Q: It has been reported that China's SOEs, which use half of the State's fixed assets and 60 percent of bank loans, produce only one third of total industrial output. Is this true? China has adopted the SOE reform since 1986. How are the reforms being carried out and to what effect?

A: It is well known that SOEs have played a pivotal role in the national economy since the founding of the People's Republic of China. SOEs take most of the credit in China's transformation from an impoverished semi-feudalist, semi-colonial country into a socialist county with an independent and complete national economic system.

When China adopted reform and opening up in 1978, 77.6 percent of the industrial output value came from SOEs. As reform continues, businesses of other ownerships, including the collective companies, private companies and foreign companies, have been greatly encouraged by the government, leading to the scaling back of SOEs' proportion of the country's total industrial output.
 
The low efficiency of SOEs is an issue of international concern. It also exists in China. In the process of China's reform and opening up, the low efficiency of SOEs have stood out more prominently. This explains why SOEs use a majority of the State's fixed assets and bank loans while creating only one-third of the industrial output. This also explains why China has attached great importance to the reform of SOEs, regarding it as a vital component of the entire economic reform.
 
Reform of SOEs began by focusing on increasing efficiency. Measures included loosening government control and implementing the contract responsibility and leasehold systems.

Reform in setting up the shareholding system began in the 1980s, though most SOEs did not the concept of property rights at that time. Even those regarding themselves as shareholding companies failed to match their name, especially if the listed company was solely founded by a SOE.

Except for the change of company's name, the internal structure remained the same. As a result, nobody was responsible for the losses or insolvency incurred by operational misconduct or for the draining of State assets caused by wrong decisions. Under such circumstances, the operation of SOEs experienced no thorough transformation and non-performing assets kept climbing.

In 1993, China decided to reform its SOEs by establishing a modern corporate system and encouraging foreign and private investment to participate in SOEs' management and development. As a result, SOEs were transformed into mixed ownership companies with different types of investors that could restrict and balance each other. Experience from property rights reforms of SOEs show that since someone is responsible for assets losses, companies are very prudent in making operation and investment decisions. Consequently, the operation of these companies has improved to certain degree.

Since 2000, the number of SOEs has dropped, but the quality of assets, their competitiveness and efficiency have all been enhanced. The State economy has continued its control over industries and fields that are vital to the national economy and maintained its dominant role in economic development.

According to statistics, the number of SOEs and state-controlled companies decreased from 238,000 in 1998 to 150,000 in 2003. In the same period, however, their total profits jumped from 21.4 billion yuan (US$2.58 billion) to 495.1 billion yuan (US$59.65 billion), total net assets from 5.2 trillion yuan (US$626.5 billion) to 8.4 trillion yuan (US$1.01 trillion), and the rate of return on State-owned assets reached 5.9 percent.
 
Every reform has its price. And the reform of Chinese SOEs is no exception. Recently, the phenomenon of State assets being drained in the process of reform and transfer of property rights has emerged. This was caused by defects in the reforms.

Determined by the special situation of SOEs in China, and without prior experience to draw from, the reform can't be completed overnight. Currently, the modern corporate system has just started to be implemented in China's SOEs and there is a long way to go before a mature system is established. Reform of the State assets management mechanisms is still at its initial stage, leaving some deep conflicts and problems to be solved only when the reform deepens.

Through a long period after the founding of the People's Republic of China in 1949, state-owned enterprises were a pillar of national economy. Pictured is a production line in the Benxi Steel and Iron Corp. in Liaoning Province.