How “New SOEs” Come of Age: Four Decades of China’s SOE Re­form


China Economist - - Articles - HuangQun­hui(黄群慧)

Ab­stract: China’s com­plex and twisted jour­ney of SOE re­form over the past four decades is an un­prece­dented trans­for­ma­tion in its his­tory and is at the cen­ter stage of its eco­nomic re­forms. Over the past four decades, SOEs tran­si­tioned from be­ing af­fil­i­ates of a planned econ­omy to “new SOEs” as modern en­ter­prises un­der the mar­ket eco­nomic sys­tem. This jour­ney can be roughly di­vided into the fol­low­ing four stages: the re­form to ex­pand SOE au­ton­omy dur­ing 1978-1993, the re­form to cre­ate a modern en­ter­prise sys­tem dur­ing 19932003, the re­form to cre­ate a new sys­tem for the ad­min­is­tra­tion of state as­sets dur­ing 20032013, and the new era of clas­si­fied SOE re­form since 2013. Af­ter the four stages, China’s SOE re­form has made tremen­dous achieve­ments, par­tic­u­larly since the 18th CPC Na­tional Congress. With pol­icy readi­ness for SOE re­form in the new era, re­form should be car­ried out in a com­pre­hen­sive and sys­tem­atic man­ner for dif­fer­ent types of SOEs in the fu­ture.

Key­words: SOE, four decades of re­form process, next step of re­form, clas­si­fied SOE re­form

JEL clas­si­fi­ca­tion code: L22

DOI: 1 0.19602/j .chi­nae­conomist.2018.01.03

1. In­tro­duc­tion

Since China’s re­form and open­ing-up in 1978, re­form of state-owned en­ter­prises (SOEs) has been con­sid­ered a cen­tral link in China’s eco­nomic re­form. The key to cre­at­ing a so­cial­ist mar­ket eco­nomic sys­tem with Chi­nese char­ac­ter­is­tics lies in fos­ter­ing mi­cro-level mar­ket en­ti­ties that op­er­ate and make de­ci­sions in­de­pen­dently to pur­sue their own de­vel­op­ment and are re­spon­si­ble for their own prof­its and losses. Hence, how to trans­form SOEs from gov­ern­ment af­fil­i­ates un­der the tra­di­tional planned eco­nomic sys­tem into in­de­pen­dent modern en­ter­prises com­pat­i­ble with the mar­ket eco­nomic sys­tem,

1 i.e. “new SOEs” has be­come a crit­i­cal task in China’s eco­nomic re­form. For China as a large so­cial­ist coun­try with its in­dus­tri­al­iza­tion process far from be­ing com­plete, this is an un­prece­dented, ex­plo­rative task, both the­o­ret­i­cally and prac­ti­cally. Not only does it re­quire tran­scend­ing ide­o­log­i­cal bar­ri­ers and in­te­grat­ing SOEs with the mar­ket econ­omy, but it also has to over­come legacy prob­lems and dif­fi­cul­ties at the prac­ti­cal level to come up with cre­ative re­form so­lu­tions and ex­plore var­i­ous re­form modes.

Af­ter four decades of SOE re­form, the op­er­at­ing mech­a­nism of SOEs has been trans­formed: Most SOEs have car­ried out cor­po­ra­ti­za­tion and share­hold­ing re­forms and ini­tially cre­ated modern

en­ter­prise sys­tems with im­proved gov­er­nance struc­tures, thus trans­form­ing from tra­di­tional state-run en­ter­prises un­der the planned econ­omy into “new SOEs” un­der the mar­ket eco­nomic sys­tem. Sig­nif­i­cant im­prove­ments have been made to the eco­nomic struc­ture where the state sec­tor of econ­omy held sway un­der the planned econ­omy, a struc­ture that has been re­placed by the mixed sec­tor of econ­omy where dom­i­nant pub­lic own­er­ship co-ex­ists with other own­er­ship sys­tems. SOEs have achieved tremen­dous de­vel­op­ment, as em­bod­ied by the emer­gence of “new SOEs” that have be­come key driv­ers of China’s rapid growth. The suc­cess of grad­u­al­ist SOE re­form lies at the heart of China’s ex­pe­ri­ence of eco­nomic de­vel­op­ment. In ret­ro­spect of the four decades of SOE re­form, it should be rec­og­nized that the achieve­ments of China’s SOEs are hard won and have ex­pe­ri­enced a com­pli­cated and twisted jour­ney that can be di­vided into the fol­low­ing four stages: the pe­riod of de­vo­lu­tion dur­ing 1978-1993, the pe­riod of in­sti­tu­tional in­no­va­tion dur­ing 1993-2003, the pe­riod of SASAC ad­min­is­tra­tion dur­ing 2003-20132, the pe­riod of clas­si­fied re­forms from 2013 till now. These four stages cor­re­spond to re­form tasks in the con­text of dif­fer­ent his­toric cir­cum­stances with dif­fer­ent pri­or­i­ties to ad­dress the pri­mary con­tra­dic­tions and prob­lems fac­ing re­forms at var­i­ous lev­els.

2. Pe­riod of De­vo­lu­tion: 1978-1993

Be­fore 1978, SOEs (more com­monly re­ferred to as state-run en­ter­prises back then) used to be pro­duc­tion units re­spon­si­ble for ex­e­cut­ing gov­ern­ment plan­ning tasks un­der a highly cen­tral­ized planned eco­nomic sys­tem. As gov­ern­ment af­fil­i­ates, SOEs did not have any au­ton­omy and com­pletely re­lied on gov­ern­ment plan­ning and ad­min­is­tra­tive al­lo­ca­tions for hu­man, fi­nan­cial and ma­te­rial re­sources and pro­duc­tion and sales ac­tiv­i­ties. This led to a se­ri­ous dis­con­nect be­tween pro­duc­tion and de­mand, which dis­in­cen­tivized en­ter­prises and damp­ened pro­duc­tiv­ity. For­tu­nately, the Third Ple­nary Ses­sion of the 11th CPC Cen­tral Com­mit­tee in 1978 un­veiled the re­forms of de­vo­lu­tion for SOEs. This pe­riod of re­form lasted for about 15 years from the be­gin­ning of re­form and open­ing-up in 1978 and ended upon the Third Ple­nary Ses­sion of the 14th CPC Cen­tral Com­mit­tee in 1993, which an­nounced the goal of SOE re­form to es­tab­lish a modern en­ter­prise sys­tem. In this stage, the pri­mary task of re­form was to give au­ton­omy to SOEs and ex­plore the sep­a­ra­tion be­tween cor­po­rate own­er­ship and op­er­a­tion; it was to help SOEs es­cape from the fet­ters of ob­so­lete con­cepts and be­hav­iors un­der the planned eco­nomic sys­tem, adapt to a com­mod­ity-based busi­ness en­vi­ron­ment, and com­plete cor­po­ra­ti­za­tion re­form.

2.1 The­o­ret­i­cal Re­search

In fact, the eco­nomic com­mu­nity had dis­cussed the is­sue of ex­pand­ing SOE au­ton­omy be­fore re­form and open­ing-up in 1978. In 1956, Gao Shangquan com­plained that en­ter­prises were given too lit­tle au­ton­omy yet were an­swer­able to too many au­thor­i­ties. In 1961, Sun Ye­fang un­equiv­o­cally pointed out that mat­ters within the scope of sim­ple pro­duc­tion ought to be de­cided by en­ter­prises them­selves and the State must re­frain from in­ter­ven­tion3. Af­ter the Cul­tural Rev­o­lu­tion, a wa­ter­shed event was the pub­li­ca­tion of a spe­cial com­men­ta­tor ar­ti­cle “Prac­tice Is the Sole Cri­te­rion for Test­ing Truth” by Peo­ple’s Daily in May 1978, which orig­i­nally ap­peared in Guang­ming Daily. This ar­ti­cle sparked a na­tion­wide de­bate on prac­tice, rather than the­ory, as the sole cri­te­rion for test­ing truth, and be­gan to eman­ci­pate peo­ple’s mind from old ide­o­log­i­cal doc­trines. In this de­bate, economists also ex­ten­sively dis­cussed a host of is­sues in­clud­ing dis­tri­bu­tion ac­cord­ing to la­bor, the is­sue of “pro­duc­tiv­ity as the fore­most pri­or­ity”, pro­duc­tion and ex­change of com­modi­ties un­der the so­cial­ist sys­tem, to­gether with the law of value. They also con­ducted in- depth the­o­ret­i­cal anal­y­sis of the flaws of state- run en­ter­prises un­der the tra­di­tional sys­tem. Among nu­mer­ous stud­ies, Jiang Yi­wei cre­atively put for­ward

the “en­ter­prise stan­dard” the­ory, which be­came an im­por­tant the­o­ret­i­cal ba­sis for the de­vo­lu­tion of cor­po­rate power. In June 1979, Jiang Yi­wei pub­lished “Dis­cus­sions on the En­ter­prise Stan­dard The­ory” in Eco­nomic Man­age­ment Monthly, which men­tioned the “en­ter­prise stan­dard” the­ory for the first time and pub­lished the En­ter­prise Stan­dard The­ory in the found­ing is­sue of China So­cial Sciences in Jan­uary 1980. Jiang Yi­wei be­lieved4 that un­like a cen­tral­ized sys­tem where the whole coun­try, or its in­di­vid­ual lo­cal­i­ties with de­volved power, op­er­ates as a sin­gle econ­omy with cen­tral­ized in­ter­nal man­age­ment and ac­count­ing, the “en­ter­prise stan­dard” refers to a sys­tem where en­ter­prises op­er­ate as ba­sic eco­nomic units with in­de­pen­dent op­er­a­tion and ac­count­ing. The “en­ter­prise stan­dard” the­ory can be sum­ma­rized as fol­lows: First, in­de­pen­dent en­ter­prises are the ba­sic units of the modern econ­omy, in­clud­ing the so­cial­ist eco­nomic sys­tem; sec­ond, en­ter­prises have both rights and obli­ga­tions; third, en­ter­prises should pur­sue their own eco­nomic in­ter­ests and share their prof­its and losses with em­ploy­ees; fourth, in­stead of in­ter­ven­ing in the daily op­er­a­tions of en­ter­prises, the State should su­per­vise and guide en­ter­prises through macroe­co­nomic reg­u­la­tion. The­o­ret­i­cal in­no­va­tions made by economists like Jiang Yi­wei have aca­dem­i­cally paved the way for SOE re­forms.

2.2 Re­form Ex­pe­ri­ence

The pe­riod of de­vo­lu­tion for SOEs dur­ing 1978-1992 can be fur­ther di­vided into the fol­low­ing stages: in­crease of au­ton­omy dur­ing 1978-1984, im­ple­men­ta­tion of the con­tract re­spon­si­bil­ity sys­tem dur­ing 1984-1989, and re­form of the cor­po­rate op­er­a­tion mech­a­nism dur­ing 1989-19925.

In Oc­to­ber 1978, the State Coun­cil ap­proved pilot pro­grams to in­crease au­ton­omy for six lo­cal staterun in­dus­trial en­ter­prises in­clud­ing Chongqing Steel Com­pany, Chengdu Seam­less Steel Pipe Fac­tory, Ningjiang Ma­chine Works, Sichuan Chem­i­cal Fac­tory, Xindu County Nitro­gen Fer­til­izer Fac­tory and Nan­chong Steel Mill, which un­veiled SOE re­form. These pilot pro­grams al­lowed en­ter­prises to re­tain a small por­tion of prof­its and dis­trib­ute bonuses to em­ploy­ees. In Fe­bru­ary 1979, Sichuan Prov­ince is­sued the Opin­ions on Pilot Pro­grams to In­crease the Au­ton­omy and Ac­cel­er­ate the De­vel­op­ment of Lo­cal In­dus­trial En­ter­prises in Sichuan Prov­ince, which cov­ered 100 in­dus­trial en­ter­prises. In May 1979, the for­mer State Eco­nomic and Trade Com­mis­sion car­ried out pilot re­forms to in­crease au­ton­omy for eight en­ter­prises in Bei­jing, Tian­jin and Shang­hai, in­clud­ing Cap­i­tal Steel Com­pany, Bei­jing Qinghe Woolen Mill, Tian­jin Bi­cy­cle Plant, Tian­jin Power Plant, Shang­hai Diesel En­gine Plant and Shang­hai Tur­bine Plant.

In July 1979, the State Coun­cil is­sued five pol­icy doc­u­ments to in­crease the au­ton­omy of en­ter­prises in­clud­ing the Reg­u­la­tions on In­creas­ing the Au­ton­omy of Op­er­a­tion and Man­age­ment for State-Run In­dus­trial En­ter­prises, which stip­u­lated the rights and obli­ga­tions of en­ter­prises as rel­a­tively in­de­pen­dent com­mod­ity pro­duc­ers and op­er­a­tors. These rights in­cluded the rights of pro­duc­tion plan­ning, prod­uct sales, profit dis­tri­bu­tion, la­bor em­ploy­ment, use of funds, for­eign ex­change re­ten­tion and fixed as­set own­er­ship. The pilot pro­grams of re­form were car­ried out for 1,590 en­ter­prises in 26 prov­inces.

In Septem­ber 1980, the State Coun­cil ap­proved com­pre­hen­sive im­ple­men­ta­tion of the re­form to in­crease cor­po­rate au­ton­omy for all state-run in­dus­trial en­ter­prises start­ing 1981, al­low­ing en­ter­prises greater de­ci­sion- mak­ing au­ton­omy with re­spect to hu­man, fi­nan­cial and ma­te­rial re­sources and pro­duc­tion and sales ac­tiv­i­ties. To en­sure the col­lec­tion of fis­cal rev­enues from en­ter­prises, Shan­dong Prov­ince took the first step of re­quir­ing en­ter­prises to sub­mit a cer­tain amount of prof­its to the State, al­low­ing them to re­tain sur­plus prof­its, i.e. the profit con­tract sys­tem. The con­tract sys­tem and the rules to in­crease cor­po­rate au­ton­omy de­vel­oped into the key el­e­ments of the in­dus­trial eco­nomic re­spon­si­bil­ity


In Oc­to­ber 1981, the for­mer State Eco­nomic and Trade Com­mis­sion and the for­mer State Of­fice for Eco­nomic Re­struc­tur­ing is­sued the Opin­ions on Im­ple­ment­ing the In­dus­trial Eco­nomic Re­spon­si­bil­ity Sys­tem, which pro­pelled the swift im­ple­men­ta­tion of the in­dus­trial eco­nomic re­spon­si­bil­ity sys­tem on a na­tion­wide ba­sis. By the end of 1982, 80% of in­tra-bud­getary state-run in­dus­trial en­ter­prises had im­ple­mented the eco­nomic re­spon­si­bil­ity sys­tem and 35% of en­ter­prises in the com­mer­cial sec­tor had fol­lowed suit6. The sys­tem can be di­vided into the fol­low­ing types: first, profit re­ten­tion; sec­ond, profit and loss con­tract re­spon­si­bil­ity sys­tem; and third, tax pay­ment as re­place­ment of profit sub­mis­sion and self-re­spon­si­bil­ity for prof­its and losses.

In May 1984, the State Coun­cil en­acted the In­terim Reg­u­la­tions on Fur­ther In­creas­ing the Au­ton­omy of State-Owned In­dus­trial En­ter­prises, which re­laxed re­stric­tions on en­ter­prises from 10 as­pects, in­clud­ing pro­duc­tion and op­er­a­tion plan­ning, prod­uct sales, pric­ing, pro­cure­ment, use of funds, pro­duc­tion, or­ga­ni­za­tion, hu­man re­sources, com­pen­sa­tion and joint op­er­a­tion. In Oc­to­ber 1984, the Third Ple­nary Ses­sion of the 12th CPC Cen­tral Com­mit­tee es­tab­lished the sta­tus of en­ter­prises as in­de­pen­dent eco­nomic en­ti­ties re­spon­si­ble for their own prof­its and losses, mark­ing the end of the re­form to in­crease cor­po­rate au­ton­omy.

Deep­en­ing re­form to in­crease cor­po­rate au­ton­omy in­cen­tivized en­ter­prises. Yet due to the im­pos­si­bil­ity of set­ting an ab­so­lutely sci­en­tific and fair amount for profit sub­mis­sion, en­ter­prises were given un­even profit sub­mis­sion bur­dens and the sta­bil­ity of state fis­cal rev­enues could not be guar­an­teed. At the be­gin­ning of 1983, the State Coun­cil de­cided to cease ap­pli­ca­tion of the eco­nomic re­spon­si­bil­ity sys­tem based on profit shar­ing and to im­ple­ment “profit for tax” re­form. In 1979, “profit for tax” re­form was pi­loted in some state-run en­ter­prises in Hubei, Guangxi, Shang­hai and Sichuan. As of Jan­uary 1, 1983, the first round of “profit for tax” re­form had been rolled out for all large and medium-sized staterun en­ter­prises with prof­its at the tax rate of 55%. As of Jan­uary 1, 1985, the sec­ond round of “profit for tax” re­form had been ini­ti­ated to reg­u­late the re­la­tion­ship be­tween state-run en­ter­prises and the gov­ern­ment through clas­si­fied tax­a­tion in­clud­ing prod­uct tax and cap­i­tal tax. How­ever, the two rounds of “profit for tax” re­form con­fused the roles of the State - whether the State rep­re­sented the gov­ern­ment or as­set own­ers - and dis­cour­aged en­ter­prises with ex­or­bi­tant taxes.

Mean­while, some en­ter­prises and en­trepreneurs achieved widely pub­li­cized suc­cesses by im­ple­ment­ing the con­tract re­spon­si­bil­ity sys­tem. In this con­text, the con­tract re­spon­si­bil­ity sys­tem re­ceived renewed at­ten­tion in 1986. In March 1987, the Res­o­lu­tions of the Fifth Ses­sion of the Sixth Na­tional Peo­ple’s Congress called for im­ple­men­ta­tion of the con­tract re­spon­si­bil­ity sys­tem un­der the prin­ci­ple of ap­pro­pri­ate sep­a­ra­tion be­tween own­er­ship and op­er­a­tion rights. In 1988, the State Coun­cil pro­mul­gated the In­terim Reg­u­la­tions on the Con­tract Re­spon­si­bil­ity Sys­tem for In­dus­trial En­ter­prises Owned by the Peo­ple, which fur­ther reg­u­lated the con­tract re­spon­si­bil­ity sys­tem. In 1989, the en­ter­prise con­tract re­spon­si­bil­ity sys­tem fur­ther im­proved. In this stage, two other re­forms also made progress: First, since Oc­to­ber 1984, the SOE lead­er­ship sys­tem was re­formed to en­hance the gen­eral man­ager re­spon­si­bil­ity sys­tem and re­duce in­ter­ven­tions by the Party in the daily op­er­a­tions of SOEs; sec­ond, proac­tive ef­forts were made to con­sol­i­date SOEs and cre­ate cor­po­rate con­glom­er­ates dur­ing 1986 and 1988.

De­spite its ini­tial suc­cesses, the flaws of the con­tract re­spon­si­bil­ity sys­tem be­came in­creas­ingly ap­par­ent af­ter 1989 due to its lack of stan­dard­iza­tion and in­sta­bil­ity, re­sult­ing in fall­ing cor­po­rate prof­its. Af­ter 1989, the Chi­nese gov­ern­ment ex­pended tremen­dous re­sources to clean up com­pa­nies with mal­prac­tices and chain debts. In this con­text, SOE re­form fo­cused more on the sep­a­ra­tion of own­er­ship and op­er­a­tion rights. The Eighth Five- Year Plan for Na­tional Eco­nomic and So­cial De­vel­op­ment

adopted at the Na­tional Peo­ple’s Congress in April 1991 stip­u­lated that the goal of trans­form­ing the en­ter­prise op­er­a­tion mech­a­nism was to sep­a­rate gov­ern­ment func­tions from en­ter­prise man­age­ment, sep­a­rate own­er­ship rights from op­er­a­tion rights, ex­plore var­i­ous forms for the re­al­iza­tion of pub­lic own­er­ship and cre­ate a vi­brant SOE man­age­ment sys­tem and op­er­a­tional mech­a­nisms. In July 1992, the State Coun­cil en­acted the Reg­u­la­tions on the Re­form of Op­er­a­tional Mech­a­nisms for En­ter­prises Owned by the Peo­ple, which stip­u­lated 14 rights of au­ton­omy for en­ter­prise op­er­a­tion. In this stage, the en­ter­prise op­er­a­tion con­tract sys­tem con­tin­ued to im­prove. At the end of the first round of con­tract­ing in 1990, the num­ber of in­tra-bud­getary in­dus­trial en­ter­prises ex­ceeded 33,000, ac­count­ing for 90% of all con­tracted en­ter­prises. The sec­ond round of con­tract­ing was ini­ti­ated since the end of the first quar­ter of 1991. The re­form also ex­plored var­i­ous forms of op­er­a­tional mech­a­nisms such as leas­ing and share­hold­ing sys­tems. In par­tic­u­lar, af­ter the open­ing of the Bei­jing Tian­qiao Depart­ment Store in July 1984, the num­ber of en­ter­prises that tried pilot share­hold­ing pro­grams in­creased to 3,220 in 1991 and 3,700 in 1992, in­clud­ing 92 listed on the Shang­hai Stock Ex­change. This has formed a solid foun­da­tion for cre­at­ing a modern en­ter­prise sys­tem in the next stage.

3. Pe­riod of In­sti­tu­tional In­no­va­tion: 1993-2002

The sec­ond pe­riod was char­ac­ter­ized by decade- long in­sti­tu­tional re­form from the 14th CPC Na­tional Congress in the early 1990s to the 16th CPC Na­tional Congress at the dawn of this cen­tury. In Oc­to­ber 1992, the 14th CPC Na­tional Congress of­fi­cially es­tab­lished the goal of in­sti­tu­tional eco­nomic re­form to es­tab­lish a so­cial­ist mar­ket eco­nomic sys­tem. In 1993, the Third Ple­nary Ses­sion of the 14th CPC Cen­tral Com­mit­tee adopted the De­ci­sions on Mat­ters Con­cern­ing the Cre­ation of A So­cial­ist Mar­ket Eco­nomic Sys­tem, which set a clear di­rec­tion of China’s SOE re­form to de­velop a modern en­ter­prise sys­tem with ex­plicit own­er­ship, clear rights and re­spon­si­bil­i­ties, sep­a­rate gov­ern­ment ad­min­is­tra­tion from en­ter­prise man­age­ment and science-based man­age­ment. In this stage, the goal of re­form was to guide SOEs in es­tab­lish­ing a modern en­ter­prise sys­tem and as­so­ci­ated cap­i­tal and own­er­ship con­cepts com­pat­i­ble with mar­ket-based econ­omy. The re­form in­tro­duced mar­ket-based com­pe­ti­tion in the state sec­tor of econ­omy, al­low­ing some loss-mak­ing SOEs to exit the mar­ket in or­der to im­prove the qual­ity and com­pet­i­tive­ness of SOEs and avoid ex­ces­sive bur­dens on pub­lic fi­nance.

3.1 The­o­ret­i­cal Re­search

In this pe­riod, the fo­cus of the­o­ret­i­cal re­search shifted from the re­la­tion­ship be­tween gov­ern­ment and en­ter­prises to the in­ter­nal sys­tems of SOEs and the func­tions of the state sec­tor of econ­omy as a whole. The goal was to iden­tify the di­rec­tions of re­form based on modern en­ter­prise and own­er­ship the­o­ries. First, the­o­ret­i­cal stud­ies fo­cused on own­er­ship the­o­ries and the na­ture and forms of re­al­iza­tion of a so­cial­ist mar­ket econ­omy, call­ing for the de­vel­op­ment of a dom­i­nant pub­lic own­er­ship sys­tem co­ex­ist­ing with other own­er­ship sys­tems and in­tro­duc­ing the con­cept of a “mixed own­er­ship sys­tem”. Sec­ond, stud­ies con­cluded that China must en­hance the dom­i­nant po­si­tion of the state sec­tor of econ­omy, pro­mote state cap­i­tal flow and re­struc­tur­ing and cre­ate a level play­ing field for var­i­ous sec­tors of the econ­omy with dif­fer­ent own­er­ship sys­tems. Third, based on their re­search on modern en­ter­prise the­o­ries, in­clud­ing un­lim­ited com­pa­nies, lim­ited com­pa­nies, share­hold­ing com­pa­nies, share­hold­ing lim­ited com­pa­nies and listed com­pa­nies, schol­ars con­cluded that the share­hold­ing sys­tem is the pri­mary form for the re­al­iza­tion of pub­lic own­er­ship and that SOEs must proac­tively carry out the re­form of share­hold­ing com­pa­nies. Fourth, stud­ies on modern own­er­ship the­o­ries at­tempted to com­bine Western own­er­ship the­o­ries with China’s SOE re­form, thus trig­ger­ing pro­tracted de­bates on a host of ques­tions con­cern­ing SOE own­er­ship. Fi­nally, clear own­er­ship was iden­ti­fied as the first char­ac­ter­is­tic of the modern en­ter­prise sys­tem.

In 2003, the Third Ple­nary Ses­sion of the 16th CPC Cen­tral Com­mit­tee noted that the cre­ation of

a modern prop­erty rights sys­tem with ex­plicit own­er­ship, clear rights and obli­ga­tions, strict own­er­ship pro­tec­tion and smooth op­er­a­tion was es­sen­tial to im­prov­ing China’s ba­sic eco­nomic sys­tem and served as an im­por­tant foun­da­tion of the modern en­ter­prise sys­tem. Fifth, based on in- depth dis­cus­sions on modern cor­po­rate gov­er­nance and in­cen­tive the­o­ries, schol­ars un­rav­eled the char­ac­ter­is­tics of the modern cor­po­rate gov­er­nance struc­ture and ways to cre­ate ef­fec­tive in­cen­tives and re­straints for cor­po­rate man­age­ment un­der the guid­ance of the prin­ci­pal-agent the­ory, so as to tran­si­tion from the gen­eral man­ager re­spon­si­bil­ity sys­tem to a modern cor­po­rate gov­er­nance struc­ture with checks and bal­ances among share­hold­ers, board di­rec­tors and man­age­ment team. Sixth, schol­ars car­ried out in-depth stud­ies on modern cap­i­tal mar­ket the­o­ries and found that the multi-tiered cap­i­tal mar­ket that came into shape played an ef­fec­tive role in fa­cil­i­tat­ing SOE merg­ers, re­or­ga­ni­za­tions and bank­rupt­cies..

3.2 Re­form Ex­pe­ri­ence

In this pe­riod, SOE re­form was car­ried out to (1) cre­ate a modern en­ter­prise sys­tem for in­di­vid­ual en­ter­prises through­out this stage of re­form and (2) im­ple­ment strate­gic re­struc­tur­ing of the state sec­tor of re­form as a whole since 1996.

Af­ter the Third Ple­nary Ses­sion of the 14th CPC Cen­tral Com­mit­tee in 1993, the fo­cus of SOE re­form shifted to­wards cre­at­ing a modern en­ter­prise sys­tem. In Novem­ber 1994, the State Coun­cil ap­proved the pilot pro­gram of the modern en­ter­prise sys­tem for 100 en­ter­prises. In ad­di­tion, 2,343 ad­di­tional lo­cal en­ter­prises car­ried out the pilot pro­gram. By 1997, 93 out of 100 SOEs com­pleted cor­po­ra­ti­za­tion re­form, in­clud­ing 17 with di­ver­si­fied share­hold­ers. Among lo­cal pilot en­ter­prises, 1,989 com­pleted cor­po­ra­ti­za­tion re­form and trans­formed into 540 share­hold­ing com­pa­nies, 540 lim­ited li­a­bil­ity com­pa­nies and 909 solely state-funded com­pa­nies. Of them, 71.9% cre­ated board of di­rec­tors, 63% cre­ated board of su­per­vi­sors and 61% had gen­eral man­agers ap­pointed by the board of di­rec­tors.

Af­ter the 15th CPC Na­tional Congress in 1997, the cen­tral gov­ern­ment called for ini­tially cre­at­ing a modern en­ter­prise sys­tem for most state-owned large and medium-sized key en­ter­prises in about three years. By the end of 2001, a to­tal of 3,322 en­ter­prises out of 4,317 key en­ter­prises had com­pleted cor­po­ra­ti­za­tion re­form, as shown by an NBS sur­vey. Of them, 74% opted for eq­uity di­ver­si­fi­ca­tion rather than ex­clu­sive state own­er­ship7. Dur­ing 1994-1997, the State launched a host of other re­form ini­tia­tives such as the pilot pro­gram to: im­prove the cap­i­tal struc­ture for cities, en­cour­age SOE merg­ers and bank­rupt­cies in pilot cities, re­duce state debts and sep­a­rate the func­tion of en­ter­prises to run com­mu­nity ser­vices, re­duce head­count and in­crease ef­fi­ciency, re- em­ploy laid- off work­ers, en­hance in­ter­nal man­age­ment, roll out Han­dan Steel’s ex­pe­ri­ence of science-based man­age­ment, ex­plore ef­fec­tive ways for the man­age­ment of state as­sets, cre­ate com­pa­nies with state con­trol­ling shares, in­tro­duce ad­di­tional pilot pro­grams for cor­po­rate con­glom­er­ates, in­vig­o­rate state-owned small en­ter­prises, etc. Af­ter 1997, the cen­tral gov­ern­ment launched a three-year re­form to help loss-mak­ing SOEs achieve prof­itabil­ity. In ad­di­tion to the re­struc­tur­ing of sec­tors like tex­tiles, coal, met­al­lurgy and build­ing ma­te­ri­als, “debt-toe­quity” re­form was im­ple­mented on a full-scale since the sec­ond half of 1999 to ease the debt bur­den of en­ter­prises and help them achieve prof­itabil­ity. Mean­while, greater ef­forts were made to re­form so­cial se­cu­rity sys­tems in­clud­ing pen­sion, un­em­ploy­ment and health­care and re-em­ploy laid-off work­ers.

The prin­ci­ple to strate­gi­cally ad­just eco­nomic lay­out of the state sec­tor of econ­omy by in­vig­o­rat­ing large en­ter­prises while re­lax­ing con­trol over small ones was high­lighted on dif­fer­ent oc­ca­sions, in­clud­ing the Fifth Ple­nary Ses­sion of the 14th CPC Cen­tral Com­mit­tee in Septem­ber 1995, the Report of the 15th CPC Na­tional Congress in 1997 and the Fourth Ple­nary Ses­sion of the 15th CPC Cen­tral Com­mit­tee in 1999. The Fourth Ple­nary Ses­sion of the 15th CPC Cen­tral Com­mit­tee noted that the state sec­tor of econ­omy must con­trol sec­tors re­lated to na­tional strat­egy, sec­tors of nat­u­ral mo­nop­oly, sec­tors

that pro­vide im­por­tant pub­lic goods and ser­vices, as well as pil­lar in­dus­tries and back­bone en­ter­prises in high-tech in­dus­tries. By 2002, the 16th CPC Na­tional Congress stressed that the cen­tral gov­ern­ment must ful­fil the re­spon­si­bil­i­ties of cap­i­tal con­trib­u­tor on be­half of the State for large SOEs, in­fra­struc­tures and im­por­tant nat­u­ral re­sources in­volv­ing na­tional eco­nomic life­line. Un­der this prin­ci­ple, the lay­out and struc­ture of the state sec­tor of econ­omy con­stantly im­proved with in­creas­ing vi­brancy, con­trol and in­flu­ence. More­over, these strate­gic ad­just­ments also paved the way for re­form­ing the ad­min­is­tra­tive sys­tem of state as­sets.

4. Pe­riod of SASAC Ad­min­is­tra­tion: 2003-2012

The third pe­riod was the decade be­tween the cre­ation of the State As­sets Su­per­vi­sion and Ad­min­is­tra­tion Com­mis­sion (SASAC) in 2003 af­ter the 16th CPC Na­tional Congress and the con­ven­ing of the 18th CPC Na­tional Congress. In this stage, tremen­dous progress was made in the sys­tem of state as­sets and the re­form of SOEs with the ob­jec­tive to main­tain and ap­pre­ci­ate the value of state as­sets for SOEs un­der the su­per­vi­sion of SASAC, a sin­gle au­thor­ity that re­placed pre­vi­ous in­ef­fi­cient bu­reau­cra­cies for the ad­min­is­tra­tion of the state sec­tor of econ­omy. In Oc­to­ber 2002, the 16th CPC Na­tional Congress called for unswerv­ingly de­vel­op­ing the pub­lic sec­tor of econ­omy and sup­port­ing the non-pub­lic sec­tor of econ­omy. In par­tic­u­lar, pos­i­tive progress was made in ad­just­ing the lay­out of the econ­omy and re­form­ing the ad­min­is­tra­tive sys­tem of the state sec­tor of econ­omy.

4.1 The­o­ret­i­cal Re­search

In this stage, schol­ars in­ves­ti­gated spe­cific ques­tions con­cern­ing the re­forms of SOEs and the state sec­tor of econ­omy. First, schol­ars car­ried out fur­ther stud­ies on the share­hold­ing sys­tem and reached a con­sen­sus on the im­por­tance of de­vel­op­ing mixed own­er­ship and turn­ing the share­hold­ing sys­tem into a ma­jor form for the re­al­iza­tion of pub­lic own­er­ship. Sec­ond, ex­ten­sive stud­ies were car­ried out to in­ves­ti­gate how state cap­i­tal could con­trib­ute to the strate­gic ar­eas of na­tional se­cu­rity and eco­nomic life­line. Third, schol­ars ex­ten­sively dis­cussed the prob­lem of in­volv­ing mul­ti­ple gov­ern­ment agen­cies in the ad­min­is­tra­tion of state as­sets and how en­ter­prises should be in­cen­tivized un­der the new sys­tem where SASAC was in charge of per­son­nel, ad­min­is­tra­tive af­fairs and as­sets. Fourth, in the re­form of mo­nop­o­lis­tic sec­tors, the­o­ret­i­cal and em­pir­i­cal stud­ies were car­ried out to an­swer such ques­tions as how to re­lax con­trol, in­crease mar­ket com­pe­ti­tion in mo­nop­o­lis­tic sec­tors and pro­pel the re­forms and re­struc­tur­ing of sec­tors like tele­com, elec­tric power, rail­way and civil avi­a­tion. Fifth, own­er­ship re­form aroused ex­ten­sive de­bates on whether own­er­ship re­form and es­pe­cially man­age­ment buy­out (MBO) caused the loss of state as­sets and should thus be deemed pri­va­ti­za­tion. These de­bates de­layed prop­erty re­form yet also in­creased its stan­dard­iza­tion and im­proved the reg­u­la­tory sys­tem.

4.2 Re­form Ex­pe­ri­ence

Fol­low­ing the re­form di­rec­tions iden­ti­fied by the 16th CPC Na­tional Congress, SOE re­form in this pe­riod made the fol­low­ing progress. First, the sys­tem for the man­age­ment of state as­sets was trans­formed. The new sys­tem for the man­age­ment of state as­sets fol­lowed the prin­ci­ple of “state own­er­ship and multi-tiered rep­re­sen­ta­tion” with cen­tral and lo­cal gov­ern­ments re­spec­tively cre­at­ing in­sti­tu­tions for the su­per­vi­sion and man­age­ment of state as­sets. The re­form brought per­son­nel, busi­ness af­fairs and as­sets un­der uni­fied man­age­ment and aimed to sep­a­rate gov­ern­ment ad­min­is­tra­tion from en­ter­prise man­age­ment and own­er­ship sys­tem from op­er­a­tion rights to en­sure in­de­pen­dent en­ter­prise op­er­a­tion. The State Coun­cil en­acted in May 2003 the In­terim Reg­u­la­tions on the Su­per­vi­sion and Ad­min­is­tra­tion of State-Owned As­sets of En­ter­prises and en­acted in 2006 the In­terim Mea­sures for the Guid­ance and Su­per­vi­sion of Lo­cal State-Owned As­sets. By the end of 2006, China cre­ated in­sti­tu­tions for the su­per­vi­sion and ad­min­is­tra­tion of state-owned as­sets at cen­tral and lo­cal lev­els and in­tro­duced

over 1,200 reg­u­la­tory rules and pro­vi­sions con­cern­ing the man­age­ment of en­ter­prise prop­erty rights, en­ter­prise as­sets and fi­nan­cial su­per­vi­sion, per­for­mance eval­u­a­tion and com­pen­sa­tion sys­tem for en­ter­prise man­agers, as well as le­gal af­fairs man­age­ment. In 2007, the State Coun­cil pro­mul­gated the Opin­ions on the Pilot Im­ple­men­ta­tion of State Cap­i­tal Op­er­a­tion Bud­get, which marked the ini­tial cre­ation of the state cap­i­tal op­er­a­tion bud­get sys­tem. Sec­ond, the ad­just­ment of the lay­out and struc­ture of the state sec­tor of econ­omy made pos­i­tive head­way. The re­struc­tured as­sets of some mega-large SOEs went listed over­seas and nu­mer­ous large and medium-sized SOEs con­ducted re­forms to sep­a­rate pri­mary busi­ness from aux­il­iary busi­ness and re­struc­tured. At the end of 2006, the State Coun­cil and SASAC pro­mul­gated the Guide­lines on Pro­pelling the Ad­just­ment of State Cap­i­tal and the Re­struc­tur­ing of SOEs, which iden­ti­fied the key ar­eas and re­struc­tur­ing ob­jec­tives for the de­vel­op­ment of cen­tral SOEs.

The 17th CPC Na­tional Congress fur­ther called for im­prov­ing the lay­out of the state sec­tor of econ­omy through cor­po­rate share­hold­ing re­form, which in­creased the con­cen­tra­tion of SOEs. By 2006, the num­ber of state-owned in­dus­trial and com­mer­cial en­ter­prises re­duced to 119,000, about half the num­ber in 1998. The num­ber of cen­tral SOEs re­duced from 196 in 2003 to 112 in 2012. Third, SOE re­form con­tin­ued to deepen in mo­nop­o­lis­tic sec­tors and a few mo­nop­o­lis­tic sec­tors dom­i­nated mar­ket com­pe­ti­tion. For in­stance, af­ter the cre­ation of the State Elec­tric Power Su­per­vi­sion Com­mis­sion in 2010, the State Grid Cor­po­ra­tion, China South­ern Power Grid and five power gen­er­a­tion groups were separated from the Na­tional Power Cor­po­ra­tion. In 2003, 93 air­ports were un­der the man­age­ment of lo­cal gov­ern­ments and the nine avi­a­tion com­pa­nies and ser­vice com­pa­nies of the Na­tional Civil Avi­a­tion Ad­min­is­tra­tion of China (CAAC) were re­or­ga­nized into Air China, China South­ern Air­lines and China Eastern Air­lines and three ser­vice com­pa­nies. In 2007, civil avi­a­tion ad­min­is­tra­tion was separated from in­dus­trial su­per­vi­sion. Fourth, fur­ther progress was made in the share­hold­ing re­form of SOEs and mixed own­er­ship sec­tor of econ­omy.

By 2012, there were 9,012 share­hold­ing in­dus­trial en­ter­prises and 65,511 lim­ited li­a­bil­ity in­dus­trial com­pa­nies in China, while in­dus­trial en­ter­prises with mixed own­er­ship ac­counted for 26.3% of the to­tal num­ber, 44.0% of to­tal as­sets, 38.8% of rev­enue from pri­mary busi­ness and 41.8% of the prof­its of large in­dus­trial en­ter­prises. By the end of 2012, cen­tral SOEs and their sub­sidiaries in­tro­duced pri­vate cap­i­tal to de­velop mixed own­er­ship en­ter­prises, which ac­counted for 52% of all en­ter­prises. There are a to­tal of 378 cen­tral en­ter­prises and listed com­pa­nies con­trolled by their sub­sidiaries and listed com­pa­nies with non-state-owned eq­uity ac­count­ing for over 60% of all listed com­pa­nies8.

5. Pe­riod of Clas­si­fied Re­form: 2013-2017

The 18th CPC Na­tional Congress marked a brand-new chap­ter of clas­si­fied SOE re­form. Ac­cord­ing to the prin­ci­ples adopted by the Third Ple­nary Ses­sion of the 18th CPC Cen­tral Com­mit­tee and the Guide­lines on Deep­en­ing SOE Re­form pro­mul­gated by the CPC Cen­tral Com­mit­tee and the State Coun­cil in Septem­ber 2015, SOEs are clas­si­fied into pub­lic-in­ter­est SOEs, com­mer­cial SOEs with pri­mary busi­ness in fully com­pet­i­tive sec­tors and com­mer­cial SOEs with pri­mary busi­ness in im­por­tant and crit­i­cal sec­tors. Dif­fer­ent types of SOEs will be sub­ject to dif­fer­ent mech­a­nisms for the su­per­vi­sion of state as­sets, mixed own­er­ship re­form schemes, cor­po­rate gov­er­nance mech­a­nisms and strate­gic ad­just­ment of the state sec­tor of econ­omy. In this stage, SOE re­form must fol­low such clas­si­fi­ca­tion.

5.1 The­o­ret­i­cal Re­search

As China’s econ­omy en­tered the new nor­mal, the fol­low­ing four ques­tions must be an­swered re­gard­ing how SOEs should come to terms with a so­phis­ti­cated mar­ket eco­nomic sys­tem. First, un­der the so­cial­ist mar­ket eco­nomic sys­tem, what should be the func­tions and lay­out of the state sec­tor of

econ­omy? Is there any need for dy­namic ad­just­ment? Sec­ond, com­pared with the uni­tary state sys­tem un­der the planned eco­nomic sys­tem, what is the main form for the re­al­iza­tion of the state sec­tor of econ­omy un­der a mar­ket eco­nomic sys­tem? What is the ap­pro­pri­ate form of own­er­ship struc­ture for SOEs? Third, given its sig­nif­i­cant size, what type of ad­min­is­tra­tive sys­tem should be cre­ated for the state sec­tor of econ­omy un­der the mar­ket eco­nomic sys­tem? Fourth, for en­ter­prises as the mi­cro-level en­ti­ties of the state sec­tor of econ­omy, what kind of gov­er­nance struc­ture and op­er­a­tional mech­a­nism should they pos­sess in or­der to stay com­pet­i­tive un­der a mar­ket-based econ­omy? Based on the Res­o­lu­tions adopted at the Third Ple­nary Ses­sion of the 18th CPC Cen­tral Com­mit­tee, academia has reached a con­sen­sus on the fol­low­ing: Based on the dom­i­nant role of pub­lic own­er­ship and the state sec­tor of econ­omy, the­o­ret­i­cal stud­ies should de­fine the func­tions of dif­fer­ent SOEs and state cap­i­tal op­er­a­tion should serve na­tional strate­gic ob­jec­tives, pro­vide pub­lic ser­vices, de­velop for­ward-look­ing strate­gic in­dus­tries, pro­tect the en­vi­ron­ment, sup­port progress in science and tech­nol­ogy and en­sure na­tional se­cu­rity; de­velop a mixed own­er­ship econ­omy as a ma­jor form for the re­al­iza­tion of the state sec­tor of econ­omy; im­prove the ad­min­is­tra­tive sys­tem of state cap­i­tal and en­hance the su­per­vi­sion of state as­sets; im­prove the modern en­ter­prise sys­tem of SOEs and de­velop a cor­po­rate le­gal per­son gov­er­nance struc­ture with co­or­di­nated op­er­a­tion and ef­fec­tive check and balance. The above state­ments have iden­ti­fied ma­jor tasks for the re­form of the state sec­tor of China’s econ­omy for the new era. Im­ple­men­ta­tion of these four re­form tasks and spe­cific re­form ini­tia­tives will ul­ti­mately help form the state sec­tor of econ­omy with “new SOEs” as the main­stay. These new SOEs will be­come in­creas­ingly in­te­grated with the so­phis­ti­cated so­cial­ist mar­ket eco­nomic sys­tem where mar­ket holds sway in re­source al­lo­ca­tion.

5.2 Re­form Ex­pe­ri­ence

Since the Third Ple­nary Ses­sion of the 18th CPC Cen­tral Com­mit­tee, the progress of SOE re­form is re­flected in the pro­mul­ga­tion of the Guide­lines of the CPC Cen­tral Com­mit­tee and the State Coun­cil on Deep­en­ing SOE Re­form on Septem­ber 13, 2015 and sup­port­ing doc­u­ments af­ter­wards, which formed a “1+N” pol­icy sys­tem (see Ta­ble 1). This marks the in­cep­tion of an in­sti­tu­tional frame­work for deep­en­ing SOE re­form in the new era on all fronts.

First, the cen­tral gov­ern­ment started to de­fine and clas­sify the func­tions of SOEs and pro­mul­gated the Guide­lines on the Func­tions and Clas­si­fi­ca­tion of SOEs in De­cem­ber 2015 and the Im­ple­ment­ing Scheme for the Func­tions and Clas­si­fi­ca­tion of Cen­tral SOEs in Au­gust 2016. Most lo­cal gov­ern­ments started to de­fine the func­tions of SOEs and for­mu­lated mea­sures for the clas­si­fied su­per­vi­sion of SOEs.

Sec­ond, the re­struc­tur­ing and re­or­ga­ni­za­tion of cen­tral SOEs rolled out. Since the 18th CPC Na­tional Congress, SASAC has pro­pelled the re­struc­tur­ing and con­sol­i­da­tion of 28 cen­tral SOEs and the num­ber of cen­tral SOEs un­der SASAC su­per­vi­sion has been ad­justed to 99. Since the sec­ond half of 2016, cen­tral SOEs ac­cel­er­ated the re­form to in­ter­nally com­press their man­age­ment hi­er­ar­chies and will achieve the ob­jec­tive of re­duc­ing the num­ber of le­gal per­son en­ti­ties by 20% in three years, so as to re­duce the num­ber of man­age­ment hi­er­ar­chies for cen­tral SOEs from 5 to 9 hi­er­ar­chies to 3 to 4 hi­er­ar­chies or fewer.

Third, in­sti­tu­tional re­form for the su­per­vi­sion of state- owned as­sets ad­vanced steadily. Since Oc­to­ber 2015, the State Coun­cil pro­mul­gated the Opin­ions on Im­prov­ing the Man­age­ment Sys­tem of State-Owned As­sets, which put forth prin­ci­ples for the tran­si­tion of SASAC func­tions, re­form of li­censed state cap­i­tal op­er­a­tion sys­tem, im­prove­ment of the al­lo­ca­tion and op­er­a­tional ef­fi­ciency of state cap­i­tal and co­or­di­nated im­ple­men­ta­tion of sup­port­ing re­forms. Af­ter one year and a half, the State Coun­cil pro­mul­gated the Scheme of SASAC for the Tran­si­tion of Func­tions to Fo­cus on the Man­age­ment of State Cap­i­tal, which marked the tran­si­tion from the man­age­ment of en­ter­prises to the man­age­ment of state cap­i­tal. In ad­di­tion, China also car­ried out a host of pilot pro­grams for state cap­i­tal in­vest­ment and op­er­a­tion com­pa­nies.

Fourth, steady progress was made in mixed own­er­ship re­form. In Septem­ber 2015, the State Coun­cil

pro­mul­gated the Opin­ions on the De­vel­op­ment of Mixed Own­er­ship for SOEs and the Guide­lines on En­cour­ag­ing and Stan­dard­iz­ing SOE In­vest­ment Projects and In­tro­duc­ing Non-State Cap­i­tal, both of which were drafted un­der the Na­tional De­vel­op­ment and Re­form Com­mis­sion’s lead­er­ship. In 2016, the State Coun­cil pro­mul­gated the In­terim Mea­sures for the Eq­uity and Div­i­dend In­cen­tives for Sta­te­Owned Tech­no­log­i­cal En­ter­prises and the Opin­ions on the Pilot Pro­gram of Em­ployee Stock Own­er­ship for Mixed Own­er­ship En­ter­prises with State Con­trol­ling Shares. By the end of 2016, mixed own­er­ship en­ter­prises ac­counted for al­most 70% of cen­tral SOEs and their sub­sidiaries and 47% of pro­vin­cial SOEs and their sub­sidiaries. In­di­vid­ual re­forms were also car­ried out in key sec­tors in­clud­ing petroleum, elec­tric power, tele­com and na­tional de­fense. In Septem­ber 2017, the mixed own­er­ship re­form pro­gram of China Uni­com was of­fi­cially im­ple­mented.

Fifth, the modern en­ter­prise sys­tem kept im­prov­ing. SOEs en­hanced Party de­vel­op­ment. For in­stance, all cen­tral SOEs have writ­ten Party de­vel­op­ment re­quire­ments into their ar­ti­cles of as­so­ci­a­tion. The re­cently en­acted Guide­lines of the State Coun­cil Gen­eral Of­fice on Fur­ther Im­prov­ing the Le­gal Per­son Gov­er­nance Struc­ture of SOEs called for ini­tial com­ple­tion of cor­po­ra­ti­za­tion re­form of SOEs be­fore the end of 2017. By 2020, solely and wholly state-funded com­pa­nies must cre­ate board of di­rec­tors whose ex­ter­nal di­rec­tors con­sti­tute a ma­jor­ity. Cur­rently, 83 out of 102 cen­tral SOEs have cre­ated stan­dard board of di­rec­tors; 88% of pro­vin­cial SOEs have or­ga­nized board of di­rec­tors with 13.1% of en­ter­prises whose ex­ter­nal di­rec­tors con­sti­tute the ma­jor­ity. Lastly, SASAC de­volved de­ci­sion-

mak­ing power, man­age­ment re­cruit­ment power, per­for­mance eval­u­a­tion power and other im­por­tant pow­ers such as em­ployee com­pen­sa­tion and ma­jor fi­nan­cial mat­ters to SOEs with stan­dard board of di­rec­tors to help these en­ter­prises im­prove mar­ket-based op­er­a­tional mech­a­nism.

6. Next Steps of SOE Re­form: Brav­ing the Chal­lenges

The Report of the 18th CPC Na­tional Congress has un­rav­eled the di­rec­tions of SOE re­form in a new era. The Third Ple­nary Ses­sion of the 18th CPC Cen­tral Com­mit­tee fur­ther de­picted a com­plete and de­tailed blueprint for SOE re­form. In Septem­ber 2015, the Guide­lines of the CPC Cen­tral Com­mit­tee and the State Coun­cil on Deep­en­ing SOE Re­forms and rel­e­vant sup­port­ing doc­u­ments cre­ated the pol­icy sys­tem for SOE re­form. In its next step, SOE re­form must make sub­stan­tive progress based on its guide­lines, re­form blueprint and pol­icy sys­tem. Yet, it is by no means easy to ac­com­plish the re­form.

As men­tioned in the Book of His­tory, Yue Ming, a Chi­nese clas­sic, “Know­ing what to do is not dif­fi­cult; do­ing it is”. The dif­fi­culty of SOE re­form is com­pounded by the fol­low­ing prob­lems. First, the ob­jec­tives of SOE re­form need to be fur­ther clar­i­fied. Although the Third Ple­nary Ses­sion of the 18th CPC Cen­tral Com­mit­tee iden­ti­fied the ob­jec­tives of SOE re­form, these ob­jec­tives need to be fur­ther clar­i­fied due to some changes in the cur­rent stage. SOE re­form should not only in­crease the strength and com­pet­i­tive­ness of SOEs them­selves but should also cre­ate a level play­ing field for the econ­omy as a whole, which may only be ac­com­plished by deep­en­ing SOE re­form and strate­gi­cally ad­just­ing the state sec­tor of econ­omy. Sec­ond, both an over­ar­ch­ing frame­work and pilot pro­grams are es­sen­tial for any re­form ini­tia­tive to suc­ceed. Although the Third Ple­nary Ses­sion of the 18th CPC Cen­tral Com­mit­tee es­tab­lished the frame­work and ob­jec­tives for SOE re­form, the im­ple­men­ta­tion is far from de­sir­able. A fault tol­er­ance mech­a­nism is not yet in place to al­low the trial and er­ror of re­form. Third, in­cen­tives and re­straints for SOE re­form are not in per­fect balance, mak­ing re­forms dif­fi­cult to im­ple­ment. Fourth, the pilot pro­grams of SOE re­form should be­come more sys­tem­atic. Pilot re­form pro­grams were car­ried out for in­di­vid­ual cen­tral SOEs and are not sys­tem­atic. Any re­form ini­tia­tive must be com­pre­hen­sive and in­di­vid­ual pilot re­form pro­grams can­not prove the suc­cess of re­form. In or­der to re­move the bar­ri­ers to im­ple­men­ta­tion, SOE re­form must adopt the fol­low­ing prin­ci­ples:

First, SOEs must be clas­si­fied and such clas­si­fi­ca­tion should be re­leased to the pub­lic. Com­pared with the pre­vi­ous three stages, SOE re­form in the new era must be based on the clas­si­fi­ca­tion of SOE func­tions. The lack of clar­ity in those func­tions pre­sented a con­flict be­tween the for-profit and pub­licin­ter­est na­ture of SOEs, thus dis­tort­ing SOE be­hav­iors. For in­stance, SOEs were blamed by the pub­lic when they made prof­its and also blamed for losses. At the the­o­ret­i­cal level, the roles and func­tions of SOEs in China’s so­cial­ist mar­ket econ­omy must also be clearly de­fined. In fact, the lack of clas­si­fi­ca­tion of SOE func­tions has be­come a crit­i­cal bar­rier to the im­ple­men­ta­tion of SOE re­forms. The clas­si­fi­ca­tion of SOEs is es­sen­tial to ac­com­plish­ing the re­form tasks iden­ti­fied by the Third Ple­nary Ses­sion of the 18th CPC Cen­tral Com­mit­tee.

Based on the guide­lines on SOE re­form, SOEs may be clas­si­fied into pub­lic- in­ter­est SOEs, com­mer­cial SOEs with pri­mary busi­ness in fully com­pet­i­tive sec­tors, as well as com­mer­cial SOEs with pri­mary busi­ness re­lated to the sec­tors of na­tional se­cu­rity and eco­nomic life­line. Dif­fer­ent types of SOEs should be sub­ject to dif­fer­ent mech­a­nisms for the su­per­vi­sion of state as­sets with dif­fer­ent re­quire­ments on state share­hold­ing ra­tios and cor­po­rate gov­er­nance mech­a­nisms. Since most SOEs have a mix­ture of the above three types of busi­ness, the func­tions and clas­si­fi­ca­tion of SOEs must be de­ter­mined through the strate­gic ad­just­ment of state cap­i­tal. Specif­i­cally, an ad­min­is­tra­tive sys­tem for the man­age­ment of state cap­i­tal should be es­tab­lished to re­al­ize the rea­son­able flow of state cap­i­tal through state cap­i­tal in­vest­ment com­pa­nies and op­er­a­tion com­pa­nies. This process is also linked with mixed own­er­ship re­form. Dif­fer­ent types of SOEs re­quire dif­fer­ent gov­er­nance, su­per­vi­sion and ad­min­is­tra­tion mech­a­nisms re­gard­ing the for­mu­la­tion of strate­gic plan­ning, busi­ness per­for­mance eval­u­a­tion, se­lec­tion

of cap­i­tal op­er­a­tion model and re­cruit­ment of per­son­nel to en­force more pre­cise and ef­fec­tive clas­si­fied su­per­vi­sion.

Sec­ond, over­all co­or­di­na­tion is es­sen­tial to SOE re­form. Re­form tasks and pol­icy mea­sures must be co­or­di­nated for the im­ple­men­ta­tion of SOE re­form given the com­plex­ity of re­form. Re­form ini­tia­tives must be car­ried out in a sys­tem­atic and co­or­di­nated man­ner, in­clud­ing the def­i­ni­tion of SOE func­tions, the strate­gic re­struc­tur­ing of the state sec­tor of econ­omy, mixed own­er­ship re­form, the cre­ation of state cap­i­tal man­age­ment sys­tem, as well as the fur­ther im­prove­ment of the modern en­ter­prise sys­tem. For in­stance, cre­at­ing an ad­min­is­tra­tive sys­tem that fo­cuses on the man­age­ment of state cap­i­tal must be co­or­di­nated with the strate­gic re­struc­tur­ing of the state sec­tor of econ­omy and the re­forms of SOEs in mo­nop­o­lis­tic sec­tors. The most crit­i­cal re­form task is to re­or­ga­nize state cap­i­tal in­vest­ment com­pa­nies and op­er­a­tion com­pa­nies; such re­or­ga­ni­za­tion must be based on a com­bi­na­tion of ad­min­is­tra­tive re­or­ga­ni­za­tion and cap­i­tal mar­ket merg­ers and re­or­ga­ni­za­tions.

The goal is to bring the state as­sets scat­tered in var­i­ous sec­tors and en­ter­prises un­der the pos­ses­sion of these state cap­i­tal in­vest­ment com­pa­nies and op­er­a­tion com­pa­nies, which is also a process of strate­gic ad­just­ment for the lay­out of state cap­i­tal. Hence, the cre­ation of state cap­i­tal in­vest­ment com­pa­nies and op­er­a­tion com­pa­nies must be in sync with the merg­ers and re­or­ga­ni­za­tions of SOEs. The sig­nif­i­cance of cor­po­rate M&A and re­struc­tur­ing is re­flected in the fol­low­ing as­pects: to pro­mote the flow and ap­pre­ci­a­tion of cap­i­tal through eq­uity op­er­a­tion, value man­age­ment and mar­ket en­try and exit. On the other hand, in­vest­ment and fi­nanc­ing, in­dus­try cul­ti­va­tion and cap­i­tal in­te­gra­tion will pro­mote in­dus­trial ag­glom­er­a­tion, tran­si­tion and up­grade and op­ti­mize the lay­out of cap­i­tal - this is the very pur­pose in cre­at­ing state cap­i­tal in­vest­ment com­pa­nies and op­er­a­tion com­pa­nies. The re­or­ga­ni­za­tions of some cen­tral SOEs were not car­ried out in sync with the cre­ation of state cap­i­tal in­vest­ment com­pa­nies and op­er­a­tion com­pa­nies, mak­ing it likely for fu­ture re­or­ga­ni­za­tions to be car­ried out once again.

In cre­at­ing state cap­i­tal op­er­a­tion com­pa­nies and in­vest­ment com­pa­nies, at­ten­tion should also be given to co­or­di­na­tion be­tween re­form pol­icy and com­pe­ti­tion pol­icy to cre­ate an ef­fec­tive mar­ket struc­ture. It is not that the fewer SOEs in spe­cific sec­tors, the bet­ter or vice versa; oth­er­wise it will ei­ther cause mo­nop­oly or ex­ces­sive com­pe­ti­tion among SOEs. The merg­ers and re­or­ga­ni­za­tions of SOEs and the ad­just­ment of the lay­out of state cap­i­tal must be con­ducive to form­ing economies of scale and a com­pet­i­tive and ef­fi­cient mar­ket struc­ture to ad­dress over­ca­pac­ity, an out­stand­ing con­tra­dic­tion fac­ing China’s econ­omy. In this sense, there should be an over­all plan­ning for the lay­out of the state sec­tor of econ­omy to guide the co­or­di­nated im­ple­men­ta­tion of SOE re­forms in ac­cor­dance with the re­quire­ments of the new nor­mal in the 13th five-year plan pe­riod (2016-2020). The ten SOE pilot re­forms launched by SASAC can­not be car­ried out for in­di­vid­ual SOEs. For pilot en­ter­prises, even if their per­for­mance im­proves with only one pilot re­form pro­gram im­ple­mented, it is hard to say that such im­prove­ment owes to such re­form. Each pilot SOE should im­ple­ment in­te­grated re­forms.

Third, SOE re­form must make break­through in key ar­eas. In the process of SOE re­form, it is crit­i­cal to make break­throughs in two types of sec­tors: first, SOE re­form in sec­tors with over­ca­pac­ity such as coal and steel; sec­ond, SOE re­form in sec­tors of nat­u­ral mo­nop­oly in­clud­ing petroleum, tele­com, elec­tric power, civil avi­a­tion and rail­way. Not only are these two types of sec­tors un­der a great deal of pub­lic at­ten­tion, but they are also of great sig­nif­i­cance to cre­at­ing a level play­ing field and sup­port­ing eco­nomic de­vel­op­ment in the new nor­mal. For the first type of sec­tors, re­form is of great im­por­tance to re­solv­ing over­ca­pac­ity, clear­ing zom­bie com­pa­nies and with­draw­ing the state sec­tor of econ­omy from these sec­tors; re­solv­ing these prob­lems is a crit­i­cal task for sup­ply-side struc­tural re­forms and their suc­cess largely de­ter­mines the op­ti­miza­tion of the state sec­tor of econ­omy and the over­all tran­si­tion and up­grade of the eco­nomic struc­ture.

For the sec­ond type of sec­tors, their nat­u­ral mo­nop­oly is mainly re­flected in the net­work pro­cesses. Re­form should open these sec­tors, ex­clud­ing their net­work pro­cesses, to non-state en­ter­prises and carry out strate­gic re­struc­tur­ing and mixed own­er­ship re­form of SOEs in these sec­tors. The goal is to de­velop a

pat­tern of busi­ness op­er­a­tion with ap­par­ent pri­mary busi­ness and open net­work and ef­fec­tive com­pe­ti­tion for sec­tors of nat­u­ral mo­nop­oly. Most of these sec­tors are fun­da­men­tal sec­tors with tremen­dous ef­fects on over­all eco­nomic ef­fi­ciency. The suc­cess of these re­forms is of de­ci­sive im­por­tance to form­ing an en­vi­ron­ment of fair com­pe­ti­tion based on mar­ket econ­omy, low­er­ing the cost of down­stream in­dus­tries and de­vel­op­ing the real econ­omy. Break­through in the re­form of these two types of sec­tors is a ba­sic hall­mark of sub­stan­tive progress of SOE re­form in the new era. De­spite tremen­dous com­plex­ity and dif­fi­cul­ties, progress must be made with great de­ter­mi­na­tion. Oth­er­wise, SOE re­form can­not be deemed as hav­ing made sub­stan­tive progress.

Fourth, gov­ern­ment in­sti­tu­tional re­forms must be deep­ened to pro­pel SOE re­form. De­spite the readi­ness of SOE re­form poli­cies, im­ple­men­ta­tion of the re­form has yet to make real progress due to lag­ging re­form of gov­ern­ment ad­min­is­tra­tive sys­tem. Im­ple­men­ta­tion of SOE re­form strate­gies re­quires the gov­ern­ment or­ga­ni­za­tional struc­ture to be im­proved and even re­struc­tured. There­fore, the cur­rent pri­or­ity is to deepen the ad­min­is­tra­tive sys­tem re­form in or­der for the pow­ers of SASAC to be de­volved to state cap­i­tal op­er­a­tion com­pa­nies and in­vest­ment com­pa­nies to in­cen­tivize and em­power SOE re­form and cre­ate a fault tol­er­ance mech­a­nism.

Fifth, some mis­per­cep­tions must be cor­rected in or­der to pro­pel mixed own­er­ship re­form. It must be rec­og­nized that mixed own­er­ship en­ter­prises are the ma­jor­ity of “new SOEs”. Although the Third Ple­nary Ses­sion of the 18th CPC Cen­tral Com­mit­tee called for de­vel­op­ing a mixed own­er­ship econ­omy and im­prov­ing the pol­icy sys­tem for mixed own­er­ship re­form, mis­per­cep­tions about the the­o­ries and prac­tices of mixed own­er­ship re­form still ex­ist9. For in­stance, mixed own­er­ship re­form was of­ten equated with eq­uity di­ver­si­fi­ca­tion re­form; em­pha­sis was placed on sim­ply in­creas­ing the num­ber of share­hold­ers, fail­ing to re­al­ize that mixed own­er­ship must be a di­ver­si­fi­ca­tion with share­hold­ers of dif­fer­ent na­ture. Oth­ers re­gard mixed own­er­ship re­form as the loss and even pri­va­ti­za­tion of state as­sets and thus op­pose the re­form. In fact, mixed own­er­ship re­form of SOEs may not nec­es­sar­ily re­sult in the loss of state as­sets. What is im­por­tant is to en­sure fair pro­ce­dures and trans­ac­tion, open in­for­ma­tion and strict en­force­ment of law. Loss of state as­sets can be pre­vented with stan­dard op­er­a­tion and ap­proval pro­ce­dures, com­plete pric­ing mech­a­nism for state as­sets, the well- func­tion­ing role of third- party in­sti­tu­tions and au­dits, and ef­fec­tive dis­ci­pline in­spec­tion and in­ter­nal em­ployee su­per­vi­sion. In the im­ple­men­ta­tion of mixed own­er­ship re­forms, it is im­por­tant to con­tin­u­ously im­prove the le­gal sys­tem and cre­ate an ef­fec­tive cor­po­rate gov­er­nance struc­ture.

7. Con­clud­ing Re­marks

China’s SOE re­form has gone through al­most four decades. Af­ter the four decades of the­o­ret­i­cal re­search and prac­tice, China’s SOE re­form and de­vel­op­ment have made bril­liant achieve­ments, giv­ing rise to a large num­ber of “new SOEs”. Among the Global 500 com­pa­nies in 2017, 109 are based in the Chi­nese main­land, in­clud­ing 64 SOEs and 48 en­ter­prises un­der the SASAC. How­ever, these en­ter­prises still may not meet the cri­te­ria for world-class en­ter­prises. There­fore, China’s SOE re­form must con­tinue to deepen in or­der to meet the re­quire­ments for so­cial­ist mar­ket eco­nomic sys­tem. With in­creas­ing ex­pe­ri­ence of China’s SOE re­form over the past four decades, China has cre­atively com­bined the ba­sic prin­ci­ples of Marx­ism with the im­ple­men­ta­tion of SOE re­form and se­lec­tively drawn upon in­ter­na­tional ex­pe­ri­ences and lessons to de­velop a grad­u­al­ist SOE re­form method­ol­ogy with Chi­nese char­ac­ter­is­tics10. Fore­see­ably, a group of world-class “new SOEs” will emerge in China with the deep­en­ing of SOE re­form and these “new SOEs” will make great con­tri­bu­tions to mak­ing the Chi­nese dream come true

Source: Yu Jing, Huang Qun­hui: “Deep­en­ing SOE Re­form in the New Era: Progress, Prob­lems and Sug­ges­tions”, Jour­nal of the Party School of CPC Cen­tral Com­mit­tee, Oc­to­ber 2017.

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