chapter  8
15 Pages

Creating corporate groups to strengthen China’s state- owned enterprises

ByJEAN C . O I AND ZHANG XIAOWEN

Introduction China stands out among the former socialist planned economies as taking the gradual, less risky political road of reform that eschewed full privatization of its state owned enterprises (SOEs). Some dismissed China’s piecemeal reforms as a recipe for failure (Sachs and Woo 1997; Steinfeld 1998; Woo 1999), others noted problems of corruption (Manion 2004; Wedeman 2004; Ding 2000). Accompanying high rates of non-performing loans and an ever-troubled banking sector only added to the pessimistic forecasts. Yet, surprisingly, even though the process was slow, by the mid-2000s, a new day seemingly dawned for China’s SOEs. Not all problems have been solved, but economists agree that China managed a turnaround in its SOEs (China Economic Quarterly 2008; Naughton 2008). Many of the worst performing SOEs have either been closed or sold. China culled thousands of firms from its SOE ranks. Overall, after 30-plus years of reform and restructuring, deep change has occurred in the state economy. As Table 8.1 shows, from 1978 to 2008, the number of SOEs declined by 33.13 percent; the total number of workers decreased by 23.8 percent; total state assets increased 59 fold; SOE income increased 35 fold; realized profits

increased 20 fold. Improvements are most evident in the biggest and most important state owned enterprises-those under central control-have reported large increases in production, profits, and taxes paid to the state (SASAC 2006; Naughton 2008). Moreover, and perhaps most important, rather than declining in importance, the remaining SOEs have become more dominant and have grown in size with the formation of corporate groups (jituan). The decline in the number of SOEs masks an advance, not retreat, of the state in certain sectors of the economy. To understand the nature of China’s current SOEs, both their strengths and their weaknesses, we look back at the restructuring process itself. It is especially important to understand how and why the corporate groups were created. China is now actively trying to grow the scale of firms to create internationally competitive national champions, but the origins of these complex corporate groups can be found in the political and economic logic of the restructuring process.