chapter  7
20 Pages

China’s centrally managed state- owned enterprises: dilemma and reform


The expansion of centrally managed SOEs had become evident long before the global financial crisis. Since 2003, both the profits and gross assets of the centrally managed SOEs have increased fivefold (Figure 7.4). This was during a period when the GDP rose only by 200 percent and the total assets for all manufacturing enterprises increased by only 400 percent. In 2013, the 115 centrally managed SOEs routinely took more than one-third and the ten top profit-makers within this group more than a quarter of all profits made by the country’s 400,000-450,000 above-scale manufacturing enterprises (revenues from main business above the scale of RMB20 million). While other enterprises regard the global financial crisis as a great woe, China’s centrally managed SOEs must have seen it as a great opportunity in retrospect. Although their profit did experience a temporary sharp dip in 2008, their relentless assets accumulation continued unabated. Under China’s new economic system, central SOEs as an economic arm of state power have an inbuilt obligation to implement the key macroeconomic objectives of the central government, in particular, economic growth and structural adjustment. Although 2009 was the big year of large investment projects funded by the RMB4 trillion rescue package, the central SOEs were in fact not the leading actors in the investment spree. In 2009, their gross investment only increased 15 percent, far below the 30 percent increase at the national level. Furthermore, 61 percent of these investments were funded by their own profits rather than bank loans (SASAC 2011b: 7). Rather, the central SOEs expanded structurally. The

crisis helped the central SOEs in two ways. First, the central SOEs strengthened their relative positions vis-à-vis other players facing an immediate worsening of financial and economic conditions in the immediate aftermath of the crisis. Second, the financial position of central SOE were further strengthened since the Chinese government was forced to pursue a painful policy of credit squeeze to quench inflation as a result of its loose credit policy in the preceding two years. In both cases, the small-and medium-sized enterprises were the major casualty, followed by smaller state firms and even the financial positions of local governments. The central SOEs had managed to take full advantage of their strong financial position ensured by monopoly over key sectors. While almost all large central SOEs have tightened their grip on their respective markets and explored new territories outside their main businesses, the most telling example is perhaps State Grid. According to an investigative article by the Business Watch Magazine, the general manager of State Grid, Liu Zhenya, who had a vision of building a Chinese Siemens, has sped up the corporation’s forceful expansion into control manufacturing of power transmission and distribution machinery, small hydropower stations and even wind power (Wang 2011: 35). In particular, State Grid was able to push forward, despite protests from the China Machinery Industry Federation, the take-over of Xuji Group and Gaoping Group, two leading electrical manufacturers, after they suffered large losses when the crisis broke out in late 2008 (Fan 2011). En route to achieving a grand monopoly, State Grid adopted a range of aggressive practices to ensure its control and profits, including barring external wind generators access to its grid, procrastinating further reforms to separate transmission and distribution, and conducting strong price bargaining with the major five power plants to achieve a handsome profit. This practice inadvertently caused a severe power shortage. (Guangming Daily 2009). Meanwhile, the core system of the electrical grid is undergoing a rapid ultra-high voltage transmission, in preparation for a planned nationally integrated smart power grid, a visionary idea for the next generation power grid that only came out five years ago. In every aspect, State Grid, now ranked seventh in Fortune Global 500, is rapidly reshaping the whole power sector. In a high-profile display of the political might of State Grid, Business Watch Magazine was banned from circulation for a month for its alleged “false report,” but there was no further statement detailing which part of the report was indeed flawed until the magazine itself was discontinued in May 2011. But political clout and market monopoly was no guarantee of good economic performance. Although the State Grid was able to secure 42 percent of the profits and 65 percent of the sale revenues of the whole sector (including State Grid, Southern Grid and all the power plants), the return of capital was only 2 percent, a low achievement even among the central SOEs (ABOUND 2011: 2-3). If State Grid had directed its expansionary strategy at a system centering on its own turf, some other larger central SOEs have explicitly crossed over to naked profit maximizations. The best example is the central SOEs expansion in the real estate sector in the past two years, which saw the most rapid increases in

revenues and profits of all major sectors. It was reported in 2010, for instance, that seven of the ten most expensive land lease deeds were made between the centrally managed SOEs and the local government. The news came at a time when the central government and the media were seriously concerned about rising land and property bubbles, which have caused many severe economic and social issues (China Youth Daily 2010). The coal-mining sector was another field where central SOEs crushed their private rivals in a series of high-profile mergers and integrations.3 In the steel sector, the state has consolidated its control on the larger manufacturers and recovered some formerly privately owned steel mills. In the coal sector, the state revoked the permits previously issued to private individuals and firms operating in hundreds of small coal mines in an effort to “rationalize” the sector through renationalization. Spearheading this de facto nationalization were China’s largest central and provincial SOEs in the coal sector, such as the Shenhua Group. Similarly, in Inner Mongolia, coal-sector restructuring had precluded private investors and the redistribution of the mines went to about 20 large SOEs, led by Shenhua and Huadian International (Shanghai Security Daily 2010). Now it has become clear that China has seen the rise of a new SOE paradigm which is decidedly different from the old SOEs during the planning period as well as in early reforms. As a new type of economic organization, the new SOE paradigm carries much less social responsibility, but no less political and economic weight. More importantly, the new SOEs are distinguished from the old SOEs by a very high degree of autonomy from both the economic force of the market and the fiscal and administrative control of the central government. In this sense, they no longer represent even a vague sense of national interests, but rather their own corporate interests. This arises partly from a relationship of autonomy and interdependence which the new SOEs have developed with the other significant economic interests within the state. The rise of new SOEs presented a significant challenge to the leadership in China. Since the second half of 2009, centrally managed SOEs were subjected to severe media criticism. In the opinions of some liberal economists and observers, the SOEs were criticized as de facto non-state owned in the sense of being controlled by a bureaucratic capitalist class.4 Recently, a number of SOE-related policy directives have been released as a symbolic gesture to rein in the central SOEs, but no concrete reform has so far been forcefully carried out. As this chapter will discuss further, a more systemic approach, either through tightened regulatory or legal frameworks, may also suffer major shortcomings. More specifically, there seems to be a lack of policy enforcement power on the part of regulatory and legal authorities, vis-à-vis the politically vocal large SOEs.