Marketization of state-owned enterprises means a process in
which the allocation of resources previously conducted by means of
government administration is now mainly determined by the market,
and part of state-owned enterprises are transformed into non-state
owned enterprises. It mainly consists of four aspects: (1)
market-oriented reform in the management system of state property;
(2) diversification of property of state-owned enterprises; (3)
market-oriented behavior of state-owned enterprises; and (4) the
formation of a mechanism for state-owned enterprises to exit from
the market. The purpose of marketization is to turn state-owned
enterprises into independent legal persons and entities in market
competition that have autonomy in business operation and are
responsible for their own losses all profits, bearing their own
risks and self disciplined.
(I) Market-Oriented Reform in the Management System of
State Property
Distinguishing the government and enterprises roles is of the
key importance in turning state-owned enterprises into independent
market entities, i.e., government is to step away from the
operation of state-owned enterprises. In distinguishing the
government and enterprise roles, the separation of government and
assets is in its turn of the key importance, i.e., the double roles
played by the government as the society administrator and at the
same time as the owner of the assets must be separated.
In 1988, the central government set up the National State
Property Administration (NSPA), which exercises the function of
administering the owner-ship of state property. In the ten years of
its operation, NSPA mainly devoted to the fundamental
administration of the state property, including checking the stock
and assets, defining the property rights, registering the property
rights, valuation of the assets, calculating and analyzing the
assets, and refining relevant rules and regulations. In this way
NSPA pioneered a way for establishing a marketized state property
administration system.
Nevertheless, NSPA was not authorized to act as the owner of the
state property. The Central Government was still the only one
representing the owner of the state property, and the functions of
the owner were shared among a number of government departments. In
order to reduce government intervention, the government then
explored ways in realizing authorized operation by the large
enterprise groups, that is, the company group was to be authorized
by the government to hold the state property in the member
enterprises established by the government by means of various forms
of direct investment but not related to the company group
property-wise, and re-organize the property rights of the member
enterprises through authorization, so as to establish the
parent-subsidiary property relation between the group company and
the members. The parent companies (i.e., the group companies) of
these large enterprise groups then became the government authorized
investing organizations. Enterprise groups in petrochemical,
metallurgy, space and aviation industries are such government
authorized state asset managing organizations. This approach has
ideally solved the issue of clarifying the property right within
the enterprise. At the local level, more far-reaching approaches
are adopted in Shanghai and Shenzhen, where a three-tiered
administration system for state property was established, namely
the Administrative Committee for State Property - the Operating
Institution for (Operation Companies or Holding Companies for State
Property) - state-owned enterprises, where the members of the
Administrative Committee for State Property are the chief officials
from various economic administrative departments of the government,
and the Director's office is assumed by the Party Secretary and the
Mayor. Under the Committee there is a State Asset Administration
Office to run the functions of the Committee. In this three-tiered
state asset administration system, the establishment of a state
asset operational body avoids the necessity of the presence of
government in enterprises in its double role of an administrator
and an owner of the state property, but the government would
participate in the decision making and management of the enterprise
in the capacity as an ordinary investor, or in other words, the
owner of the property, thus solving to a great extent the chronic
problems of the "unavailability" of an owner in state-owned
enterprises and of the "insufficiency" of confinement and incentive
to the governing body by the owner. In this way, state-owned
enterprises became market entities independent of the government to
a certain degree.
(Ⅱ)Property Rights of state-owned Enterprises
Diversified
1.Transforming into Joint Stock Limited Companies: Main
Approaches for Diversification of Property Rights
Diversification of the property rights of State-owned
enterprises was realized mainly by means of turning state-owned
enterprises into companies with limited liability or limited shares
with a diversified stock rights, and transforming into joint stock
limited companies was an important aspect in establishing the
independent market status of state-owned enterprises. In
transforming into joint stock limited companies, one of the
approaches was to introduce non-state owned capital into
state-owned enterprises, and the pattern in which the former
state-owned enterprise owned all or an overwhelming number of
shares was changed to a certain degree. According to the sampling
by the State Economic and Trade Commission, in 2001, as many as
64.18 percent of state-owned enterprises underwent transformation
for diversified property rights, with the mean value of the
state-owned stocks being 66.52 percent. Taking into account of the
former state-owned enterprises that had went bankrupt, or had been
merged into or infiltrated by non-state owned enterprises so that
they had become non-state owned enterprises, the above two figures
are likely to be above 75 percent and below 50 percent
respectively. Among the 64.18 percent of enterprises that had
conducted diversification of property rights, 38.75 percent of them
preferred to realize such transformation by means of employee stock
ownership, 31.25 percent preferred the promoter method, 28.75
percent of them selected the approach of holding each other's
shares.
2.Transformation of State-Owned Medium and Small
Enterprises and Diversification of Property Rights
By the end of 2001, 81.4 percent of the state-owned medium and
small enterprises in China conducted ownership transformation.
Among the state-owned medium and small enterprises that had
transformed their ownership systems, 51 percent assumed the
share-holding system and equity joint-venture system. By means of a
variety of forms of transformation and restructuring, the overall
economic efficiency of the state-owned medium and small enterprises
turned for the better, and emerged from the situation of net loss
in successive six years.
3.Transformation of Large Stat-Owned Enterprises and
Diversification of Property Rights
Impressive progress was also made in the diversification of
property rights of the large state-owned enterprises. Take the
state-owned enterprise groups for example. In 2000, there were 1725
enterprise groups the parent companies of which were registered as
state-owned enterprises. Among these groups, 1265 of the parent
companies transformed into joint stock limited companies,
accounting for 73.33 percent of the total. Among these 1265
enterprise groups, there were 507 parent companies turned into
wholly non-state owned companies (other companies with limited
liability or limited shares), accounting for 40.08 percent of the
total. In 2001, enterprise groups with the parent companies
registered as state-owned amounted to 1772, out of them 1269 of the
parent companies transformed into joint stock limited companies.
accounting for 71.69 percent of the total. Out of these 1269
enterprise groups, 468 parent companies were turned into wholly
non-state owned companies, accounting for 36.88 percent of the
total.
4. Diversification of Stock Rights of Listed
Companies
In contrast to the companies not listed, the stock rights of the
listed companies are obviously more diversified. Events in which
controlling shareholders of state-owned listed companies were
replaced by the non-state owned entities, or even in which
state-owned stocks were entirely liquidated were reported
repeatedly. In such cases, the state-owned listed companies were
actually turned into non-state owned enterprises. Similarly, events
in which state-owned stocks took over non-state owned enterprises
with the number of shares surpassing that of the non-state owned
shares took place occasionally as well. In 1992, there were only 53
listed companies, all of them state-owned holding companies. In
2000, there were a total of 1086 listed companies, 458 of them had
no state shares or no shares subscribed by the State, accounting
for 42.17 percent of the total; 50 of them had their state shares
completely liquidated, accounting for 4.60 percent of the total;
628 companies had the State as the absolute or relative controlling
shareholder, accounting for 57.83 percent of the total. In 2001,
there were a total of 1159 listed companies (excluding one whose
full data was not available), of which 415 companies had no State
shares or no shares subscribed by the State, accounting for 35.81
percent; 55 of them had the State-owned shares entirely liquidated,
accounting for 4.75 percent; 744 had the State as the absolute or
relative controlling shareholder, accounting for 64.2 percent of
the total. The proportion of State shares in the total shares of
the listed companies dropped from 41.38 percent in 1992 to 38.9
percent in 2000 and rose to 46.2 percent in 2001. Among the listed
companies, the proportion of non-state shares was on the rise in
general: it was 58.6 percent in 1992, rose to 61.1 percent in 2000,
and declined to 53.8 percent in 2001, indicating that the
state-owned entities and non-state owned entities had a tendency of
intensified mutual infiltration.
(Ⅲ)Market-Oriented Operation of State-owned
Enterprises
In spite of the fact that some of state-owned enterprises have
not yet conducted ownership transformation and that some of those
having undergone transformation remain wholly state-owned, in
market operation, particularly in operation, the marketization is
already highly developed. The transformed state-owned enterprises
are more standardized in their market-oriented operation.
1. Corporate Governance of State-Owned
Enterprises
According to the sampling made by the State Economic and Trade
Commission, 92.8 percent of the transformed state-owned enterprises
believe their corporate governance was appropriate or quite
appropriate as it was designed to fit the requirements of the
market and the actual conditions of the enterprise.
(1) Selection of Managers by Market
With regard to the appointment of managers, 89.8 percent of the
transformed state-owned enterprises had their managers appointed by
non-government approaches or selected through market approaches
(including appointment by BOD, election by general membership
meeting etc). Selection of managers by market approach accounted
for 76.4 percent of enterprises that have not conducted ownership
transformation as well. The rate of selecting managers by market
approaches for both transformed and un-transformed enterprises
amounted to a total of 86.3 percent, while in 1993 this rate was a
mere 3.4 percent, representing an average annual increase rate of
49.82 percent during 1993 to 2001.
(2) Autonomy in Decision-making
Before transformation, 71.3 percent of enterprises selected the
collective mode of decision-making, 22.1 percent of them adopted
the centralized decision-making method and 6.6 percent preferred
the mode of shared power. After transformation, those selected
collective mode of decision-making declined to 55.8 percent, those
preferred centralized decision-making reduced to 18.6 percent and
those adopted the mode of shared power rose to 24.8 percent. 87.8
percent of enterprises believed that, compared with the time before
transformation, the decision-making after transformation was more
scientific or considerably more scientific. 89.4 percent of
enterprises selected their own decision-making mode independently,
or, in other words, 89.4 percent of enterprises enjoyed autonomy in
decision-making. The remaining 10.6 percent enterprises selected
their decision-making mode under the government intervention or
guidance. In 1993, 54.9 percent of enterprises had the autonomy in
decision-making. From 1993 to 2001 there had been an average annual
increase of 6.28 percent.
(3) Incentives Matching Performance
With regard to incentives to the Managers, 53.5 percent of the
transformed state-owned enterprises gave incentives according their
contributions and performance, and 21.7 percent of them offered
them with yearly wages.
(4) Completeness of Financial and Accounting
System
Concerning the General Principles of Enterprise Finance and the
Accounting Standard for Enterprises, 91.6 percent of all
state-owned enterprises (transformed or not transformed alike) of
the sampling had put them into full implementation, or 13.5
percentage points higher than non-state owned enterprises,
indicating a more standardized accounting system in state-owned
enterprises.
(5) Correlation of Corporate Governance and
Performance
Similar to non-state owned enterprises, a well-developed
corporate governance is remarkably effective in improving the
performance of enterprises. Analysis on the relationship between
the corporate governance of the transformed enterprises and their
profit and tax generating ability, quality of assets, capital
liquidity, technological innovation as well as the renovation of
equipment and efficiency in the use of human resources and
equipment showed that they were highly proportional to each other.
Because of a well developed corporate governance, in the past three
years 77.3 percent of enterprises improved their ability in
generating profits and taxable revenues, which were improved by
over 20 percent in 46.7 percent of enterprises; 84.7 percent of
enterprises witnessed certain degree or considerable improvement in
the quality of their assets; 85.7 percent of enterprises had the
capital liquidity accelerated; 76.2 percent of them improved the
equipment renovation and technical levels; and 85.9 percent of them
greatly reduced or reduced by a certain degree the idling or
abusive use of human resources and equipment.
2. Operation of State-Owned Enterprises
In June 1992, the State Council passed the Regulations on
the Transformation of Managerial Mechanism of Industries and
Enterprises Owned by the Whole People, which granted autonomy
in 14 aspects of great significance to state-owned enterprises,
sending them off to the market-oriented business activities. By
2001, over 80 percent of state-owned enterprises were enjoying
autonomy in the 14 aspects. For instance, 93.4 percent of the 1994
transformed enterprises had autonomy in investment, 74.5 percent
had autonomy in providing credit guarantee services; 72.5 percent
of them had the autonomy in import and export of goods for their
own business and 53.9 percent of them were authorized in carrying
out international contract business and labor service
cooperation.
The marketization of state-owned enterprises' operation is
embodied in the following aspects:
(1) subsidies by the State to state-owned deficit
enterprises dropping very low
Subsidies from the national fiscal revenues to the losses of
state-owned enterprises accounted for a smaller proportion of the
GDP with each passing year, dropping from 5.66 percent in 1985 to
0.31 percent in 2001. Moreover, the absolute value of the subsidies
for losses declined continuously as well, from 50.7 billion yuan in
1985 to 30.04 billion yuan in 2001. If calculated at the unchanged
price of 1990, the absolute value of fiscal subsidies to the losses
in state-owned enterprises would be dropping from 71.5 billion yuan
in 1985 to 16.4 billion yuan 2001, an average annual decline of
8.82 percent. In addition, with the accelerated marketization of
interest rates, state-owned specialized banks have turned into
commercial banks wholly owned by the state which are responsible
for their own profits and losses, thus the disguised subsidies in
the form of low-interest bank loans provided by the government to
state-owned enterprises are basically eliminated. The reduction and
even elimination of subsidies forced state-owned enterprises to
fight for survival in the market.
(2) Appropriation by the Government to State-Owned
Enterprises Nearly Stopped
Funds required by state-owned enterprises for operation are
mainly raised by themselves, from bank loans, by floating bonds or
by listing on the stock exchange, and the appropriation by the
government has almost come to an end. According to statistics,
loans obtained by state-owned enterprises from commercial banks
accounted for nearly 70 percent of all bank loans. The government
no longer arranged loans from the state-owned commercial banks for
enterprises. Instead, the loans were available through market
negotiations between the banks and enterprises. Starting from 1993,
joint stock limited companies or liabilities satisfying the
conditions for floating enterprise bonds as stipulated in the
Company Low were allowed to openly float bonds in the market,
adding one more channel for enterprises to obtain funds. Such bond
floating arrangements made by enterprises according to their own
conditions and market requirements were basically market-oriented
behavior. The proportion of fund raising through stock exchanges by
enterprises accounted for 0.023 percent of the GDP in 1991, and
1.084 percent in 1993, 1.738 percent in 1997, 2.35 percent in 2000
and 1.305 percent in 2001 respectively, representing an upward
slope in general.
(3) Market-related price formation mechanism of
state-owned enterprises taking shape
State-owned enterprises are now pricing their products according
to the actual costs and the market supply and demand. The
market-related pricing mechanism has already taken shape, as
various factors, commodities and services required for the
operation of state-owned enterprises are basically selected and
purchased from the market. Presently prices of most competitive
factors, commodities and services are free of government
intervention and are subject to market regulation. From 1978 to
2001, market determined prices of means of production rose from
zero to 90.5 percent of the total, and that of farm and sideline
products from 5.6 percent to 97.3 percent of the total. During the
sampling, 90.8 percent of enterprises admitted that the inputs,
costs and prices were entirely decided by themselves.
(4) Employment and Wage Rates Determined Through Free
Negotiations Between the Employer and the Employee Among Most
State-Owned Enterprises
According to sampling, in 2001, 98 percent of the employees in
state-owned enterprises were on contractual employment terms. The
barriers for the employees to shift between enterprises had been
considerably reduced. Concerning the determination of wage rates
for the employees, 53.5 percent of enterprises chose the method of
remuneration linked with contribution and performance. Since job
shifting had become easy, it was possible for the employee to
refuse the wage rates determined by the enterprise and leave for
other jobs. Therefore, wage rates of the employees in state-owned
enterprises can be regarded as determined by free negotiations
between the employees and the employer. According to sampling, 71.6
percent of the people accepted this view. Further, the
implementation of the Interim Procedures for the Collective
Negotiation of Wages issued by the Ministry of Labor and Social
Security enhanced the important function of the Trade Union
organizations in representing the employees in coordinating the
relationship between the enterprise and the employees, safeguarding
the lawful interests of the employees in general. The three
relatively standardized insurance policies in state-owned
enterprises are the statutory guaranty for the market-oriented
decision-making by state-owned enterprises with regard to
employment and wages. The payment for old-age pensions, medical
care and unemployment insurances by state-owned enterprises
accounts for the highest rate among all types of enterprises, and
are most seriously implemented at the same time.
(Ⅳ)Market Exit of State-Owned Enterprises
One of the important aspects in the marketization of state-owned
enterprises is the decision to exit according to their own
performance and the changes in market supply and demand. Starting
from 1993, the government has repeatedly issued circulars
clarifying that the state-owned sector would take the absolute
controlling or dominant position mainly in military industries, in
providing important public goods and services, and in fields of
natural monopoly; that the dominant position of a few key
state-owned enterprises in fields representing the comprehensive
national strength such as petrochemical, automobile, IT, machinery
and equipment and high-and-new technology industries were to be
guaranteed; and that in fields subject to common competition, the
State would step out from its status as the controlling shareholder
or even exit entirely. Such reform mainly covers the following
three aspects:
1.Selling, Restructuring and Bankruptcy of State-Owned
Deficit Enterprises
The selling, restructuring and bankruptcy of state-owned deficit
enterprises are important aspects in deepening the transformation
of state-owned enterprises. The year 2001 saw an unprecedented
number of bankruptcies of state-owned enterprises with an annual
total of 460, with 51.5 billion yuan in bad debts written off and
390,000 employees resettled. In 2001 the government allocated a
reserve fund amounting to 50 billion yuan to be used in writing off
bad debts with the banks for mergers and bankruptcies of
enterprises. In 2002, the government ordered a total of 382 cases
for merger or bankruptcy of enterprises, terminated 248 projects
and wrote off 26.9 billion yuan in bad debts. In the several years
to come, over 3000 large and medium sized state-owned enterprises
that are in weak positions in the competitive fields will fade out.
The selling, restructuring and bankruptcy of medium and small
state-owned deficit enterprises will be accelerated. According to
sampling, among state-owned deficit enterprises, those that were
sold, restructured or declared bankruptcy accounted for 67.5
percent of the total, most of them were medium or small
enterprises.
2. Reduction of State-owned Shares in State-owned
Enterprises in Competitive Industries and Introducing Non-state
Owned Capital
With regard to state-owned enterprises in fields subject to
common competition, restructuring and ownership transformation were
conducted by cutting down the state-owned shares, encouraging the
participation of non-state owned enterprises, individuals and
investors from outside the legislative boundaries of the People's
Republic of China and allowing them to be the controlling
shareholders. In 2001, of all state-owned enterprises listed on the
stock exchange 15.4 percent turned into companies with the State as
the ordinary subscriber or liquidated the shares owned by it
entirely, and enterprises with the State as the ordinary
shareholder was in essence non-state owned. After China joined the
WTO, foreign businesses became much more active in taking over or
purchasing state-owned enterprises by means of: (l), purchasing the
entire property rights of the state-owned enterprise, so that it
becomes a subsidiary; (2), purchasing over 51 percent of the
state-owned enterprise's stock rights so that the purchaser becomes
the controlling party; (3), in forming an equity joint-venture the
foreign party expands the size of its capital by subscribing to
more shares, so as to dilute the stock rights of the Chinese party,
turning subscription to shares into expansion of shares. In order
to encourage foreign businesses to take over and purchase
state-owned enterprises, the Chinese government will abolish
restrictions on proportions of stock rights allowed to other
sectors, except in key industries or enterprises relating to
national security or of vital economic importance where the State
must be the controlling party.
3. Small State-owned Enterprises Turning into Non-state
Owned Enterprises
The small state-owned enterprises are to be gradually turned
into non-state owned enterprises by means of equity joint ventures,
auctioning and transferring. According to sampling, by the end of
2001, nearly 80 percent of state-owned enterprises had completed
ownership transformation, most of them turned into non-state owned
enterprises.
(China.org.cn November 7, 2003)
