
As the reform of SOE property rights progresses, the definition of SOEs gets increasingly clear
and specific. However, there are still some ambiguous concepts.
Before 1992, SOEs were called state-run enterprises or enterprises owned by the whole people.
The Law of the People's Republic of China on Industrial Enterprises Owned by the Whole
People 23 enacted in 1998 was the first law on enterprises in China. According to Article 2, “An
industrial enterprise owned by the whole people shall be a socialist commodity production and
operation unit which shall, in accordance with law, make its own managerial decisions, take full
responsibility for its profits and losses and practice independent accounting. The property of the
enterprise shall be owned by the whole people, operated and managed by the enterprise with the
authorization of the state in line with the principle of the separating ownership from management.
The enterprise shall enjoy the rights to possess, utilize and dispose of, according to law, the
property which the state has authorized it to operate and manage.” As for the responsibility of
production according to the government plans in the original planned economy system, this
definition specifies that enterprises should be given the right to operate independently in the
principle of “separating ownership from control”. With regard to ownership, it is specified that the
enterprise assets are owned by the whole people. This complies with the concept that the
enterprises are owned by the whole people, but does not reveal the capital relations between the
state and enterprises.
The Interim Regulations on Supervision and Administration of State-owned Assets of
Enterprises enacted in 2003 began to emphasize the definition from the perspective of capital
relations. According to Article 3, “the term ‘state-owned assets of enterprises’ refers to all forms
of state investments in enterprises and the equities generated therefrom, as well as other
equities which are legally determined to be owned by the state.” In terms of ownership relation,
Article 4 stipulates that “state-owned assets of enterprises are owned by the state”. Article 4 of the
Company Law revised in 2005 stipulates that: “Ownership of the state-owned property rights in a
company belongs to the state.” The state is an abstract concept, which can’t enjoy or exercise
tangible ownership or other property rights. The state-owned assets must be used by concrete
organizations and individuals. This is the de facto property rights of state-owned assets. Therefore,
in practice, the actual ownership is directly embodied by the possession of production means by
government at all levels and SOEs are basically equivalent to government organizations.
From ownership, the concept of SOE evolves from the concept of enterprises owned by the whole
people. In terms of economic nature, SOEs are owned by the whole people. In terms of ownership,
23
The bold parts in this chapter are added by the author.
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Unirule Institute of Economics
SOEs themselves are not assets, but a display of relations or combination of factors. Therefore,
there is no the issue of ownership. Moreover, once the property (capital) of any person (including
natural person and legal person) is invested in an enterprise, it becomes the legal property of the
enterprise, and the investor is only entitled to the rights of capital contributor. Therefore, the
ownership of enterprises only refers to the equity or capital contributor’s rights in the enterprise.
Specifically, the state performs capital contributor’s duties and responsibilities in SOEs and
secures equity or capital contributor’s right at the cost of contribution ownership. The state
ownership of SOEs should be embraced by the ownership of the capital contribution and gains
rather than the ownership of enterprise assets by the state.
Compared with the Interim Regulations on Supervision and Administration of State-owned Assets
of Enterprises and Company Law (2005), the Law of the People’s Republic of China on the
State-Owned Assets of Enterprises (2008) revised the concept of SOEs. Firstly, it adopted the
new concept of state-invested enterprises to replace the original concept of “SOEs”.
“State-invested enterprises as mentioned herein refer to wholly state-invested enterprises,
state-invested companies, state-invested holding companies and state-invested joint stock
companies.” Secondly, it substituted the concept of “assets” ownership with ownership of “rights
and interests.” According to Article 2, “The term ‘state-owned assets of enterprises’ (hereinafter
referred to as the ‘state-owned assets’) as mentioned herein refers to the rights and interests
formed from various types of capital contribution made by the state in enterprises.” The
state-owned assets of enterprises are rights and interests formed from capital contribution or
investment, i.e. assets of enterprises in value form. The term “various types of capital
contribution” in the Law on the State-owned Assets includes money, physical goods, intellectual
property rights and land use rights. But the term ‘various types of investment” in the Interim
Regulations on Supervision and Administration of State-owned Assets of Enterprises generally
refers to total investment, including both the capital contribution, and also funds raised by
enterprises. Therefore, the current term “state-owned assets of enterprises” is more specifically
defined as only the rights and interests formed from state investments.
The Law on the State-owned Assets gave a more specific definition of the ultimate rights and
interests owner than the Interim Regulations on Supervision and Administration of State-owned
Assets of Enterprises and the Company Law, i.e. “State-owned assets shall be owned by the
state, i.e. by the whole people.” We can further understand that any gain from the state-owned
assets shall be completely owned and shared by the whole people. This, however, is not
implemented in reality. Only a small part of the gain is really shared by the whole people as SOE
shares transferred into social security funds.
Definition of SOEs by other countries and organizations
In international practice, if the investment of state-owned assets or state-held shares in an
enterprise is over 50%, such enterprise is an SOE.
For instance, German’s financial statistics take enterprises in which public agencies (federal, state
and town governments) have the majority of capital or voting rights as state-owned enterprises.
According to Article 2 of the Law on Administration of State-owned Enterprises enacted by Korea
in 1984, SOEs include “government-invested enterprises and enterprises in which government
investment reaches or exceeds 50%.”
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Unirule Institute of Economics
In addition to the principle of categorizing enterprises in which the government has over 50%
shares or voting rights as SOEs, if the government has less than 50% shares in an enterprise but
the government can actually control it, such enterprise is also taken as an SOE.
For instance, in Germany, large enterprises in which the government has over 25% shares and
other shares are held by small shareholders are regarded as SOEs. Government shares in the SOEs
controlled by Temasek Holding Pte Ltd of Singapore only account for about 10%. In some special
Japanese SOEs, such as Nippon Telegraph and Telephone Corporation and Japan Airlines
Corporation, although the government investment is less than half of the total, such companies are
also controlled by the government.
The Financial Transparency Regulations of the European Communities gave a more specific
definition. According to Article 2, “public undertaking” means an undertaking over which a public
authority may exercise, directly or indirectly, a dominant influence by virtue of their ownership of
it, their financial participation in it or the rules that govern it.
II. Business Scope of SOEs
After 1999, SOE reform was transformed from the stage of revitalizing individual SOEs to the
stage of adjusting the distribution of state-owned economy in the macro sense. At the Fourth
Plenum of the 15th CPC Central Committee held in 1999, it was proposed that the state-owned
economy should control important sectors and key areas. The Decision of the Central Committee
of the Communist Party of China on Major Issues Concerning the Reform and Development of
State-Owned Enterprises first specified that the sectors and areas which need to be controlled by
the state-owned economy include: sectors that concern national security; sectors that are
naturally monopolized; sectors that supply major products and services for the public; and
pillar sectors and backbone enterprises in high and new technology sectors. But in the
Circular of the General Office of the State Council on Forwarding the Guiding Opinions of
SASAC on Promoting the Adjustment of State-owned Capital and the Reorganization of
State-owned Enterprises issued in 2006, SASAC adjusted the areas controlled by SOEs, replacing
the sectors that are naturally monopolized with major infrastructure and important mineral
resources. Then, SASAC further explained that the state-owned capital should keep absolute
control of important sectors and key areas that concern the lifeline of the national economy and
national security, including defense, grid and power, petroleum and petrochemical,
telecommunication, coal, civil aviation and shipping. Amongst, state-owned capital should
wholly fund or maintain absolute control of central enterprises in defense, important resources
such as petroleum and natural gas, grid and telecom infrastructure. It should maintain absolute
control of important enterprises in these important sectors and central enterprises in civil aviation
and shipping. The reform and reorganization of central enterprises in downstream petrochemical
products, value-added telecom service areas should be intensified to introduce non-public
economy and foreign investment to diversify the investors and property rights. The state-owned
economy should maintain strong control over backbone enterprises in fundamental and pillar
sectors, including equipment manufacturing, automobile, electronic information,
construction, steel, nonferrous metal, chemical, survey and design, and technology. Central
enterprises in equipment manufacturing, automobile, electronic information, construction, steel
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Unirule Institute of Economics
and nonferrous metal sectors should become backbone enterprises and industry leaders. In such
enterprises, state-owned capital should maintain absolute control or relative control. In addition,
the state-owned capital should maintain absolute control of research and design-oriented central
enterprises that research generic technologies and transform research results into production.
Finance, railroad and postal service are not subject to the supervision of SASAC. However, as
telecom and shipping industries must by controlled by state-owned economy, finance, railroad and
postal service can’t be exception. That is to say, at least 10 sectors must be controlled by the state,
or the government will maintain and even enhance the monopoly in these sectors.
In its document, SASAC replaced “sectors that are naturally monopolized” with “major
infrastructure and important mineral resources”, spawning “Guo Jin Min Tui” in the coal sector, or
“justifying” the merger and reorganization of coal mine enterprises in Shanxi Province. The seven
sectors over which the state-owned capital must maintain “absolute control”, including defense,
and the nine sectors over which the state-owned capital must maintain “strong control”, including
equipment manufacturing, are mostly major sectors in the secondary industry, covering
non-competitive and competitive areas in which non-SOEs are also qualified to engage in. But
SASAC defines a boundary using administrative power and the excuse of “safeguarding the
security of national economy” and “controlling the lifeline sectors”, setting up a monopoly
threshold for SOEs in these sectors.
According to the statistics of SASAC, by 2008, over 80% of the assets of central enterprises were
concentrated in defense, petroleum, petrochemical, power, metallurgy, coal, large equipment
manufacturing, automobile and commercial aircraft manufacturing, telecommunication, civil
aviation, sea transportation, construction, real estate development and port sectors. Over two thirds
of the assets of local SOEs were concentrated in airport, port, important roads, supply of tap water
and coal gas in urban areas, public transport, power generation, metallurgy, coal, equipment
manufacturing and automobile manufacturing sectors.
Table 1 Sector indexes of state-owned and private enterprises (2007)
Private industrial enterprises
Value-added
rate of
industry (%)
Contribution
ratio of total
assets (%)
177080
28. 06
17. 18
3601
43. 78
Petroleum and natural
gas extraction
22
Ferrous metals mining
and dressing
2104
Sector
National total
Coal mining and
dressing
243
Number of
enterprises
State-owned and holding enterprises
Value-added
rate of
industry (%)
Contribution
ratio of total
assets (%)
20680
33. 40
13. 79
29. 72
795
53. 03
11. 83
44. 23
17. 42
91
78. 06
47. 17
42. 20
39. 38
111
52. 13
14. 06
Number of
enterprises
Unirule Institute of Economics
Non-ferrous metals
mining and dressing
1093
42. 86
36. 22
298
43. 61
26. 37
Nonmetal minerals
mining and dressing
1754
34. 79
26. 88
210
48. 06
12. 73
Other mining sectors
16
29. 30
31. 86
1
21. 11
0. 56
10783
27. 68
20. 44
857
21. 71
11. 41
Food production
3240
29. 96
17. 90
377
32. 72
9. 18
Beverage production
2209
33. 45
19. 52
366
43. 62
20. 37
1
26. 85
1. 26
120
77. 51
70. 30
17716
25. 46
13. 35
601
26. 72
5. 07
Manufacturing of textile
garments, footwear and
headgear
6882
28. 78
16. 77
221
35. 03
7. 43
Leather, furs, down and
related products
3742
28. 19
23. 12
36
34. 75
8. 50
Timber processing,
bamboo, cane, palm
fiber & straw products
5580
29. 72
23. 47
171
30. 79
7. 92
Furniture manufacturing
2257
27. 97
16. 27
45
19. 84
14. 23
Papermaking and paper
products
4786
27. 36
16. 52
220
27. 02
6. 78
Printing and record
medium reproduction
2514
28. 44
12. 16
580
41. 51
11. 06
Cultural, educational and
sports articles
1888
25. 33
14. 78
55
32. 45
6. 20
Petroleum processing,
coking and nuclear fuel
processing
1112
29. 45
18. 54
213
14. 18
11. 19
Raw chemical materials
and chemical products
12108
28. 40
17. 93
1377
25. 58
11. 02
Pharmaceutical
2198
33. 32
14. 29
559
35. 91
11. 27
Chemical fiber
manufacturing
964
20. 87
9. 59
60
18. 82
6. 24
Rubber products
1879
30. 51
19. 72
122
22. 41
7. 06
Plastic products
8292
25. 68
16. 19
303
28. 45
6. 35
13515
30. 94
19. 34
1333
31. 39
8. 25
Agricultural and sideline
food processing
Tobacco manufacturing
Textile
Nonmetal mineral
products
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Unirule Institute of Economics
Smelting and pressing of
ferrous metals
4460
25. 65
15. 82
329
29. 26
11. 46
Smelting and pressing of
nonferrous metals
3719
24. 97
19. 81
432
25. 93
18. 11
Metal products
10428
26. 59
15. 46
486
25. 87
9. 30
Ordinary equipment
manufacturing
15850
28. 28
16. 98
1124
25. 96
8. 11
Special equipment
manufacturing
6641
30. 08
16. 41
973
26. 41
7. 61
Transport equipment
manufacturing
6733
27. 03
13. 13
1358
25. 06
11. 34
Electric equipment and
machinery
manufacturing
9505
25. 34
15. 16
694
25. 18
8. 91
Communication
equipment, computer
and other equipment
manufacturing
3356
25. 47
12. 96
726
27. 65
5. 18
Meter, instrument &
cultural, office
equipment
manufacturing
1741
30. 34
15. 68
369
35. 12
8. 94
Handicraft and others
3245
25. 86
18. 39
139
23. 83
4. 85
Recycling and
processing of waste
resources and materials
372
24. 81
21. 81
19
23. 34
19. 51
Production and supply of
electricity and heat
591
39. 08
6. 98
3481
32. 62
8. 81
Production and supply of
fuel gas
84
28. 11
11. 54
217
29. 17
5. 86
Production and supply of
water
99
29. 79
6. 20
1211
46. 69
1. 86
Source: China Statistical Yearbook 2008 (Ministry of Land Resources, 2008).
In addition to policies, SOEs in China cover the whole secondary industry and part of the tertiary
industry. For instance, as of the end of 2007, the state-owned assets of 46 groups supervised by
Shanghai State-owned Assets Supervision and Administration Bureau totaled 398 billion yuan,
covering 39 sectors. Nearly 11% of the assets covered 56 generally competitive sectors including
catering, papermaking, lumber processing, construction, decoration, plastic products, textile,
clothing, footwear and head gear. Some groups were engaged in 30 sectors. In August of 2009, the
State Tobacco Monopoly Administration issued the Rules on Report of Major Corporate Issues
for Diversification in Tobacco Industry (for Trial Implementation) (Guo Yan Ban [2009] No. 289
Document), listing real estate as one of the strategic sectors for diversification of China National
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Unirule Institute of Economics
Tobacco Corporation
III. Principal-agent Relations
The ownership of SOEs in China belongs to the whole people, and the state manages state-owned
assets on behalf of the whole people. In reality, as the state can’t manage SOEs by itself, it needs
to entrust the government, which will entrusts functional departments and then the managers,
forming principal-agent relations for SOEs in China.
The principal-agent relations for state-owned assets in China now present a trend of
multi-polarization, with the presence of superior-subordinate relations in the administrative sense
and also relations between equal subjects in the civil sense. Generally, the principal-agent
relations for state-owned assets can be divided into three layers: the first-layer between the whole
people and the state, the second-layer between the state and capital contributors of state-owned
assets and the third-layer between capital contributors and actual state-owned asset managers.
Except the unchanged role of the whole people as the final principal, the other roles are dual, i.e.
acting as the principals and agents at the same time.
The first-layer principal-agent relation is between the whole people and the state. The law
prescribes that the ultimate ownership of state-owned assets “is owned by the state, i.e. the whole
people,” or “is owned by the whole people, i.e. the state”, equating the state with the whole
people.
Actually, the whole people constitute an abstract and inseparable total, while the “state” is a
virtualized concept. The use of state-owned assets must be carried out by entities. There are two
agents for the state, i.e. the State Council and local governments, which perform capital
contributors’ duties and responsibilities on behalf of the state for different types of assets. “The
State Council shall perform capital contributor’s duties and responsibilities on behalf of the state
for large-scale state-invested enterprises concerning the lifeline of the national economy and
national security and state-invested enterprises in important infrastructure, important natural
resources and other sectors. For other state-invested enterprises, local people’s governments shall
perform capital contributor’s duties and responsibilities on behalf of the state” (Law of the
People’s Republic of China on the State-Owned Assets of Enterprises).
The second-layer principal-agent relation is between the state and capital contributors of
state-owned assets. According to the Law on the State-owned Assets, “The state-owned assets
supervision and administration body under the State Council and the state-owned assets
supervision and administration bodies established by local people’s governments according to
the provisions of the State Council shall perform capital contributor’s duties and responsibilities
for state-invested enterprises on behalf of and upon the authorization of corresponding people’s
governments. The State Council and the local people’s governments may, when necessary,
authorize other departments or bodies to perform capital contributor’s duties and responsibilities
for state-invested enterprises on behalf of corresponding people’s government”. The
responsibility definition for SASAC (state-owned assets supervision and administration bureau)
to perform capital contributor’s duties and responsibilities on behalf of the state to some extent
solved the problem that nobody was responsible for the rights and interests of the owners of
state-owned assets. For SOEs, SASAC is a principal. But for its upper principal, i.e. the
government and the ultimate principal, i.e. the whole people, SASAC is also an agent. Between
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them, there is still the problem whether the objective functions are consistent and moral risks. In
addition, the too long chain of agents adds up the agent costs during SOE reform in China, and
makes SASAC subject to restraints of other administrative forces. As a result, SASAC can’t
conscientiously play the role of a qualified agent for state-owned assets owners.
The third-layer principal-agent relation is between the capital contributors and actual state-owned
assets managers. According to Chapter III of the Law on the State-owned Assets, “The
state-invested enterprises shall enjoy the rights of possession, use, usufruct and disposition of their
movables, real estate and other property according to laws, administrative regulations and
enterprise bylaws.” “The state-invested enterprises engaged in business activities shall observe
laws and administrative regulations, strengthen business management, enhance economic benefits,
accept the administration and supervision legally implemented by the people’s governments and
their relevant departments and bodies, accept the supervision of the general public, assume social
responsibilities, and be responsible to capital contributors.” For such civil delegation, the state can
issue management certificates for state-owned assets, sign management contracts for state-owned
assets and share equities to entrust organizations or individuals with the right to use state-owned
assets.
At this layer, there is severe information asymmetry between the principal and the agent.
Moreover, state-owned assets managers are not completely selected through the market. Board
members and managers in some SOEs are appointed by the government or the Party committee.
This will lead to one result: the whole people and governments at all levels, as the principals, can’t
exercise their residual claim and residual control rights. In addition, government officials who act
as the principals of managers and agents of the government also have moral risks. As they don’t
have the residual claim, they are prone to incorporate the realization of personal gains into
decision making, giving rise to rent-seeking behavior in order to maximize personal gains.
The multi-layer principal-agent relations extend the distance between the principals and agents,
increase the subjects that share the interests, expand the information asymmetry and exacerbate
the contractual incompleteness. Moreover, the rights and responsibilities of agents at all layers are
diluted in the multi-layer principal-agent relations. As a result, the goal of the ultimate principals
can’t be realized, and the agent efficiency becomes lower.
Regulation of SOEs in other countries
In the regulation of SOEs in other countries, parliamentary supervision constitutes a strong force.
The parliament directly represents the people. Since SOEs serve the people, the ultimate
decision-making power comes from the parliament. In U.S., the Congress decides all the major
issues of SOEs through legislation. To establish an SOE, the federal government must get
approval from the Congress.
The parliament decides the business lines, even the market access and sales regions of SOEs
through legislation. It inspects the operation of SOEs at any time, and makes major decisions
accordingly, including, dissolution, merger and even sale of an SOE. The board chairman of an
SOE is appointed by the parliament at the same level. The parliament decides whether to grant
fiscal allocations to SOEs in its portfolio, how much to grant, whether the grant is gratis or
onerous, and the payment terms for onerous grants.
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Moreover, the management of SOEs in other countries is transparent. Since SOEs are owned by
the whole people, people have the right to know their operation. In U.S., U.K., Sweden, Finland
and some other countries, the government requires that SOEs, whether they are listed or not,
should maintain an open and transparent financial report system, and disclose their financial
reports for the supervision of the whole society on their websites or by other means on a regular
basis.
The power of SOEs is from the parliament, and SOEs are subject to transparent supervision from
the whole society. For instance, the largest SOE in the U.S. is Tennessee Valley Authority (TVA).
It raises funds mainly by issuing bonds, in which government bonds account for about a half. Each
year, the government allocates US$ 130 million to TVA, but specifically prescribes that such
allocations can only be used in predetermined social undertakings.
German government specifically stipulates that senior SOE executives and their subordinates can’t
come from government organizations. This is called the non-government official principle for
direct SOE managers. According to French laws, government ministers or parliament members
can’t join the board of directors. Once a government official is appointed as chairman of an SOE,
he/she will no longer hold the post in the government. Although chairmen and general managers
of SOEs are appointed by the government, they must be real professional managers from the
business community. For these professional managers, to work for SOEs or private companies has
no big difference. They are just managers hired by the employers. Their performance is, in the
final analysis, evaluated by the parliament at the corresponding level, i.e. representatives of the
people. The criteria to judge whether their work is up to the standard is not how much money is
made, but how much the public are satisfied.
More importantly, as SOEs are incorporated into the budget of government at all levels, and the
allocations are decided by the parliament. The profit they make, large or small, are shared by the
people as proceeds of SOEs rather than disposed of by SOEs or competent authorities to form
special interest groups.
IV. Corporate Governance Structure
In 1993, China confirmed the goal of SOE reform to be the establishment of a modern enterprise
system. Prior to that, the economic community in China also began to discuss the concept of
corporate governance. In December of 1993, China enacted the Company Law, laying a legal
foundation for modern enterprise systems and corporate governance which was widely recognized
by market economies. From then on, China began to adopt a corporate governance structure of
inclusive top management accountability under the leadership of board of directors. The idea to
adopt a corporate governance structure in SOEs was embraced in the Decision of the Central
Committee of the Communist Party of China on Major Issues Concerning the Reform and
Development of State-Owned Enterprises adopted at the Fourth Plenum of the 15th CPC Central
Committee. “Corporate governance structure is the core of the company system. The
responsibilities of the shareholders’ meeting, board of directors, supervisory board and
management should be defined to form a corporate governance structure in which all parties act in
accordance with their own duties, operate in a coordinated manner and exercise effective check
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and balance.”
Although it was proposed to establish a governance structure consisting of shareholders’ meeting,
board of directors, supervisory board and management, in reality, the board of directors almost
existed in name only due to the overlap between the board chairman and general manager. After
SOEs were reorganized into wholly state-owned companies or stat-holding limited liability
companies and stock limited companies, they established shareholders or shareholders’ meeting,
board of directors, supervisory board and appointed general manager in accordance with the
Company Law. But in reality, the conflict between the old organs (congress of Party representative,
workers congress and labor union) and the new organs (board of directors, supervisory board and
shareholders’ meeting) was still rampant in these companies. Many SOEs that adopted the
company system nominated Party committee members as directors to alleviate the conflict. The
Decision of the Central Committee of the Communist Party of China on Major Issues
Concerning the Reform and Development of State-Owned Enterprises (September of 1999) also
stipulated that chief of Party committees in wholly state-owned or state-holding companies can
enter the board of directors and supervisory board through a statutory procedure, and the board of
directors and supervisory board should include workers’ representatives. In addition, chiefs of
Party members in the board of directors, supervisory board, management and labor union can
enter the Party committee in accordance with the Party constitution and relevant regulations.
Secretary of the Party committee and the board chairman can be served by the same person
concurrently, and the board chairman and general manager should in principle served by two
persons. However, according to a research in 1998, board chairman and general manager were
concurrently served by the same person in 253 companies among more than 530 listed companies,
accounting for 47.7% of the sample. Therefore, these listed companies were under de facto insider
control. As the top decision-making body in a company, the board of directors should decide
major operation and investment issues. But in fact, the establishment of board of directors in SOEs
was quite irregular. Many directors were directly appointed and dismissed through superior
administrative orders. Consequently, the board of directors became a messenger of government
administrative orders.
Before the system or supervisory board was formed, a special inspector system was adopted for
SOEs. In 1998, China began to implement the special inspector system for large SOEs directly
under the central government, and enacted the Regulations of the State Council on Special
Inspectors. Dispatched by the State Council, special inspectors would supervise large SOEs on
behalf the government and report to the State Council. In February of 2000, the State Council
issued the Interim Regulations on the Supervisory Board in SOEs, stipulating that the
supervisory board should mainly supervise the financial affairs and consist of a chairman and
several supervisors. The number of supervisors should be no smaller than 3, the chairman
appointed by the State Council and the full-time supervisors appointed by the supervisory board
management department. In June of 2000, according to the Decision of the Central Committee of
the Communist Party of China on Major Issues Concerning the Reform and Development of
State-Owned Enterprises, the special inspector system was transited into the supervisory board
system, and the special inspector changed into chairman of supervisory board. Before 2007, the
supervisory board mainly carried out subsequent supervision. In 2007, SASAC issued the Several
Opinions on Strengthening and Improving the Work of Supervisory Board in State-owned
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Enterprises, authorizing the supervisory board to carry out current supervision.
Because the previously-introduced external supervision force, i.e. the supervisory board failed to
demonstrate a satisfactory result, the approach to improving corporate governance was shifted to
internal structure. In August of 2001, China Securities Regulatory Commission issued the Guiding
Ideas on Establishing a System of Independent Directors in Listed Companies, demanding that
listed companies should have at least 1/3 independent directors in their boards by June 30 of 2003.
The Guiding Opinions of the State-owned Assets Supervision and Administration Commission
of the State Council on the Construction of Board of Directors in Wholly State-owned
Companies (Trial) issued in 2004 proposed a system of external directors in the board. The
external directors were engaged by SASAC, and their remuneration decided by SASAC and paid
by the companies where they worked. At the initial pilot period, the number of external directors
in each company was no smaller than 2. The Administrative Measures for Employee Directors of
Pilot State-owned Companies for the Work on the Board of Directors (for Trial Implementation)
(2006) required that there should be at least one employee director in the board. In 2009, the
Administrative Measures for the Full-time External Directors of Pilot Central Enterprises for
the Work on the Board of Directors (for Trial Implementation) were issued for the administration
of external directors. According to the requirements of SASAC, in pilot state-owned companies
for the board of directors, external directors can account for more than a half of the board, and
SASAC can authorize the board to assess the management. However, when SASAC may collude
with SOE managers, the execution and independence of external directors needs to be put under
test.
According to the Company Law, corporate government structure in Chinese companies is learned
from Europe. It is a dual-governance structure with the presence of both the board of directors and
supervisory board. From the organization, it is a multi-governance structure with the presence of
board of directors, supervisory board, Party committee, workers congress and labor union. It also
introduced the system of independent directors later from U.K. and U.S. companies. From the
actual operation, it is a unitary-governance structure, i.e. “inside control”. There is no effective
mechanism for balance between the board of directors, supervisory board and management in
SOEs. On the one hand, the supervision of the board over the management is not enough. In
modern enterprise system, the board entrusts managers with the management of enterprises on
behalf of the shareholders’ meeting. To maintain the independence of the board, there should be
some non-executive directors and external directors in the board. But in some SOEs, that the
board chairman concurrently serves as the general manager leads to insider control and inadequate
independence of independent directors. On the other hand, the supervision over the board is not
enough. In companies of developed economies, board members are usually major shareholders,
and supervision of the board over the management is an internal need. For SOEs, the board
exercises ownership on behalf of the government. However, it does not have the residual claim.
Therefore, it does not have the motive to supervise the behavior of the management. Some board
members can directly or indirectly benefit from the company by exercising some power. If there is
no effective supervision and restraint over the board, the board and the management may possibly
collude to form or even exacerbate insider control. Obviously, the government control over the
board is not enough.
V. Profit Distribution and Relevant Financial Policies
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Before 1984, SOEs must turned in their profits to the treasury and then receive all the funds
needed to make investment and cover their losses from the treasury. In 1978, “revenues from
enterprises” were the primary source of fiscal revenue. SOEs turned in 57.199 billion yuan,
accounting for 50.5% of the fiscal revenue.
The SOE reform in the 1980’s started with expanding management autonomy and allowing SOEs
to retain some profits. The core of this reform strategy was to break the system of “getting an
equal share regardless of the work done”. According to the profit retention policy, SOEs that made
higher profits can retain more profits. Some of the retained profits could be used for the
“collective benefits” and “employee rewards”, so that the managers and employees could get
tangible benefits and foster profit motives in SOEs. Moreover, in most cases, the bonus rewards
that employees received were decided and allocated by the management. Better-performing
employees could receive more rewards.
In April of 1984, the State Council approved the Interim Measures for Substitution of Tax
Payment for Profit Delivery for State-run Enterprises prepared by the Ministry of Finance.
SOEs began to pay taxes instead of turning in profits. Specifically, medium and large-sized
state-run enterprises paid income tax at a rate of 55%. Then they turned in some post-tax
profit and retained some profits according to the ratio approved by the state. Small-sized
state-run enterprises could completely paid taxes instead of turning in profits. After paying
taxes according to the 8-level progressive tax rate in excess of specific amount, they could
independently allocate the remaining profits and assume sole responsibility for their own
profits or losses. But for enterprises that still had huge profits after paying the taxes, the state
could collect some contract fees or a fixed amount of profit. In September of the same year,
the State Council approved the Report on the Step-2 Reform of Substitution of Tax Payment for
Profit Delivery for State-Run Enterprises and the Interim Measures for Step-2 Substitution of Tax
Payment for Profit Delivery for State-run Enterprises prepared by the Ministry of Finance.
“Profit-making medium and large-sized state-run enterprises shall pay income taxes at a fixed rate
of 55%. Profit-making small-sized state-run enterprises shall pay income taxes according to the
new 8-level progressive tax rate in excess of specific amount.” “50% of the profits that
enterprises retain from the increased profit shall be used for production and development,
20% for collective employee benefits and 30% for employee rewards.”
In 1993, the Decision on Implementing a Tax-sharing System was adopted. “A distribution system
shall be gradually established in which the investment proceeds of state-owned assets shall be
divided in line with contributions, or the after-tax profits of SOEs shall be turned in. As a
transitional measure, most wholly-SOEs that were registered before 1993 may retain their after-tax
profits. ” Although the measure prescribing that SOEs should pay taxes to the government
(administrator) and not to turn in their profits to the owners was stipulated to be tentative, it was
enforced for 14 years.
The government exempted SOEs from turning in their profits due to several reasons. Firstly, the
core of SOE reform at that time was still to expand the autonomy of managers and reduce
government interference. This policy was a natural continuation of the SOE reform approach in
the whole 1980’s. Secondly, in early 1990’s, the financial conditions of SOEs were generally very
poor. The government could hardly get any profit from SOEs. To inject capital into SOEs was
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considered to be a more urgent and necessary task. The net profit of nonfinancial SOEs only
accounted for 0.3% of GDP in 1994, 7% of GDP and 34% of the fiscal revenues in 2007. Thirdly,
SOEs were originally exempted from turning in their profits so that they could use such profit to
solve a series of reform-related problems such as the relocation of laid-off workers and pension
funds.
Improved profitability has given rise to an increasingly powerful role of SOE profit in China’s
growth and development. In 2007, aggregate profit of nonfinancial SOEs reached 7 percent of
GDP, equivalent to 1/6 China’s capital formation. Had it been completely added to the budget,
total government fiscal revenue would have been 1/3 higher. In1998, for example, nonfinancial
SOEs collectively reported 0.3 yuan aggregate profit (defined as total profit net of loss of all
nonfinancial SOEs) for every 100 yuan of sales revenue. This ratio rose to 9 yuan in 2007.
Similarly, the aggregate profit SOEs earned for every 100 yuan of equity capital jumped from 0.4
yuan to 12.1 yuan in the ten years. This highlights the potential significance of SOE dividend
policy (World Bank, 2010).
Table 2 Profit of nonfinancial SOEs in China, 1998-2007
Year
Amount (billion
yuan)
As % of fiscal
As % of GDP
revenue
Capital formation
as % of GDP
1998
213
0. 3
2. 2
36. 2
1999
1145
1. 3
10. 0
36. 2
2000
2834
2. 9
21. 2
35. 3
2001
2811
2. 6
17. 2
36. 5
2002
3786
3. 1
20. 0
37. 9
2003
4769
3. 5
22. 0
41. 0
2004
7369
4. 6
27. 9
43. 2
2005
9580
5. 2
30. 3
42. 7
2006
12194
5. 8
31. 5
42. 6
2007
17442
7. 0
34. 0
42. 3
Source: Ministry of Finance: Financial Yearbook of China 2008; National Bureau of Statistics of
China: China Statistical Yearbook.
A dividend policy for a SOE group would divide its after-tax profit into two parts: retained
earnings to finance investment in the group and dividends to finance general public spending by
the government. As such, the rationale for a sound dividend policy is twofold. First, it has the
potential to enhance the efficiency of investments financed by retained earnings of SOEs; and
second, it would improve the overall allocation of public financial resources. The absence of a
dividend policy seems to have an implicit assumption that there is no better use of SOE profit
other than reinvestment back into SOEs. This is obviously questionable. Indeed, China now faces
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the urgent challenge of refocusing its public spending to improve equity and efficiency of the
delivery of key social services, such as education and health, which are considered critical to
achieve national development goals. And the isolation of SOE profit from normal budgeting
process is hardly justified (World Bank, 2005). From this, the reform kicked off by the Opinions of
the State Council on the Pilot Implementation of the State-owned Capital Management Budget
(No. 26 Document) issued by the State Council in September of 2007 marked a major step in the
right direction. “The state-owned capital management budget shall refer to the income and
expenditure budget for the state as the owner to legally receive and distribute the proceeds from
state-owned capital, which constitutes an integral part of the government budget.” Therefore,
SOEs are legally owned by the whole people, and they should advance the benefits of the whole
society rather than benefit a few people.
At the end of 2007, SASAC and the Ministry of Finance jointly issued the Interim Measures for
the Administration of the Collection of Proceeds from State-owned Capital of Central Enterprises,
marking the end of an era of 14 years in which SOEs only paid taxes and retained profits.
According to relevant regulations, SOEs were divided into three categories to turn in their profits:
SOEs in five resource sectors including tobacco, petroleum and petrochemical, power, telecom
and coal should turn in 10% of their profits; SOEs in steel, transportation, electronics, trade,
construction and other generally competitive sectors should turn in 5% of their profits. Research
institutions reorganized in defense sector did not need to turn in their profits in three years.
Obviously, such rates were too low. In 2009, the profits and net profits of central enterprises
covered in the state-owned capital management budget totaled 965.56 billion yuan and 702.35
billion yuan respectively. However, the management budget after profits were drawn only reached
44 billion yuan in 2010, accounting for only 6% of their net profits, a rate lower than the
individual income tax rate.
In 2010 and 2011, only a small proportion of SOE profits were transferred into the public budget.
The No. 26 Document of the State Council stipulated the interconnection between the state-owned
capital management budget and the public budget. The document prescribed that the state-owned
capital management budget should be relatively independent and interconnected. While the
state-owned capital management budget should remain integral and relatively independent, it
should be interconnected with the government public budget (i.e. general budget). Therefore, the
interconnection between them is just a matter of time. Central enterprises should be incorporated
into the central budget and local SOEs into local budgets. The ratio of dividends for distribution
and re-investment should be decided by the shareholders rather than the managements. Budgets of
SOEs should be subject to the supervision of the people’s congress at the corresponding level and
SOEs should report their operation to the people’s congress at the corresponding level. Otherwise,
SOEs may easily become special interest groups controlled by insiders. The interconnection with
public budget not only enhances the ability of the government to exercise macro control through
budgetary management, but also better reflects the attribute of state-owned assets, i.e. owned by
the whole people.
VI. Transfer and Transaction of Property Rights
After the 14th CPC National Congress, the guiding theory for SOEs was changed from improving
the performance of individual SOEs to strategically adjusting the distribution of national economy
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and restructuring SOEs. In 1997, at the report of the 15th CPC National Congress, it was officially
proposed to “to invigorate large SOEs while relaxing control over small ones, and carry out
strategic reorganization.” The report also revised the traditional public ownership theory, and
raised the concept of “mixed ownership”, i.e. non-public sector is not only a “supplement” to but
also “an important part” of the public ownership. In 1998, driven by CPC Central Committee and
social reform forces, SOE reform entered the stage of property rights reform which required the
transfer and transaction of SOE property rights, in forms of reorganization, association, merger,
rent, contracted management, joint stock partnership and sale, and the transfer of state-owned
property rights to the management.
After the 16th CPC National Congress, the management system of state-owned assets was changed
from “unified ownership and hierarchic management” to one in which governments at all levels
performed capital contributor’s duties and responsibilities on behalf of the state. Consequently,
governments at all levels became legal owners and gained the right to dispose of state-owned
assets. Therefore, many local governments brought the enterprises in difficulty and state-owned
property rights in state-holding enterprises to the market. According to some statistics, from 1998
to 2003, the number of state-owned and state-holding enterprises dropped from 238,000 to
150,000, down 40%. From 2002, the number of SOEs in China began to shrink at a rate of more
than 8,000 every year to 110,000 in 2007. Some progress was made in the reform of SOEs at this
period.
However, there was no nationwide legal reform plan for the strategic adjustments to SOE reform,
from the initial “Guo Tui Min Jin” to “invigorating large enterprises while relaxing control over
small ones”. Due to the lack of standard procedure and legal regulation, severe deviations
occurred in the reform, such as the embezzlement of state-owned assets. After SASAC was
founded in 2003, the Circular of the General Office of the State Council on Forwarding the
Opinions of the State-owned Assets Supervision and Administration Commission of the State
Council on Regulating the Restructuring of State-owned Enterprises, the Interim Measures for the
Management of Transfer of State-owned Property Rights in Enterprises, the Circular on
Strengthening the Regulation of Transaction of State-owned Property Rights in Enterprises, the
Circular on Problems Concerning the Transfer of State-owned Assets in Enterprises and the
Circular on Issues Concerning the Transfer of State-owned Assets in Enterprises were issued to
regulate the transfer of state-owned assets.
The Interim Provisions on the Transfer of State-owned Property Rights in Enterprises to the
Management was a highly disputed policy. According to it, “Any region or department where a
state-owned assets supervision and administration organ is established or the government has
specified the subject responsible for the value maintenance and increment of state-owned assets
and the subject of liability thereof may experiment new ways for the transfer of state-owned
property rights of small and medium-sized state-owned and state-holding enterprises to the
managements thereof (unless it is otherwise prescribed by any law, regulation or ministerial rule).
The state-owned property rights of large state-owned and state-holding enterprises and the
important wholly owned or holding enterprises that undertake major businesses of the said large
enterprises as well as those of listed companies may not be transferred to the managements.”
In January of 2006, SASAC issued the Opinions on Further Standardizing the Work Relating to
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the Reconstructing of State-owned Enterprises. According to Part V of the document, “In case a
large state-owned or state-holding enterprise carries out restructuring, the direct or indirect holding
of equities by the management by capital increase, equity expansion or any other means shall be
rigidly restricted. In order to experimentally implement the stimulus-and-restriction mechanism,
and upon approval of the state-owned assets supervision and administration organ, any
management member who gets his/her post by public competitive employment or competitive
employment inside the enterprise or who has contributed a lot to the development of the enterprise
may hold equities of the enterprise by way of capital increase and equity expansion. However, the
total amount of equities held by the management shall not reach a holding or relatively holding
amount.” This marked that the ban on shareholding by managements of large state-owned and
state-holding enterprises was lift after it was implemented for over 8 months. It was a compromise
which was made when there was no other choice under the real conditions, because prior to this,
some provinces broke the policy by instituting regulations that allowed SOE managements to
increase their shares. In addition, according to Article 143 of the new company law which became
effective as of January 1 of 2006, listed companies can purchase back their own shares to reward
the employees. As it is legal to reward employees with shares, employees can buy shares with
their own money. Changes in laws shake the foundation to prohibit the managements from holding
shares.
Although the “management buy-out” model is not unique to China, it is under de jure doubt in
China. Because state-owned assets belong to the whole people, such property rights reform that
senior SOE executives only need to reach agreements with competent authorities and get approval
from the state-owned assets supervision and administration organs to get the property rights of
SOEs without obtaining the approval of the whole people - getting the approval of the people’s
congress under the current constitutional framework, is legally wrong.
Moreover, due to the presence of unique multiple-layer principal-agent relations in China, in case
of major issue such as the transfer of SOE property rights, inter-agent insider transactions may
easily arise to harm the legitimate interests of principals. When SOE executives want to change
SOE property rights into their individual property rights, they don’t need to get the approval of the
principals. Instead, they only need to reach an agreement with the upper SOE property rights agent.
Therefore, the change in SOE property rights is often accompanied with rampant corruption. No
matter how meticulous the operation rules on the reform of SOE property rights are, public
interests will be inevitably harmed. This is the fundamental problem with the reform of SOE
property rights (Qiao Xinsheng, 2004).
VII. Remuneration and Internal Distribution System
In the planned economy system, SOE leaders were officials, who were appointed and dismissed
by the government, and whose remuneration was also decided by the state. After the policy of
power decentralization and profit transfer was adopted in 1978, SOEs began to give out bonuses in
addition to salaries to employees. Generally speaking, the bonuses of the managements were
higher than those of ordinary employees, but the disparity was quite limited.
From 1987, SOEs began to adopt the contracted managerial responsibility system in a bid to
enable managers to completely grasp the residual claim and control. The basic principles of the
system were to fix the base, ensure the turn-in, keep the excess and supplement the insufficiency.
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In 1986, at the remuneration reform meeting held by the former Ministry of Labor and Personnel
in Wuxi, it was proposed to link the income of managers to the performance of their enterprises. In
1988, the State Council issued the Interim Regulations on Contracted Managerial Responsibility
System in Industrial Enterprises Owned by the Whole People. In 1992, the Ministry of Labor and
the Economic and Trade Office of the State Council issued the Opinions on Improving the Income
Distribution Measures for Managers of Enterprises Owned by the Whole People. It was clearly
stipulated that if an enterprise fulfills its targets and increases its asset values for three consecutive
years, the managing director or other leaders of the same level should be rewarded, further linking
the income of managers to their work performance.
In the 1990’s, China gradually loosened the control over income distribution inside SOEs,
emphasizing the control over gross salaries and linking salaries to performance. Within the gross
salaries, SOEs had more power to decide the internal distribution. According to Article 19 of the
Regulations on Transforming the Management Mechanism of Industrial Enterprises Owned by
the Whole People (1992), “enterprises have the power to distribute salaries and bonuses. The
gross salaries should be determined according to the method of linking the gross salaries to
economic performance. Enterprises have the power to use and distribute salaries and bonuses
within the extracted gross salaries.” At that time, SOE executives didn’t dare to increase the
disparity between their remuneration and the income of ordinary employees so as not to intensify
the conflict. However, to make up the insufficient cash remuneration incentives, invisible incomes
and duty consumption were increased rapidly.
Before SASAC was founded, SOEs decided the remuneration by themselves. According to the
Opinions on Deepening the Reform of Personnel, Labor and Distribution Systems inside
State-owned Enterprises which were issued by the State Economic and Trade Commission in
2001, “Salary levels of employees should be decided by enterprises under the state macro control
according to the local average salary levels and the economic performance of enterprises.” This
provided a policy basis for SOEs to determine the remuneration. In addition to nominal
remuneration, there is much room for invisible incomes and duty consumption for senior SOE
executives. In 2003, local state-owned assets supervision and administration committees were
established. The State Council and local governments began to perform capital contributor’s
duties and responsibilities, and enjoy the capital contributor’s rights and interests for state-funded
enterprises on behalf of the state in accordance with laws and administration regulations. At the
end of 2003, SASAC issued the Interim Measures for Evaluation of Operational Performance of
Persons in Charge of Central Enterprises. In 2004, it issued the Detailed Rules for the
Implementation of the Interim Measures for Evaluation of Operational Performance of Persons in
Charge of Central Enterprises, adopting a performance-driven annual remuneration system for
people in charge of central enterprises.
After 2004, remuneration of SOE employees began to exceed the salary of employees of other
enterprises and also local social average, exacerbating the conflict of income distribution. In 2010,
SASAC began to launch a new salary management system in central enterprises in its portfolio, i.e.
gross salary budget management, adopting “dual control” over the salaries of central enterprises:
gross salary control and per capita salary control, and replacing the system which linked the salary
to performance with the “dual control” system. The detailed procedure is as follows: at the
beginning of a year, central enterprises would, according to their performance and profits in the
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previous year, submit their salary budget plan for the year to SASAC. For its part, SASAC would
check whether the plans are reasonable according to the budgets submitted by central enterprises
and its own control requirements, and decide the upper, middle and lower per capita salary
increase limits according to the salaries in different industries. It hoped to solve the problems of
irrational salary distribution structures between different groups of employees in central
enterprises and too high salaries in some monopolized industries through the salary reform.
In February of 2009, the General Office of the Ministry of Finance issued the Measures for the
Management of Remuneration of Executives of Financial State-owned and State-holding
Enterprises (Exposure Draft) (hereinafter referred to as the Measures), stipulating that the highest
annual pay for executives of state-owned financial enterprises should be no more than 2.8 million
yuan (pre-tax), and that the remuneration should consist of basic annual pay, performance-based
annual pay, benefits and medium and long-term incentive payouts.
According to the Measures, the basic annual pay is the basic income of the executives, the
minimum of which is 25,000 yuan, calculated according to the following formula: maximum
annual pay * distribution coefficient. Amongst, the maximum annual pay is 0.7 million yuan, and
the minimum is 50,000 yuan. The distribution coefficient is 0.5-1, depending on the
responsibilities and contribution of the executives.
The total remuneration should be no higher than 4 times of the basic annual pay, i.e. no more than
2.8 million yuan. According to the interim measures for performance evaluation issued by the
Ministry of Finance, there are five evaluation grades. When the grade is E, the performance-based
annual pay is 0 time of the basic annual pay. Therefore, the minimum theoretical annual pay of an
executive is 25,000 yuan.
SASAC began the pilot of new governance structure in some central enterprises in 2005, where
the remuneration committee in the board would decide the remuneration of senior executives. The
Regulations on the Executives of State-owned Enterprises for Performing Management Duties
with Integrity (2009) also stipulated that the remuneration, housing subsidy and other benefits of
executives should not be determined without the approval of the organization that performs capital
contributor’s duties and responsibilities for state-owned assets and the personnel authority. The
document also stipulated that the remuneration of SOE executives should be linked to the
performance of SOEs. However, the reality did not show the positive relationship between the
remuneration of SOE executives and SOE profits. As of February 15 of 2009, according to the
annual reports released by 31 companies listed at the main board markets of Shanghai and
Shenzhen stock exchanges, 17 companies reported a significant increase in net profits over 2007
and 14 companies posted a slide in their performance. However, 21 companies reported an
increase in executive remuneration over 2007, 2 companies registered unchanged executive
remuneration and 8 companies posted a decline in executive remuneration (Feng Pengcheng,
2010).
In December of 2009, SASAC released the Interim Measures for Evaluation of Operational
Performance of Persons in Charge of Central Enterprises, linking the “economic value added
(EVA)” to the remuneration of senior executives of central enterprises for the first time. Although
it is a commendable advance to introduce the EVA index to evaluate the performance of those in
charge of central enterprises, because it brings some restraint and pressure to the operational
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behavior of senior executives of central enterprises. However, it still can’t hide a fact that the
operational performance of central enterprises is not based on fair market competition. The large
quantity of resource elements occupied by SOEs for free or at low costs and the monopoly enables
SOEs to gain profits much higher than what they can get under fair market competition.
The remuneration of senior SOE executives in Chin is subject to the administrative interference of
competent authorities to some extent. But their performance is evaluated and remuneration plans
are prepared by the board of directors. Whether the board of directors can really play its role to a
great extent depends on its structure, and the composition of the board largely depends on the
equity structure. Although some SOEs in China have established the board system, because
members of the board and management highly overlap, the board lacks due dependence. Large
shareholders assign directors that can represent their interests in the board, and most directors
concurrently serve at the management. Therefore, an interest group with the board as the center is
formed. Moreover, the real problems in corporate governance of Chinese enterprises – immature
system of external directors and lack of professional managers – make it impossible to shake this
interest group with external forces so as to control the enterprises. According to the analysis of
406 listed SOEs that provide complete information on their board members, the average rate of
insider control (proportion of inside directors in total number of directors) is 67%. In this context,
senior executives can evaluate their own performance and determine their remuneration, which is
obviously quite unfair (Feng Pengcheng, 2010).
As an internal supervision organization in corporate governance, the supervisory board should
play a special role in regulating the behavior of directors and managers and safeguarding the
interests of shareholders. At present, however, senior SOE executives are mainly appointed by the
government rather than selected by a market-oriented means. The supervisory board, which is in
parallel with the board, only has some supervision power and doesn’t have the control power, or
the power to appoint or dismiss members of the board of directors or management, take part in
decision making or veto the decisions of the board or the management. Moreover, the supervisory
board in SOEs includes some workers’ representatives such as the president of the labor union. In
terms of administrative level, board members and managers are their superiors, and the board
members and managers decide the remuneration of supervisors, control the performance
evaluation and nomination of supervisors. Therefore, the supervisory board virtually can’t
supervise the remuneration or the evaluation of the performance of senior SOE executives. The
remuneration of senior SOE executives is nominally determined by shareholders and the board of
directors, or even evaluated by the so-called “remuneration committee”. But in fact, it is decided
by the senior executives. The remuneration is nominally approved by the board of directors, but
virtually decided by one person or a few stakeholders.
VIII. Social Responsibilities of SEOs
In 2003, SASAC issued the Guidelines to the State-owned Enterprises Directly under the Central
Government on Fulfilling Corporate Social Responsibilities. In the mindset of SOEs, social
responsibilities cover a wide range. Their CSR reports normally include the interests of
stakeholders such as shareholders, clients, suppliers, employees, governments, communities and
competitors, as well as economic, social and environmental aspects. However, despite the wide
coverage, SOEs mostly use social responsibilities as slogans describing their philosophies and
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visions, which lack accurate definitions, and therefore, can’t give specific guidance on practical
operation. Secondly, on the one hand, SOEs still emphasize integrity, law observation, product
quality guaranty and other basic social responsibilities, and put public interests at a secondary
place. On the other hand, even if they support public welfare programs, SOEs mostly rely on their
large sizes but lack creativity. For instance, SOEs in China take part in public welfare programs
mostly in the form of donation.
Major contents of social responsibilities of central enterprises
(8) Insisting on business operation in a legal and honest way. Central enterprises are asked to
comply with laws, regulations, public virtues, commercial conventions, and trade rules. They
should pay due taxes in a timely manner, safeguard the interests of investors and creditors, protect
intellectual property rights, honor contracts in a faithful manner, maintain business creditability,
oppose unfair competition and eradicate corruption in business activities.
(9) Constantly improving sustainable profitability. Central enterprises should improve their
corporate governance, and advocate scientific and democratic decision-making. They should
optimize their development strategies, focus on and strengthen their core businesses, reduce
management chains and distribute resources in a reasonable way. They should also enforce
corporate administration, control and supervision, including minimizing operational costs,
strengthening risk prevention, increasing investment profit ratio, and enforcing market
competitiveness as well.
(10) Improving product and service quality. Central enterprises should ensure their product and
service safety, improve product performance and service system so as to provide quality products
and services for consumers. They should also protect the interests of consumers, properly handle
complaints and suggestions filed by consumers, and try their best to create more values for
consumers in order to win the trust and recognition of consumers.
(11) Strengthening resource conservation and environmental protection. Central enterprises should
fulfill their responsibilities and take a lead in energy saving and emission reduction. To do this,
they should develop energy-saving industries, products and recycling economy so as to increase
resource utilization efficiency. In addition, they should invest more in environmental protection,
better production procedures, reduce pollutant emission and carry out clean production so as to
embark on a road of low investment, consumption and pollution but high efficiency.
(12) Promoting independent innovation and technological advance. Central enterprises should
establish and complete a technological innovation system, increase investment in research and
development so as to enforce independent innovation capability. They should accelerate the
development of new technologies, renovation of traditional industries, make new breakthroughs in
key technologies and increase the reserve of innovative technologies. They should also pay more
attention to intellectual property rights and implement an intellectual property rights strategy to
promote sound interaction between technical innovation and intellectual property rights, grasp
some independently-developed core technologies and famous brands, and play a leading role in
industrial upgrade and structural optimization.
(13) Ensuring production safety. Central enterprises should adopt a strict responsibility system for
safe production and invest more in production safety so as to prevent severe safety accidents. They
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should establish and complete an emergency management system, and continuously improve the
emergency management response ability. In addition, they should provide safe and healthy
working conditions and living environments to ensure the health of all employees, prevent and
minimize occupational and other diseases.
(14) Protecting the legitimate rights and interests of employees. Central enterprises should sign
employment contracts with employees and perform the employment contracts, adhere to the
principle of distribution on the basis of labor and equal pay for equal work, maintain a mechanism
of regular pay increase, and pay social insurance in full amount. They should also respect and treat
all the employees equally, and prohibit any discrimination of gender, nationality, religion or age.
In addition, they should provide on-duty education and training, and create equal development
opportunities for employees. Moreover, they should further strengthen the workers’ congress
system, increase transparency in corporate affairs, and advance democratic management. They
should also care for employees’ livelihood and help the needy out of their difficulties and
problems.
(15) Take part in public welfare programs. Central enterprises should actively involve themselves
in community construction, encourage their employees to provide voluntary services, take an
active part in charity, donation and other social welfare programs, and support education, culture
and public health undertakings. In case of major natural disaster or emergency accident, they
should also provide financial, material and manpower support.
IX. Policy Source of Administrative Monopoly
1. Tobacco
China decided to adopt a tobacco monopoly system in 1981, and approved the establishment of
China National Tobacco Corporation and State Tobacco Monopoly Administration in January of
1982 and January of 1984 respectively for administration of tobacco monopoly. On September 23
of 1983, the State Council issued the Regulations on Monopoly of Tobacco. After that, county, city
and provincial-level tobacco monopoly administrations and tobacco companies were established
in China.
In 1992, China introduced the Tobacco Monopoly Law and abolished the Regulations on
Monopoly of Tobacco. Then in 1997, China issued the Rules for the Implementation of the
Regulations on Monopoly of Tobacco.
According to Article 3 of the Tobacco Monopoly Law, “the state shall adopt monopoly
administration over the production, sale, import and export of tobacco commodities, and a tobacco
monopoly license system in pursuance of laws.” According to Article 2 of the Regulations for the
Implementation of the Law of the People’s Republic of China on Tobacco Monopoly, “Tobacco
monopoly means that the state adopts monopolistic operation and unified control over the
production, sale, import and export of tobacco products.” The Regulations also prescribe the issue
and use of tobacco monopoly licenses and operation licenses in different chapters. This shows that
the whole process, including material supply, production, supply, sale and transportation, is
strictly regulated by administrative monopoly. In this regard, China set up a specialized
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administrative organization, i.e. State Tobacco Monopoly Administration. The administration has
provincial, city and county branches to exercise unified and vertical administration of the
production and sale of tobacco and related products (including raw materials and equipment).
In Chapter I General Provisions of the Tobacco Monopoly Law, the state is set to be the subject of
tobacco monopoly, which exercises nationwide tobacco monopoly administration. The strict
monopoly covers not only the sale of tobacco products, but also tobacco planting, purchase and
allocation, production of tobacco products, production and sale of cigarette paper, filter rod,
cigarette tow and cigarette manufacturing equipment, import, export, foreign economic and
technical cooperation. In addition, China adopts a license system for the transportation of tobacco
products.
The government explanation for administrative monopoly of tobacco industry is “to organize the
production and management of tobacco commodities in a planned way, improve the quality of
tobacco products, safeguard consumers' interests and ensure the national revenue” (Tobacco
Monopoly Law). However, this explanation is untenable. The profit of industrial and commercial
enterprises in China’s tobacco industry is very high, while their tax rate is very low, which is only
a little over 40% (Yang Daijin, 2006). In many other countries which do not adopt tobacco
monopoly, the tobacco tax rate is well over 75%.
In the 1980’s, more than 70 countries and regions adopted a tobacco monopoly system. But in
2003, this number dropped to about 20. Take Japan as example, due to the pressure of economic
globalization, Japanese government abolished the tobacco monopoly system in 1995 and replaced
it with economic monopoly. The reform lasted 10 years before it was finally completed. Korea
began to privatize its tobacco industry in 1999, and Taiwan completed the reform in 2002.
2. Salt
China used to be one of the countries that suffered the worst iodine deficiency in the world. More
than 700 million people in the country lacked iodine, accounting for 40% of the world’s total. This
is the most important reason for competent authorities to adopt salt iodization and monopoly. In
1994, the State Council issued the Regulations on Salt Iodization to Eliminate Iodine Deficiency
Disorder, unveiling compulsory salt iodization in most parts of China. To ensure salt iodization,
the State Council enacted the Measures for Salt Monopoly in 1996, which gave more specific
regulations on state monopoly of salt than the Regulations for the Management of Salt Industry
that became effective in 1990.
According to Chapter I of the Measures for Salt Monopoly, “the state shall exercise monopoly of
salt,” “these Measures are applicable to salt production, storage, transportation and sale within the
territory of the People’s Republic of China,” “competent salt industry authorities authorized by the
State Council shall be responsible for administrating salt monopoly in China. Competent salt
industry authorities authorized by the people’s government above the county level shall be
responsible for administrating salt monopoly in their respective jurisdictions.” This shows that
China’s salt industry, from production to transportation and then to wholesale, is completely under
administrative monopoly by competent authorities above the county level.
In the production process, “a system of designated production shall be adopted. Enterprises that
are not designated shall not produce salt.” In the transportation process, a “salt transportation
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license” must be obtained. In the sale process, “a wholesale license system shall be adopted. Firms
must obtain a wholesale license in accordance with the law to be engaged in salt wholesale
business. Those that do not have a license shall not be engaged in salt wholesale business.”
After the former State Planning Commission and the State Economic and Trade Commission
jointly issued the Measures on Improving the Supply, Sale and Price Management of Industrial
Salt in 1995, the market of salt for soda and caustic soda was deregulated. “The existing planned
distribution of industrial salt shall be changed into contract purchase under the guidance of
national aggregate planning, i.e. the situation in which and caustic soda producers can only go to
the designated salt farms (plants) to purchase salt on a ‘one-to-one’ basis according to the
distribution plan into one where China National Council of Light Industry and the Ministry of
Chemical Industry organize an order-placing meeting every year so that salt and soda producers
can meet to directly sign contracts and settle payment. In addition, the current industrial salt
transportation license and seal system shall be abolished. Salt and soda producers can apply for
transportation to the carrier according to the contracts between them.” After the deregulation, the
price was lowered from 800 yuan to about 200-300 yuan. However, the small industrial salt was
not deregulated, which is still monopolized by local salt companies. The price and quantity are
determined by salt companies and downstream salt users have no say in the pricing process.
The monopoly of salt industry in China is mainly in the wholesale process, involving two relevant
markets, i.e. common salt and industrial salt except for salt for soda and caustic soda, which is
also known as small industrial salt. The annual sales volume of common salt and small industrial
salt in China is about 8 million tons and 10 million tons respectively. China National Salt Industry
Corporation and subsidiary companies monopolize the salt market in the country, which have
monopolized the sales of salt except salt for soda and caustic soda since 1996. In a geographic
region, normally a province, salt is produced by a few companies licensed by the government
according to the government plans. The wholesale is exclusively carried out by the only company
designated by the government, i.e. local salt company. Salt producers can only sell their products
to the wholesaler designated by the government at a price approved by the government. They
cannot directly sell their products in the market. This completely eliminates competition from
other companies and endows local salt companies with the power to monopolize local salt
markets.
In the production process, although most producers are outside the system of China National Salt
Industry Corporation, their salt production quotas are distributed by China National Salt
Industry Corporation. This means that salt companies go beyond the wholesale process and
control the production and retail processes. A direct result of such vertical monopoly is that, as the
exclusive salt wholesalers, salt companies can leverage the monopoly power to suppress the
supply price of salt producers, and at the same time, raise the salt sales price in the market as
much as possible, gaining huge monopoly profits. Moreover, the state provides a subsidy of 0.03
yuan/kg for salt iodization.
According to some experts, salt companies buy salt from producers for about 400-500 yuan/ton,
and the cost of iodization is bout 20-25 yuan/ton. However, the average wholesale price of salt
companies is about 1,500-2,000 yuan/ton. Consequently, the price gap in the wholesale process is
up to 4 times (Feng Haining, 2010).
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But now, the problem of iodine deficiency is solved. Moreover, in some places, people get sick
because of excessive iodization. Obviously, salt monopoly no longer has any existence value. If
China continues to adopt salt monopoly, it means to set obstacles for fair market competition and
add to unreasonable consumption costs for the public.
3. Civil aviation
Traditional enterprises in China’s aviation industry are highly concentrated enterprises, which
merge government administration and enterprise administration under the oversight of the
government. After the reform in 1987, six major state-owned airline companies become
wholly-owned SOEs. On October 11 of 2002, according to the Structural Reform Plan for Civil
Aviation enacted by the State Council, civil aviation enterprises in China were reorganized into six
major civil aviation groups, including China National Aviation Holding Company, China Eastern
Air Holding Company and China Southern Air Holding Company, and three major aviation
service support groups, i.e. China TravelSky Holding Company, China National Aviation Fuel
Group Corporation and China Aviation Supplies Holding Company.
Civil aviation is an industry characterized by high access barriers. According to Article 92 and
Article 93 of the Civil Aviation Law of the People’s Republic of China (1995), “in establishing a
public air transport enterprise, application shall be filed with the competent civil aviation authority
under the State Council for operating license, and registration with the department of industrial
and commercial administration shall be performed according to law”, and “the establishment of a
public air transport enterprise shall satisfy the following conditions: (1) it has civil aircraft
conforming to the requirements of flight safety as stipulated by the state; (2) it has necessary
aviation personnel who have obtained licenses according to law; (3) it has a registered capital no
less than the minimum limit prescribed by the State Council; and (4) other conditions prescribed
in laws and administrative rules and regulations.”
Aviation fuel and aviation supplies are supplied under control in China. Aviation fuel is
exclusively supplied by China National Aviation Fuel Group Corporation. The company
monopolizes fuel source, fuel storage and supply facilities at airports in China, selling the fuel at a
price 50-100% higher than that in other countries. This is one of the important reasons why airline
companies in China suffer high costs and low competitiveness. Subordinate to Civil Aviation
Administration of China, China Aviation Supplies Holding Company purchases airplanes on
behalf of all airline companies in the country. It virtually acts as monopolistic intermediary.
Airline companies in China can’t bypass it to directly place orders with airplane manufacturers. In
these groups, state-holding enterprises are still dominant, which enjoy significant advantages than
local and private aviation enterprises from the beginning.
On March 20, 2006, the Regulations on Permitting the Operation of Domestic Air Route of Civil
Aviation of China were officially enacted, liberalizing the market access of some air routes in the
country. The regulations loosen the control of civil aviation market in China to some extent, but
the golden air routes are still controlled by the government. Airline companies must obtain
government approval to operate these air routes. China adopts a strict control policy for civil
aviation. The air routes and charge rates must be approved by Civil Aviation Administration of
China. Airline companies must operate regular routes. When two or more airline companies apply
for operation permits for new routes or existing routes, the company that has a base will be given
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precedence.
4. Petroleum and petrochemical
Provisions in the Opinions on Checking up and Rectifying Small Refineries and Regulating the
Distribution Order of Crude Oil and Petroleum Products (No. 38 Document, 1999) reflect
monopoly of the whole petroleum and petrochemical industry value chain.
Upstream control of crude oil: “Crude oil produced by China National Petroleum Corporation and
China Petroleum & Chemical Corporation, crude oil sold by China National Offshore Oil
Corporation at home, crude oil produced by SINOPEC Star Petroleum Co., Ltd. and local oilfields,
and also imported crude oil shall be centrally allocated by the state, and shall not be sold without
permission.” To enter upstream petroleum sectors, private companies must cooperate with China
National Petroleum Corporation to exploit low-yield fields that are deemed to be valueless by
China National Petroleum Corporation, bear all the investment risks, turn in 20% of the exploited
oil to China National Petroleum Corporation for free, and sell the remaining oil to China National
Petroleum Corporation at a price fixed by China National Petroleum Corporation.
Monopoly of production: “Small refineries other than China National Petroleum Corporation and
China Petroleum & Chemical Corporation, which survive the check-up and rectification, can be
restructured by China National Petroleum Corporation and China Petroleum & Chemical
Corporation through transfer, joint operation, equity participation and merger.”
Monopoly of wholesale of petroleum products: “Petroleum products refined by all refineries in
China (gasoline, kerosene and diesel oil, the same below) shall be transferred to China National
Petroleum Corporation and China Petroleum & Chemical Corporation for wholesale. Other
enterprises shall not wholesale petroleum products, and all refineries shall not sell their own
products by themselves. The supply of crude oil shall be stopped for refineries that sell petroleum
products in violation of this stipulation. Petroleum products wholesalers shall be checked up and
rectified before the end of 1999, and the permit of wholesalers that are not eligible for wholesale
business shall be revoked. Wholesalers other than China National Petroleum Corporation and
China Petroleum & Chemical Corporation, which survive the check-up and rectification, can be
restructured by China National Petroleum Corporation and China Petroleum & Chemical
Corporation through transfer, joint operation, equity participation and merger.”
This policy stifles the lifeline of private petroleum enterprises. Local governments launched
vigorous check-up and rectification campaigns, revoking the permits of many enterprises other
than China National Petroleum Corporation and China Petroleum & Chemical Corporation. Many
of these enterprises were directly acquired or merged by the two groups, or directly transferred to
the two groups.
The Opinions on Further Checking up, Rectifying and Regulating the Market Order of
Petroleum Products (No. 72 Document) were issued in 2003, further consolidating the monopoly
of China National Petroleum Corporation and China Petroleum & Chemical Corporation. In the
access process: “The construction of new gas stations shall be strictly controlled, and the approval
procedure for new gas stations shall be regulated. As of the issue of this document,
newly-constructed gas stations in different regions shall be wholly owned or jointly owned by
China National Petroleum Corporation and China Petroleum & Chemical Corporation.” In the
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wholesale process: “Petroleum products shall be centrally wholesaled by China National
Petroleum Corporation and China Petroleum & Chemical Corporation. The distribution plan of
petroleum products wholesalers shall be prepared by China National Petroleum Corporation and
China Petroleum & Chemical Corporation, and submitted to the State Economic and Trade
Commission for approval. As of the issue of this document, the plan to establish any new
petroleum products wholesale enterprise shall be submitted by China National Petroleum
Corporation and China Petroleum & Chemical Corporation, to the State Economic and Trade
Commission for approval.”
Although private petroleum enterprises have obtained the “non-state crude oil import
qualification” and “non-state trade import quota”, they can hardly import crude oil according to
currently effective policies in China. To import crude oil, enterprises other than China National
Petroleum Corporation and China Petroleum & Chemical Corporation must produce the
“certificate of production scheduling” issued by the two groups for the customs to allow the
import and the railroad authority to arrange transportation plans. In addition, even if they import
crude oil with the non-state import quota, they still need to sell the imported crude oil to China
National Petroleum Corporation and China Petroleum & Chemical Corporation which will
centrally arrange the sale. Moreover, according to the survey of All-China Federation of Industry
and Commerce, the non-state import quota is not completely shared by private petroleum
enterprises. Over half of the 22 enterprises that have non-state crude oil import quota are state
owned, including companies registered under the name of China National Petroleum Corporation
and China Petroleum & Chemical Corporation.
What’s more, the monopoly power is expanded to transportation and other product areas. It is
clearly stipulated in the Tie Yun Han No. 150 Decree issued by the Ministry of Railways in 2003
that without the written approval of China National Petroleum Corporation and China Petroleum
& Chemical Corporation, all the railway bureaus shall not accept any petroleum products
transportation business. As a result, local and private refineries have to use road transportation at
costs several times higher than railway transportation. According to the Extension Plan of the Pilot
Program of Vehicle-use Ethanol Gasoline (No. 230 Document) and the Detailed Rules for the
Implementation of the Extension Plan of the Pilot Program of Vehicle-use Ethanol Gasoline (No.
230 Document) issued by NDRC in 2004, “Vehicle-use ethanol gasoline shall only be produced
and supplied by China National Petroleum Corporation and China Petroleum & Chemical
Corporation.”
5. Grid and power
The Reform Plan of Power System (No. 5 Document) issued by the State Council in February of
2002 was a landmark document for the reform of power system in China. According to the plan,
“Power generators and power grid operators shall be separated and reorganized. A bid-for-grid
mechanism shall be implemented. Power market operating rules and government regulation
systems shall be put in place so that competitive and open regional power markets which adopt a
new power price system can be initially built, and the pattern in which power is exclusively
purchased by grid operators can be changed.” This is the primary task of power system reform. To
break the monopoly, introduce competition and build competitive and open regional power
markets are the primary principles of the reform, replacing the original task of building a unified
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nationwide power grid. The national grid was split into China Southern Power Grid Corporation
Limited and State Grid Corporation of China. Internally, State Grid Corporation of China consists
of and vertically controls five regional power companies for northeast, north, northwest and
central and east China. On November 11, the Implementation Opinions on Deepening the Reform
of Power system in the 11th Five-Year-Plan Period were adopted at the standing meeting of the
State Council. To steadily separate power transmission and distribution and accelerate the
construction of regional power markets is listed on the top agenda of power system reform in the
11th Five-Year-Plan Period.
In the original consideration of the No. 5 Document, after the “separation of power generators and
grid operators,” the “separation of core and non-core businesses”, “separation of diversified
utilities from main business” and “separation of transmission and distribution” will be carried out
in order to eventually build a standard, fair, efficient and competitive market-oriented power
system. So far, only the first step is taken toward the”separation of power generators and grid
operators”. No progress is made in subsequent reform.
According to the Power Price Reform Plan and subsequent Measures for the Implementation of
the Power Price Reform Plan issued in 2003, the on-grid price for power generators and sales
price for users shall be decided by the market through competition, and the transmission and
distribution prices shall be approved by the government, i.e. “deregulate both ends and control the
middle”. However, the reality is that “both ends are controlled and the middle deregulated,” i.e.
the on-grid and sales prices are approved by the government while the transmission and
distribution prices fluctuate according to changes in sales price and on-grid price.
Moreover, the State Grid Corporation of China is constantly enhancing its technical monopoly. In
2004, it put forth a plan to build a UHV grid network. According to the plan, the UHV grid
network will consist of one vertical line and four horizontal lines, extending from Dianbai of
Guangdong Province in the south to Hulunbeir League of Heilongjiang Province in the north,
from Yunnan-Guizhou Plateau in the west to Shanghai in the east. At the beginning of 2009, the
trial 1,000 KV UHV AC transmission and distribution project that runs from Jindongnan to
Nanyang and then to Jingmen, which was designed and constructed by State Grid Corporation of
China, successfully passed the trial operation. In addition, plans for two other lines were approved
by NDRC. Once the nationwide UHV AC grid network is completed, a unified network will be
formed, and the State Grid Corporation of China will secure technical monopoly. This goes
against the goal of developing regional grids and separating power transmission and distribution
as outlined in the No. 5 Document.
6. Coal
“Guo Jin Min Tui” in the coal sector is mainly carried out according to the Notice on Issues
Regarding Further Accelerating Merger & Reorganization of Coal Mine Enterprises issued by
Shanxi provincial government in April of 2009. The document prescribed that “the merger and
reorganization target is to reduce the number of coal mine enterprises in the province from 1,500
to 1,000 by the end of 2010. After merger and reorganization, the capacity of every coal mine
enterprise shall in principle be no less than 3 million tons/year, the capacity of each mine no less
than 0.9 million tons/year, and all the mines shall adopt mechanized mining. The city-specific
number of coal mines shall be 50 in Taiyuan, 71 in Datong, 50 in Yangquan, 95 in Changzhi, 118
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Unirule Institute of Economics
in Jincheng, 65 in Shuozhou, 63 in Xinzhou, 110 in Jinzhong, 100 in Lvliang, 127 in Linfen and
18 in Yuncheng. The number of mines of key state-owned coal groups shall be limited to 133.” It
is expected that after the reorganization, the number of coal mines controlled by large state-owned
groups, central enterprises and nonlocal large groups and key local state-owned enterprises will
account for 82.1% of the total in the province and their aggregate capacity will take up 84% of the
total.
As early as 2004, Shanxi launched a “coal property rights reform”. Initially, the official
explanation of the motive was to check the frequent coal mine disasters. Currently, in the
integration dominated by large state-owned coal mine enterprises, the targets only have three
choices, i.e. directly sell themselves to state-owned groups, invest in state-owned groups with their
mines and form local coal mine enterprise groups.
The merger and reorganization of coal mine enterprises in Shanxi is not market oriented. Instead,
it is carried by the government with administrative power. The prerequisite of market-oriented
merger and reorganization is the willingness of both parties, and in the market-oriented
reorganization, the control rather than property rights should be reorganized. Only in this way can
both parties optimize the resource allocation and the reorganized enterprise can be more
competitive in the market.
Reference:
Feng Pengcheng, Liu Leijin: Crux of Senior SOE Executive Remuneration is Corporate
Governance, Digest of Management Science, Issue 5 of 2010.
Qiao Xinsheng: Empirical Analysis and Value Judgment of Property Rights Reform of
State-owned Enterprises, Chinese Book Review Monthly, Issue 11 of 2004.
World Bank: Effective discipline with adequate autonomy: the direction for further reform of
China's SOE dividend policy, 2010.
Yang Daijin: “Cost Track of Lucrative Industries: Tobacco Industry to be Privatized and Tax
Increased”, Accounting Messenger, September 18 of 2006.
Feng Haining: “Anti-monopoly Lash Still Needs to be Held High after Salt Monopoly Is Broken”,
China Securities Journal, January 8 of 2010.
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