Reform of Enterprises: New Progress in Spite of Controversy and Stagnation

 

 

A certain amount of progress has been made in the reform of enterprises in China as a whole in the spirit of the Third Plenary Session of the 16th Central Committee of the Communist Party of China, held in 2004. At the same time, there has been controversy over the reform of the status of property, which has affected, to a certain extent, policy decisions in this field, and the result has been a stalemate. There should be more consensus not only on its actual work, but also on the concepts.

 

The most difficult problem is that of reforming the property rights system. Enterprises directly under the Central Government achieved fairly good results in 2004, and their profits rose to a new level. In June 2004, Hong Kong scholar Lang Xianping questioned the property reform of the TCL and Hai’er Groups and criticized Greencool Group, leading to a big controversy about the reform of property rights which caused wide public concern. The State-owned Assets Supervision and Administration Commission of the State Council issued a number of documents to standardize the reform of state-owned enterprises. The reform of the property order is the most valuable experience gained in the reforms in China in the past two decades and more, and is a correct choice. This general orientation allows no change. It is true that there has been loss of state property in the course of this reform, but the key to the solution of this problem is the adoption of standard measures. China’s new state property management system was instituted in 2004. The State-owned Assets Supervision and Administration Commission of the State Council has set up its corresponding organs at the provincial level throughout the country, and is setting up a state-owned property supervision and control system at the prefectural and city levels. Three major property rights trading centers have been set up, demanding that all state property must be traded openly. These measures have had certain positive effects.

 

The percentage of the contribution of non-public enterprises to the growth of the Chinese economy increased in 2004, reaching a new phase from the original quantitative expansion to accelerated and sustained development. This is a profound change. The State Council will soon publish its “36-point” opinions on promoting the development of the non-public sector of the economy.

 

It should be noted that the Central Government exercised macro control over the overheated investment in some industries in 2004, aimed at maintaining an appropriate growth rate more favorable to the development of the private sector of the economy. However, in the course of the macro control exercised in the first half of the year, some private enterprises were adversely affected.

 

Generally speaking, 2004 was the first year of the enterprise reform conducted according to the plan made at the Third Plenary Session of the 16th Central Committee of the CPC. Despite some setbacks, hesitancy and debate in the new course of the reform, considerable consensus was reached. This will help people further emancipate their minds, and deepen the reform.

 

 

Section 1  Reform of State-Owned Enterprises: Attempt to Cross the Threshold of

Property Order

 

1. It is difficult for the reform of state-owned enterprises to surmount the obstacle of property rights

(1) MBO (management buy-out) is an attempt to step over the threshold of property rights

 

MBO is an act of purchase by which the managers of an enterprise buy its shares in the form of leveraged financing, thereby changing the composition of its owners, the structure of its controlling power and the composition of the property, thus turning themselves into the owners of the enterprise. Beginning in 1997, MBO was introduced into China with the reform of the property rights of state-owned enterprises, guided by the spirit of using the reform of property status to promote the reform of the latter. But at the same time, a controversy arose among economists over the pattern for the reform of state-owned enterprises. At the end of 2004, the State-owned Assets Supervision and Administration Commission of the State Council stated that “MBO will not be introduced in the large state-owned enterprises directly under the Central Government, but will be tried out in small and medium-sized enterprises” (Beijing Morning News, December 16, 2004), and began the legislation work concerned, putting the debate to an end. In fact, the holding of stocks by the workers and staff, or by the managers, and MBO are all aimed at solving the problem of incentives for the workers and managers and the correct property rights system for enterprises. We can’t abandon reform of the property status of state-owned enterprises just because of shortcomings in certain aspects of its practice. We must seek a way to standardize this practice.

 

(2) Setting up three major property rights trading centers to seek a pattern for the trading of property rights according to market rules

 

Non-standardized transfer or trade of state property, low pricing of state property in the course of trade, and rent-seeking by the power holders of state-owned enterprises have been the main causes of the loss of state property in recent years. In order to standardize the transfer of state property rights and improve the efficiency of the transfers, the State-owned Assets Supervision and Administration Commission has required enterprises directly under the Central Government to trade their property rights openly at the three property right exchanges in Beijing, Shanghai and Tianjin. The Commission issued its Order No. 3 -- “Interim Measures for Control of the Transfer of State Property in Enterprises” -- in February 2004, and its Document No. 268 -- “Circular on the Problems Related to the Transfer of State Property” -- in September of the same year. According to information from the three exchanges, there were 2,363 transactions concerning state property in enterprises during the first eight months of 2004, involving a total of 46.76 billion yuan. The volume of trade at the three centers accounted for 95 percent of the national volume of such trade in 2004. The tendency of concentration in this trade is becoming clear. At present, of the 2,903 key state-owned enterprises, 1,464 have been transformed into corporate enterprises with their stocks held by diverse stockholders, accounting for 50.4 percent of the total. Of them, more than 1,000 companies have been listed at home or abroad, and their state-owned equity and realized profits accounted respectively for 17 percent and 46 percent of those of all state-owned and state-controlled enterprises in China. On October 6, 2004, the State-owned Assets Supervision and Administration Commission of the State Council demanded that all listed companies openly transfer their state-owned property rights. The same year saw 3,599 enterprises transfer their state-owned property rights, with 3,055 of them carrying out their transactions at the exchanges, accounting for 85 percent of the total. The prices of these transfers were all much higher than the assessed property values.

 

This showed that as the information on the transfers was disclosed to the public and the transfer prices were all higher than the assessed values, the outstanding problems of hidden transactions, low evaluation and cheap sales were effectively avoided. All these factors played an important role in deepening the reform of the property rights system, promoting the flow and reorganization of state property, optimizing the distribution and structure of the state-owned sector of the economy and preventing the loss of state property. At the same time, however, some problems remained in the course of transfer: Some enterprises did not transfer their property rights openly and transparently; some only had a low percentage of their property rights traded at the centers; the accounts and financial records of some were not strictly audited, their property not truthfully assessed, their costs falsely reported, or their state property rights underestimated and sold cheaply. In some areas, there was even private seizure of state property through collaboration among lawbreakers inside and outside enterprises, along with unlawful examination and approval and hidden transfer of property. All these things caused losses of state property, and were a cause of public concern.

 

On December 13, 2004, the State-owned Assets Supervision and Administration Commission of the State Council announced that the large state-owned enterprises would not be allowed to introduce the MBO system, and the small and medium-sized enterprises would only be allowed to introduce MBO on a case-by-case basis. Two days later, it clarified the conditions for the introduction of MBO in small and medium-sized enterprises. These announcements meant that a new way out had to be sought for the reorganization of state property rights in China.

 

The trading of state property rights in China has always been a focus of attention among the public. Since MBO was introduced on an experimental basis in 1997, contracting by managers, holding of stocks by managers and MBO have been introduced in various forms in China, but it has been difficult to standardize the procedures. Although the establishment of the three major trading centers shows that the government department concerned was doing its best to find a new way out for the reorganization of state property, the results were not as good as expected. The short time of their operation was also a factor. From a long-term and medium-term point of view, it is obviously far from enough to rely only on the three trading centers to achieve the strategic goal of reorganizing state property throughout the country.

 

(3) Merging and reorganization are still the main channels for changing the property rights of big and medium-sized enterprises

 

The state-owned enterprises form an important part of the Chinese economy. Practice in 2004 showed that mixed ownership has become the direction for the reorganization of state-owned enterprises and state property. In the course of the reorganization of the Shanghai Electric Group, a large number of private enterprises participated, and accelerated the successful reorganization of the group. At the same time, many state-owned enterprises put efforts into attracting major overseas strategic investors. Mixed ownership is of strategic significance for the transformation of state-owned enterprises into joint-stock companies, the conversion of state property into state capital and the preservation and increase of the value of state property. According to a questionnaire distributed by the China Institute for Reform and Development (CIRD) on the reform of property rights, most of the specialists (93.1 percent) believed that mixed ownership would be introduced in 50-80 percent of China’s economic entities in the coming five years, and some of them even said that the percentage might rise to over 90 percent.

 

Accelerating the transformation of the large state-owned enterprises in the monopoly industries into joint stock companies, and encouraging the private sector of the economy to take part in these companies. While adhering to the general orientation of the common development of the state-owned and private sectors of the economy and doing all we can to abandon discriminative policies, we must persist in transforming the large state-owned enterprises in the monopoly industries into joint-stock companies and encouraging the private sector of the economy to participate in the process, so that the state-owned and private sectors of the economy will engage in common development in these industries and improve their competitiveness.

 

2. Correctly understanding the debate over the reform of the property rights of state-owned enterprises and firmly pushing ahead with the reform of the property rights system of state-owned enterprises

 

On June 17, 2004, Lang Xianping questioned the reform of the property rights of the TCL and Hai’er Groups. In August, he gave a lecture under the title “Greencool: Revelry in the Banquet with Retreat of State-owned Assets and Advancement of Private Enterprises,” accusing Gu Chujun, chairman of the board of the Kolon Group, of causing loss of state property in buying out state-owned enterprises. He proposed at the same time that the government should “put a stop to the privatization-oriented reform of property rights” and halt the introduction of MBO. A week later, Gu Chujun filed a suit with the Hong Kong High Court, accusing Lang Xianping of libel. This started the “Lang-Gu debate,” which lasted for the whole second half of 2004. This debate over the reform of property rights was the first extensive debate ever since the one on the reform of state-owned enterprises in 1994. The debate reflected the stern reality that most state-owned property cannot preserve or increase its value without reorganization and, once state property is reorganized, some of it is inevitably lost or embezzled. When state property is reorganized, the work of preserving its value is often not done conscientiously, and there are no third parties qualified enough to evaluate it. Without a fair market price, it is easy for the two sides to conspire with each other when private capital and even overseas capital participate in the reorganization of state property, to trade the latter at a price lower than the market value. The trend of the reform of state-owned enterprises shows that these are not problems related to the orientation of the reform of state-owned enterprises, but problems arising from the absence of a solid legal basis as a platform for the reform of state-owned enterprises, and from the inadequate market environment in China at present. Therefore, we should provide adequate and solid legal and market support for the existing reform tendency to better protect the future of the reform of state-owned enterprises.

 

(1) The essence of the debate over the reform of the property rights of state-owned enterprises does not lie in what Lang Xianping said, but in the problems themselves

 

The purpose of the reform of the state sector of the economy is to establish a good management structure and a set of correct incentive-control mechanisms in state-owned enterprises. We should deepen the reform of property rights in the course of establishing a good management structure, and establish a mechanism that holds people responsible for every piece of state property. We should differentiate and handle the different types of state property at different levels. It is essential to establish a mechanism that provides check and balances and holds people responsible for state property.

 

(2) Treating achievements and challenges in the reform of state-owned enterprises in a rational way, and persisting in pushing forward the reform of the property rights system of state-owned enterprises

 

The economic achievements of state-owned enterprises rose considerably in 2004, thus laying a material foundation for the reorganization of state property in the future. The enterprises directly under the Central Government received a sales income of 4,467.81 billion yuan in the first ten months of 2004, showing an increase of 29.2 percent over the same period of the previous year, and a profit of 418.89 billion yuan -- an increase of 53.2 percent. By the end of October 2004, the total assets of the centrally controlled enterprises came to 9,215.07 billion yuan -- an increase of 12.5 percent over the same period of the preceding year -- and their net assets totaled 3,947.32 billion yuan -- an increase of 10.5 percent. The equity of their owners totaled 3,213.25 billion yuan -- an increase of 9.5 percent. In the first 10 months of 2004, these enterprises delivered a combined total of taxes amounting to 364.63 billion yuan -- an increase of 17.3 percent over the same period of 2003 and accounting for 50.7 percent of the taxes paid by the state-owned or state-controlled industrial and commercial enterprises nationwide. In order to implement the macro-control policy of the government, and ease the shortages of coal, electric power, oil and transport capacity, the central enterprises processed 208 million tons of crude oil, and generated 731.7 billion kwh of electric power, accounting respectively for 92.4 percent and 42 percent of the national production. The civil air freight turnover was 15.86 billion ton/km, while the water transport freight volume came to 2,825.8 billion ton/km, accounting for 82.6 percent and 87.3 percent of the national total turnovers respectively. (Li Rongrong’s speech at the meeting of leaders of the centrally-controlled enterprises called by the State-owned Assets Supervision and Administration Commission of the State Council on December 13, 2004)

 

We should perceive that the achievements made by the central enterprises were closely related to two major background factors. One, the rise of the international oil price to its highest in 30 years. In 2004, the China’s petroleum saw a sales income of more than 560 billion yuan -- an increase of 15.7 percent over the previous year and accounting for one tenth of that of the central enterprises. It made a total profit of 110 billion yuan -- an increase of more than 50 percent over the previous year and accounting for one fourth of that of the central enterprises. (Economic Daily, December 24, 2004)  Two, the profit from the monopoly industries. For example, the seven large enterprises -- China Mobile, China Petrochemicals, China Telecom, China Marine Oils, Baoshan Iron and Steel and China Ocean Shipping -- earned 66 percent of the total profits, while the other enterprises earned only 34 percent of the total profit. In 2004, the realized profits of the central enterprises accounted for over two-thirds of the total profits earned by all enterprises in the country. Apart from the oil giants, many central enterprises occupy a monopoly position in the domestic market, enabling them to achieve super monopoly profits during the period of overheated investment. As a result of macro control, the growth rate of the macro economy will tend to fall in 2005, and the profit-making ability of the enterprises in the monopoly position will be challenged to a certain extent.