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The Unfinished Business of State-Owned Enterprise Reform in the People's Republic of China

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The Unfinished Business of State-Owned Enterprise Reform in the People's Republic of China A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Holz, Carsten A. Working Paper The unfinished business of state-owned enterprise reform in the People's Republic of China CESifo Working Paper, No. 7688 Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Suggested Citation: Holz, Carsten A. (2019) : The unfinished business of state-owned enterprise reform in the People's Republic of China, CESifo Working Paper, No. 7688, Center for Economic Studies and ifo Institute (CESifo), Munich This Version is available at: http://hdl.handle.net/10419/201914 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu 7688 2019 June 2019 The unfinished business of state-owned enterprise reform in the People’s Republic of China Carsten A. Holz Impressum: CESifo Working Papers ISSN 2364-1428 (electronic version) Publisher and distributor: Munich Society for the Promotion of Economic Research - CESifo GmbH The international platform of Ludwigs-Maximilians University’s Center for Economic Studies and the ifo Institute Poschingerstr. 5, 81679 Munich, Germany Telephone +49 (0)89 2180-2740, Telefax +49 (0)89 2180-17845, email [email protected] Editor: Clemens Fuest www.cesifo-group.org/wp An electronic version of the paper may be downloaded · from the SSRN website: www.SSRN.com · from the RePEc website: www.RePEc.org · from the CESifo website: www.CESifo-group.org/wp CESifo Working Paper No. 7688 Category P: Economic Systems Category L: Industrial Organization The unfinished business of state-owned enterprise reform in the People’s Republic of China Abstract This paper examines the progress of state-owned enterprise (SOE) reform in the People’s Republic of China. After defining SOEs and considering their scope of operation within the PRC economy, the focus of the paper is on the major reform waves that followed the deterioration of SOE profitability in the early 1990s. The oil industry serves to illustrate industry-specific SOE reform trends as well as the latest reform developments. Until today, a stable, successful, longterm arrangement of state ownership has remained elusive. SOE reform is incomplete as long as a number of fundamental governance issues are not resolved. But these are difficult to resolve in the context of Party-controlled state-owned enterprises. JEL-Codes: P000, P310, L200, P260, D220, L320, O250, O530. Keywords: state-owned enterprise reform, People’s Republic of China, corporate governance, public enterprise management, Chinese Communist Party, state-owned asset management, industrial policy. Carsten A. Holz Social Science Division Hong Kong University of Science & Technology Clear Water Bay, Kowloon, Hong Kong [email protected] http://carstenholz.people.ust.hk/ 2 December 2018 Summary State ownership dominated the pre-reform economy of the People’s Republic of China (PRC). The transition to a more market-oriented economy from 1978 onward triggered a deterioration in the finances of state-owned enterprises (SOEs) which eventually led to major SOE reforms in 1998-2000. Employment and losses were drastically reduced, and thousands of SOEs were merged or allowed to go bankrupt. In 2003, the remaining SOEs were organized under the newly established central State(-owned) Asset Supervision and Administration Commission (SASAC) or its provincial equivalents. Reform then continued within these institutions. SOEs transformed progressively into formal companies, underwent various forms of restructuring, and began to surrender some of their profit. By the late 2000s, SOEs came to be seen as instrumental in spearheading state industrial policies, an emphasis that subsequently weakened, with SOEs being crucial to only a few industrial policy areas today. By tightening (Chinese Communist) Party control over SOEs as well as private enterprises, the distinction in industrial policy became one of domestic vs. foreign enterprises rather than SOEs versus private enterprises. Since 2013, new SOE reform initiatives emerged; key among them was the promotion of mixed ownership, a new state capital management system, and various elements of a “modern enterprise system.” Bbut progress has been slow. By 2018, SOE reform discussions centered on strengthening Party control over SOEs and making SOEs “stronger, better, and bigger.” State ownership today accounts for little more than one-third of gross domestic product (GDP) and it is concentrated in typical public goods sectors such as public facilities, education, health, and public management. In manufacturing, SOEs account for only one-quarter of assets. The state has a monopoly position in petroleum and natural gas extraction, the tobacco industry, and electricity production/distribution and water supply. The state controls all banks and owns the three major airlines and all three telecommunication providers. Questions persist about the objectives of SOEs, ownership rights over SOEs, and SOE supervision. SOE objectives are ambiguous. SASAC’s ownership of the center’s state-owned conglomerates is exceedingly weak in that SASAC does not appoint key personnel of its companies, has only limited claims to SOE profits, has little regulatory authority, and seems preoccupied primarily with resolving problems in individual SOEs and supporting top-level industry priorities. To some extent, SASAC appears to be a smokescreen for the actual channels of authority and a convenient location in which to deposit (and make invisible) SOE problems. Supervision within SOEs is fraught when basic control mechanisms established by the Company Law are sidestepped through Party precedence. Adoption of the formal company system and mixed ownership reform have allowed (re-)capitalization of listed SOEs by means other than the state budget and state bank lending and thereby freed the state of some of the liability for SOE failure, but it has not necessarily led to good governance. Corporate governance in the PRC is ultimately a question of how the Party is to manage the state- owned Party-controlled enterprises in an environment where Western principles of good corporate governance are not an option. While past achievements may be impressive, current SOE performance suggests a dilemma in that an increasingly sophisticated economy exceeds the steering capacity of an authoritarian Leninist regime, while the correspondingly mature institutions needed to support a modern economy and to advance economic growth are missing. 2 Table of Contents I. INTRODUCTION ........................................................................................................ 5 II. STATE-OWNED ENTERPRISE DEFINITION, EXTENT, AND PERFORMANCE ... 7 A. STATE-OWNED ENTERPRISE DATA ACROSS SOURCES ........................................................... 8 B. THE EXTENT OF STATE OWNERSHIP ACROSS THE ECONOMY ............................................... 10 C. STATE-OWNED ENTERPRISE PROFITABILITY (FINANCE MINISTRY DATA) ............................... 11 III. STATE-OWNED ENTERPRISE REFORMS ........................................................... 14 A. STATE-OWNED ENTERPRISE REFORM PROGRAM OF 1998-2000 ......................................... 14 B. STATE ASSET SUPERVISION AND ADMINISTRATION COMMISSION, FROM 2003 ONWARD ....... 16 C. DISPARATE STRANDS OF STATE-OWNED ENTERPRISE POLICY IN THE 2010S ........................ 18 Industrial policy............................................................................................................. 1 8 State-owned enterprise reforms since the Third Plenum of 2013 ................................ 19 Role of the Chinese Communist Party ......................................................................... 22 IV. CASE STUDY: OIL INDUSTRY ............................................................................... 25 A. REFORM STAGES .............................................................................................................. 25 B. IDIOSYNCRASIES ................................................................................................................ 27 Pricing .......................................................................................................................... 27 Appointments and appointment authority .................................................................... 28 Relationship to government/Party ................................................................................ 28
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