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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 1 Unirule Institute of Economics 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 2 Unirule Institute of Economics 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. 3 Unirule Institute of Economics 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. 4 Unirule Institute of Economics 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). 5 Unirule Institute of Economics 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; 6 Unirule Institute of Economics 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; 7 Unirule Institute of Economics 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 8 Unirule Institute of Economics 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 9 Unirule Institute of Economics 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 10 Unirule Institute of Economics 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 11 Unirule Institute of Economics 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. 12 Unirule Institute of Economics 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 13 Unirule Institute of Economics 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! 14 Unirule Institute of Economics 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 15 Unirule Institute of Economics 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 16 Unirule Institute of Economics 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 17 Unirule Institute of Economics 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. 18 Unirule Institute of Economics (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 19 Unirule Institute of Economics 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 20 Unirule Institute of Economics 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 21 Unirule Institute of Economics 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 22 Unirule Institute of Economics 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 23 Unirule Institute of Economics 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 24 Unirule Institute of Economics 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” 25 Unirule Institute of Economics 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 26 Unirule Institute of Economics 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” 27 Unirule Institute of Economics 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 28 Unirule Institute of Economics 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 29 Unirule Institute of Economics 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 30 Unirule Institute of Economics 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. 31 Unirule Institute of Economics 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. 32 Unirule Institute of Economics 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 33 Unirule Institute of Economics 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 34 Unirule Institute of Economics 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, 35 Unirule Institute of Economics 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 36 Unirule Institute of Economics 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 37 Unirule Institute of Economics 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. 38 Unirule Institute of Economics 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. 39 Unirule Institute of Economics 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. 40 Unirule Institute of Economics 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 41 Unirule Institute of Economics 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. 42 Unirule Institute of Economics 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 43 Unirule Institute of Economics 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 44 Unirule Institute of Economics 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 45 Unirule Institute of Economics 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. 46 Unirule Institute of Economics 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. 47 Unirule Institute of Economics 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 48 Unirule Institute of Economics 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 49 Unirule Institute of Economics 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 50 Unirule Institute of Economics 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 51 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 52 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 53 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 54 Unirule Institute of Economics 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) 55 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 56 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 57 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 58 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. 59 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 60 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 61 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 62 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 63 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 64 Unirule Institute of Economics 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 65 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 66 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. 67 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 68 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 69 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 70 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# 71 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) 72 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; 73 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. 74 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 75 Unirule Institute of Economics 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: 76 Unirule Institute of Economics 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 77 Unirule Institute of Economics 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 78 Unirule Institute of Economics 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 79 Unirule Institute of Economics 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 80 Unirule Institute of Economics 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 82 Unirule Institute of Economics 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 83 Unirule Institute of Economics 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 84 Unirule Institute of Economics 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 85 Unirule Institute of Economics 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 86 Unirule Institute of Economics 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 87 Unirule Institute of Economics 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 88 Unirule Institute of Economics 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. 89 Unirule Institute of Economics 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 90 Unirule Institute of Economics 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 91 Unirule Institute of Economics 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). 92 Unirule Institute of Economics 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 93 Unirule Institute of Economics 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 94 Unirule Institute of Economics 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. 95 Unirule Institute of Economics 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% 96 Unirule Institute of Economics 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. 97 Unirule Institute of Economics 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 98 Unirule Institute of Economics 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. 99 Unirule Institute of Economics 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 100 Unirule Institute of Economics 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. 101 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 102 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, 103 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 104 Unirule Institute of Economics 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. 106 Unirule Institute of Economics 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, 107 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 108 Unirule Institute of Economics 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 109 Unirule Institute of Economics 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. 110 Unirule Institute of Economics 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 111 Unirule Institute of Economics 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 112 Unirule Institute of Economics 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. 113 Unirule Institute of Economics 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 114 Unirule Institute of Economics 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 115 Unirule Institute of Economics 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 116 Unirule Institute of Economics 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 117 Unirule Institute of Economics 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. 118 Unirule Institute of Economics 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 119 Unirule Institute of Economics 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. 120 Unirule Institute of Economics 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 121 Unirule Institute of Economics 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. 122 Unirule Institute of Economics 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 123 Unirule Institute of Economics 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 124 Unirule Institute of Economics 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 125 Unirule Institute of Economics 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, 18 126 Unirule Institute of Economics 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 127 Unirule Institute of Economics 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 128 Unirule Institute of Economics 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 129 Unirule Institute of Economics 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 130 Unirule Institute of Economics 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. 131 Unirule Institute of Economics (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 132 Unirule Institute of Economics 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. 133 Unirule Institute of Economics 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. 134 Unirule Institute of Economics 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. 135 Unirule Institute of Economics 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 136 Unirule Institute of Economics 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. 137 280.51 299.53 Unirule Institute of Economics 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. 138 Unirule Institute of Economics 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. 139 Unirule Institute of Economics 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. 140 Unirule Institute of Economics 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. 141 Unirule Institute of Economics 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. 142 Unirule Institute of Economics 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. 8 143 Unirule Institute of Economics 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) 144 Unirule Institute of Economics 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 145 Unirule Institute of Economics 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). 146 Unirule Institute of Economics 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) 147 10 Unirule Institute of Economics 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". 148 Unirule Institute of Economics 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 149 Unirule Institute of Economics 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 150 Unirule Institute of Economics 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. 151 Unirule Institute of Economics 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. 152 Unirule Institute of Economics 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 153 Unirule Institute of Economics 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 154 Unirule Institute of Economics 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 155 Unirule Institute of Economics 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 156 Unirule Institute of Economics 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 157 Unirule Institute of Economics 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.” 158 Unirule Institute of Economics 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 159 Unirule Institute of Economics 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, 160 Unirule Institute of Economics 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. 161 Unirule Institute of Economics 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. 162 Unirule Institute of Economics 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). 163 13 Unirule Institute of Economics 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, 164 Unirule Institute of Economics 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 165 Unirule Institute of Economics 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: 166 According to this report, the tobacco industry does not have adequate reasons for administrative monopoly. Therefore, the Tobacco Monopoly Law (1992) should be abolished Unirule Institute of Economics 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. 167 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 Unirule Institute of Economics 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. 168 Unirule Institute of Economics 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 169 Unirule Institute of Economics 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 170 Unirule Institute of Economics 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. 171 Unirule Institute of Economics 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. 172 Unirule Institute of Economics 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. 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Zou Dongtao, 2003: Innovation in China’s Economic System – Exploration in Reform Years, People’s Publishing House, Edition 1, October of 2003. 179 Unirule Institute of Economics 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 180 Unirule Institute of Economics 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 181 Unirule Institute of Economics 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” 182 Unirule Institute of Economics 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 183 Unirule Institute of Economics 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. 184 Unirule Institute of Economics 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 185 Unirule Institute of Economics 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 186 Unirule Institute of Economics 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 187 Unirule Institute of Economics 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 188 Unirule Institute of Economics 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. 189 Unirule Institute of Economics (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 190 Unirule Institute of Economics 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 191 Unirule Institute of Economics 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. 192 Unirule Institute of Economics 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 193 Unirule Institute of Economics 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 194 Unirule Institute of Economics 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. 195 Unirule Institute of Economics (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. 196 Unirule Institute of Economics 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 197 Unirule Institute of Economics 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 198 Unirule Institute of Economics 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. 199 Unirule Institute of Economics 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. 200 Unirule Institute of Economics 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 201 Unirule Institute of Economics 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; 202 Unirule Institute of Economics 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. 203 Unirule Institute of Economics 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 204 Unirule Institute of Economics 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 205 Unirule Institute of Economics 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 206 Unirule Institute of Economics 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”. 207 SOE Unirule Institute of Economics 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. 208 Unirule Institute of Economics 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 209 Unirule Institute of Economics 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 210 Unirule Institute of Economics 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 211 department Ⅲ Government department Ⅱ SOE State-owned assets authorities Government department Ⅲ SASAC Unirule Institute of Economics 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 212 Unirule Institute of Economics 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”. 213 Unirule Institute of Economics 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. 214 Unirule Institute of Economics 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. 215 Unirule Institute of Economics 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. 216 Unirule Institute of Economics 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. 217 Unirule Institute of Economics 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 218 Unirule Institute of Economics 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 219 Unirule Institute of Economics 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 Unirule Institute of Economics 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 221 Unirule Institute of Economics 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 222 Unirule Institute of Economics 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 223 Unirule Institute of Economics 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) 224 Unirule Institute of Economics 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) 225 Unirule Institute of Economics 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. 226 Unirule Institute of Economics 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 227 Unirule Institute of Economics 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 228 Unirule Institute of Economics 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 1962 Unirule Institute of Economics 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 230 Unirule Institute of Economics 231 Unirule Institute of Economics 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 232 Unirule Institute of Economics 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 233 Unirule Institute of Economics 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. 236 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 238 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. 239 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. 240 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%.” 241 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 242 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 244 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 245 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 246 Unirule Institute of Economics 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. 247 Unirule Institute of Economics 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 248 Unirule Institute of Economics 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 249 Unirule Institute of Economics 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 250 Unirule Institute of Economics 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 251 Unirule Institute of Economics 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 252 Unirule Institute of Economics 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 253 Unirule Institute of Economics 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 254 Unirule Institute of Economics 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. 255 Unirule Institute of Economics 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 256 Unirule Institute of Economics 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 257 Unirule Institute of Economics 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 258 Unirule Institute of Economics 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 259 Unirule Institute of Economics 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 260 Unirule Institute of Economics 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 261 Unirule Institute of Economics 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). 262 Unirule Institute of Economics 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 263 Unirule Institute of Economics 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 264 Unirule Institute of Economics 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 265 Unirule Institute of Economics 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, 118 266 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. 267