China aims blow at iron rice bowl in rad­i­cal shift

Kuwait Times - - BUSINESS -

Smash­ing the iron rice bowl could be costly

China has or­dered state firms to smash the decades-old sys­tem of pro­vid­ing cra­dle-to-grave wel­fare sup­port, known as the coun­try’s “iron rice bowl”.

But the or­der, part of a plan to re­duce fi­nan­cial pres­sure on bloated and heav­ily in­debted state-owned en­ter­prises (SOEs), is likely to be eas­ier said than done as cities nav­i­gate the so­cial and fi­nan­cial wrenches the changes will cause. At the heart of soot-cov­ered Pingdingshan in cen­tral China is the Ping­mei Shenma Group, a state coal con­glom­er­ate that dom­i­nates the econ­omy, so­ci­ety and air of the heav­ily pol­luted city in He­nan prov­ince.

Apart from coal, it has chem­i­cals and con­struc­tion busi­nesses. But it also has a star­tling num­ber of other re­spon­si­bil­i­ties.

It op­er­ates 41 hos­pi­tals and 18 schools and pro­vides pen­sions, sub­sidised hous­ing for work­ers, wa­ter, heat­ing and power. It even runs a plush re­tire­ment home, com­plete with golf course, for its se­nior man­agers. The fate of these fa­cil­i­ties, land­marks for the city’s res­i­dents, is now un­clear. If they are not closed down, much of the in­fra­struc­ture will need to be ren­o­vated, which State Coun­cil re­searchers es­ti­mate will cost more than 1 tril­lion yuan ($115 bil­lion) na­tion­wide.

Some of Pingdingshan’s hos­pi­tals al­ready had fewer min­ers to treat af­ter ca­pac­ity cuts in coal pro­duc­tion. “We can only try to pro­vide bet­ter ser­vices,” a doc­tor, who only wanted to be iden­ti­fied by his sur­name Li, said at a small out­pa­tient clinic near Ping­mei Shenma’s de­funct Num­ber Seven coal mine.

“Though this is a big place, we are far away from the city cen­tre, there is no good trans­porta­tion and it isn’t con­ve­nient for or­di­nary peo­ple to come,” Li said. Beijing has given SOEs un­til 2020 to ditch their “so­cial func­tions”. For Pingdingshan, the dead­line is more im­mi­nent be­cause He­nan wants to com­plete the process by the end of 2017 un­der a pi­lot project, putting it in the spot­light not only of Beijing but also other prov­inces fac­ing sim­i­lar chal­lenges.

While state firms in wealth­ier re­gions of the coun­try moved away from pay­ing for so­cial wel­fare ser­vices some years ago, poorer prov­inces and es­pe­cially one-com­pany towns like Pingdingshan strug­gled to make the switch given the cen­tral role their SOE played.

“Re­mov­ing so­cial func­tions and re­solv­ing the prob­lems left be­hind by his­tory is an im­por­tant con­di­tion for SOEs to be­come mar­ket en­ti­ties,” Xiao Yap­ing, head of the State-Owned As­sets Su­per­vi­sion and Ad­min­is­tra­tion Com­mis­sion, said on the in­sti­tu­tion’s web­site.

China’s SOEs ac­cu­mu­lated to­tal debts of 85.3 tril­lion yuan by the end of Septem­ber, in a credit splurge en­cour­aged by Beijing fol­low­ing the global fi­nan­cial cri­sis. Ex­ec­u­tives have re­peat­edly called on Beijing to help re­duce their costs. China’s cen­tral gov­ern­ment-ad­min­is­tered SOEs run around 8,000 units pro­vid­ing com­mu­nity ser­vices, and the ef­forts to ditch them could also in­crease a firm’s re­dun­dancy and la­bor re­de­ploy­ment costs, es­pe­cially as au­thor­i­ties try to limit un­rest in re­gions al­ready hit by an eco­nomic down­turn.

They spend 850 bil­lion yuan a year on schools, pen­sions and other “so­cial func­tions”. Lo­cal gov­ern­ment-run firms pay even more, a del­e­gate to China’s par­lia­ment said in March. In He­nan, state firms spend 800 mil­lion yuan a year just to sup­ply res­i­dents with heat­ing, wa­ter and elec­tric­ity.

Cut­ting the cord

While the eco­nomic slow­down and a fall in com­mod­ity prices have done the most dam­age to China’s lum­ber­ing SOEs, ex­pen­sive “so­cial func­tions” have also con­trib­uted to pun­ish­ing losses in re­cent years. “To­day, when we are cre­at­ing world class en­ergy en­ter­prises and com­pet­ing against global firms, con­tin­u­ing to bear these heavy bur­dens is ob­vi­ously out­moded and hard to sus­tain,” said Hal­i­dan Ab­dulla Kader, a leg­is­la­tor from the north­west­ern fron­tier re­gion of Xin­jiang.

China’s “iron rice bowl” sys­tem was launched in 1951. Many state-owned firms be­gan life as gov­ern­ment bu­reaus and fre­quently acted as mi­crostates re­spon­si­ble for the en­tire so­cial in­fra­struc­ture of a re­gion. The first cracks ap­peared in 1986 when a rapidly mod­ern­iz­ing China in­tro­duced new pen­sion schemes and put an end to per­ma­nent ten­ure at state firms. By 1995 it was call­ing for the sys­tem­atic trans­fer of “so­cial func­tions” in prepa­ra­tion for rad­i­cal SOE re­forms that closed thou­sands of bank­rupt firms and led to more than 20 mil­lion lay­offs.

Poorer prov­inces strug­gled to make the switch, es­pe­cially in re­mote min­ing re­gions where the SOE was the only source of po­lit­i­cal au­thor­ity.

Nei­ther the Pingdingshan gov­ern­ment nor the pro­vin­cial au­thor­i­ties would re­spond to re­quests for com­ment. In a doc­u­ment sent to Ping­mei Shenma and other state firms in He­nan, lo­cal reg­u­la­tors warned that some health and ed­u­ca­tion fa­cil­i­ties would be shut down if they were not eco­nom­i­cally vi­able.

“Where there is du­pli­ca­tion they will close them down,” said a doc­tor sur­named Liu at an in­de­pen­dent clinic near one of Ping­mei Shenma’s mines. “There are a lot of small pits that need to be closed and af­ter they close, their med­i­cal in­sti­tu­tions will go too.”

Point­ing to the chal­lenges ahead, State Coun­cil re­searchers said the cost of trans­fer­ring so­cial func­tions to a lo­cal au­thor­ity was as much as 4.3 bil­lion yuan for the Long­may Group, a strug­gling state coal pro­ducer in north­east China’s Hei­longjiang prov­ince. That com­pared with an­nual run­ning costs of 300 mil­lion yuan. The Kailuan Group, a coal pro­ducer in He­bei prov­ince, needs around 4.6 bil­lion yuan to up­grade heat­ing, wa­ter and power fa­cil­i­ties to ac­cept­able stan­dards be­fore trans­fer­ring them, one es­ti­mate showed.


In Pingdingshan, teacher Zhang Kai is al­ready ex­pe­ri­enc­ing change. Op­er­a­tional rights for the kin­der­garten where she works have shifted from the lo­cal coal mine to the staff of the school.

It must now stand on its own feet as a com­mer­cial busi­ness, Zhang said. “Ev­ery mine has a kin­der­garten and ev­ery si­t­u­a­tion is dif­fer­ent,” she said. “We don’t re­ally know what’s go­ing to hap­pen next.” At its peak, Ping­mei Shenma’s Num­ber Seven Mine em­ployed 8,000 work­ers. Now, around 500 min­ers turn up at the pit on a re­duced wage of just 410 yuan ($60.52) a month while the com­pany tries to find jobs for them at other state mines. In the mean­time, they while away the time play­ing cards.

“We worry the most about whether we have jobs or not,” said one of them, a 51-year old miner who gave his name as Chen. Sit­ting in the gate­house of the mine, Chen lifted his shirt to show the scars from a kid­ney op­er­a­tion, paid for by his com­pany in­sur­ance that he as­sumes is no longer pro­vided.

“When the com­pany’s per­for­mance gets worse, it doesn’t pay health in­sur­ance. We haven’t been get­ting it for sev­eral years,” he said. “Af­ter the clo­sure of the mine, a lot of the old wel­fare we get just isn’t go­ing to ex­ist.”

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