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The Triggers

An immediate trigger for the CCP’s policy change in 1997 was the concern about nonfarm employment. As shown in chapter 1, the 1980s saw an active role played by the public sector in the creation of nonfarm jobs. This role ceased after 1995, when public sector employment plateaued.1 Yet job creation pressures persisted because of the lasting impact of the age structure shaped in the booming years of the population and because of the continuing movement of labor out of farming after agricultural decollectivization (chapter 2). This challenge was also coupled with the growing pressure for the provision of retirement benefits for retirees in the urban public sector due to the life-cycle effect of the postrevolution workforce (table 2.4). In 1991 the fiscal expenditure on retirees in state-owned work units was 45 billion yuan; in 1997 it almost quadrupled, totaling 173 billion yuan (FYC1998, 457). Moreover, as more and more public enterprises ran into difficulties in implementing the sales growth strategy discussed in chapter 4, their ability to make use of the existing workforce declined. Over time, redundant employees became a pressing issue.[1] [2]

Starting from 1993 the central government launched a series of “reemployment projects” (zai jiuyegongcheng) among urban public enterprises, especially SOEs, to cope with the redundant personnel problem. In 1995 the National Bureau of Statistics began to collect statistics on xiagang zhigong,

Table 7.1 Redundant and furloughed employees in urban public enterprises (millions)

Year

All urban staff and workers

SOE staff and workers

Redundant

Newly

furloughed

Furloughed and yet to be placed

Redundant

Newly

furloughed

Furloughed and yet to be placed

1994

1.2

1995

6.6

5.6

4.3

3.7

1996

9.7

8.2

6.2

5.4

1997

10

12..7

6.4

6.9

1998

17.4

7.4

8.7

12.5

5.6

5.9

1999

16.5

7.8

9.4

12.1

6.2

6.5

2000

14.5

5.1

9.1

10

4.5

6.6

2001

11.9

2.8

7.4

8.9

2.3

5.2

2002

9.5

2.1

6.2

7.5

1.6

4.1

2003

7.5

1.3

4.2

5.1

1

2.6

2004

4.7

0.5

2.7

2.9

0.3

1.5

Sources: LSYC1995-2005.

or furloughed employees, who had been removed from active duty because of slack or overcapacity. In 1996 the officially documented number of xia- gang zhigong exceeded 8 million, whereas the total number of redundant personnel in the urban public sector reached 9.7 million, plus 5.5 million urban citizens formally registered as unemployed (CSY 1997, 273).[3] Table 7.1 shows that the total number of furloughed employees in urban public enterprises swelled from 1.2 million in 1994 to 10 million in 1997. With such a drastic increase, the burden of continuing to support redundant personnel quickly became unbearable for urban public enterprises. Alternative placement was badly needed to absorb these people back into the active workforce and to contain the political fallout of the growing problem.

A concurrent problem that triggered the policy change in 1997 is deteriorating financial performance of many public enterprises and their increasing

Table 7.2 Selected financial indicators of industrial SOEs, 1980-1997

Year

Ratio (%) of taxes and profit to assets

Ratio (%) of profit to assets

Total profit (billions of yuan)

Total losses (billions of yuan)

% of enterprises incurring losses

1980

24.8

i6

55.i

3.2

22.4

1981

23.8

i6

52.i

4.2

27.7

1982

23.4

i4.4

5i.9

4.3

25.i

1983

23.2

i4.4

57.1

2.9

i4.6

1984

24.2

i4.9

6i.5

2.3

i0.5

1985

23.8

i3.2

62.2

2.7

9.6

1986

20.7

i0.6

57.2

4.7

i3.4

i987

20.3

i0.6

60.9

5.i

i2.8

1988

20.6

i0.4

70.2

7.1

10.7

i989

i7.2

7.2

57.3

i2.8

i5.9

199°

i2.4

3.2

25.3

27.9

30.3

i99i

ii.8

2.9

23.7

30.0

28

i992

9.7

2.7

3i.i

30.0

22.7

i993

9.7

3.2

66.0

28.2

29.8

i994

9.8

2.6

70.6

27.4

32.6

i995

7.2

I-7

63.i

36.5

33.3

1996

6.5

i

36.9

50.i

37.5

i997

6.3

0.9

29.6

60.7

43.9

Sources: CFYB1998; CIEYB1998.

inability to service the loans borrowed from state banks to finance earlier growth. Table 7.2 shows that both the ratio of taxes and profit to assets and the ratio of profit to assets steadily declined among industrial SOEs after the mid- 1980s. In the meantime, the percentage of loss-making enterprises increased in the 1990s, and the magnitude of their losses relative to the total profits of industrial SOEs also rose, especially after 1995. Consequently, more and more SOEs were unable to generate enough revenue to pay back the loans they had taken out from state-owned banks. Figure 7.1 shows that in 1997 SOEs located in more than two-thirds of the country’s provinces had “unhealthy assets” (which mostly consisted of debts and could not be recovered) equivalent to more than 20% of their equity. The problem further worsened in 1998, when this percentage equivalent doubled to 40% and three provinces (i.e., Jilin, Heilongjiang, and Qinghai) even had more unhealthy assets than equity capital.

Ratio of unhealthy assets to equity (%) by province

FIGURE 7.1 Ratio of unhealthy assets to equity (%) by province: Nonfinancial SOEs,

1997-1998

Source: CFYB 2000.

Since SOEs were the main recipients of bank loans, their financial woes resulted in growing strains on the banking sector. Figure 7.2 shows a sharp increase of nonperforming loans relative to bank lending after 1995. The real magnitude of the problem was likely greater than what the chart shows, as the official definition of nonperforming loans before 2002 lacked clarity and was narrower than international standard (Holz 2003). In 1995 the People’s Bank (China’s central bank) adopted a four-tier system to rate the quality of bank lending as “pass,” “past due,” “idle,” and “bad.” The last three categories were called “poor quality loans” or “bad loans” (buliang daikuan). While this categorization did capture borrowers that were clearly in default, the underlying criterion included no separate assessment of the financial risk of borrowers other than the occurrence and duration of default. This left out cases where the borrowers became financially unhealthy but were able to continue to service their loans on schedule by stretching the repayment deadlines beyond the regulatory limit for loan extension and/or borrowing new loans to cover old ones, oftentimes with the help of government agencies and officials.

Ratio (%) of nonperforming loans to bank lending, 1995-2012 Note

FIGURE 7.2 Ratio (%) of nonperforming loans to bank lending, 1995-2012 Note: The figures for 1998-2002 are for the “Big Four” (i.e., Industrial and Commercial Bank of China, China Construction Bank, Bank of China, and Agricultural Bank of China) only. The situation for other (state-owned) financial institutions, according to Premier Zhu Rongji (Zhu Rongji 2006, 2:477), was even worse.

Sources: Pre-2001 figures are from speeches made by Premier Zhu Rongji (Zhu Rongji 2011, 2:162, 511; 3:182; 4:113, 240). Figures for 2001-2002 are from http://www.china.com.cn/chinese/2002/ Jul/i 7 5314.htm and http://www.cbrc.gov.cn/chinese/home/docView/183.html, and figures for 2003-2012 are from the website of the China Banking Regulatory Commission (http://www. cbrc.gov.cn/chinese/home/docV iewPage/ii0009&current=i).

It was not until May 1998 that the People’s Bank began to pilot a new system that would follow international practice by focusing on the assessment of the financial risks of borrowers and classifying loans into five categories: “pass" “special mention" “substandard" “doubtful" and “loss.” It took some four years for this system to be fully implemented among commercial banks. During the transitional period the loan quality statistics reported by the government were based on the combined information under the two different systems. It is likely that there were more ambiguities in the statistics reported around 1997-1998 than those closer to 2002. Indeed, many foreign observers argue that China’s nonperforming loan problem in the late 1990s was more serious than was indicated by the officially reported figures. A report produced by the Swiss bank UBS (2006, 91), for example, estimated that the ratio of nonperforming loans to all bank lending in 1996-1997 was in the range of зз%-6з%, which was more than twice the official numbers (see also Lardy 1998).

The double crunch of redundant personnel and deteriorating financial health of SOEs drove the CCP to make policy changes. In a speech (to central economic policymakers) on risk prevention in economic development in August 1996, for example, General Secretary Jiang Zemin highlighted the job creation challenges confronting the state:

There are 1.2 billion people in our country, with a fast growth of labor supply and tremendous pressures for urban and rural employment. ...

The challenge of job creation we face now and ahead is very formidable. 5.2 million urban residents are currently registered as unemployed.

6.6 million urban staff and workers are deployed in idle or semi-idle production processes. Hidden unemployment and underemployment total some 22 million. In addition, there are 130 million surplus laborers yet to be transferred out of rural areas. (Jiang Zemin 2006, 1:542)

Jiang’s concern was echoed in a series of speeches made by Zhu Rongji (Zhu Rongji 2011, vol. 2), who as vice premier (1993-1998) and then premier (1998-2003) was in charge of economic issues. Expounding on the need to deepen reforms, he repeatedly mentioned the challenge of having to accommodate the 10 million furloughed employees in the urban public sector (e.g., Zhu Rongji 2011, 2:484). He also expressed serious concern about the financial and fiscal consequences of the problems of SOEs. According to him, state- owned banks could only collect some 62% of the interest due on their lending when the decision on ownership restructuring was announced in 1997 (Zhu Rongji 2011, 2:511). This had a major negative impact on banks’ ability to fulfill their fiscal obligations and was a major contributing factor to the growth of budget deficit (Zhu Rongji 2011, 2:326).[4] At the same time the government had to resort to money printing for the unrecoverable loans that banks had to write off, which created inflationary pressures on the economy.[5] The outbreak of the Asian financial crisis as a coincidence only further heightened the seriousness of the threat posed by the growing financial risks in the state sector (Zhu Rongji 2011, 2:475-49i).

3

The coping strategy adopted at the Fifteenth Party Congress of the CCP was “holding onto the large (enterprises) and letting go of the small” (zhuada fangxiao).[6] The announced objective (known as san nian tuokun) was to lift SOEs, especially large and medium ones, from the plight of overstaffing and financial malaise within three years. What CCP leaders sought to do was to transform the five hundred largest SOEs into shareholding companies with predominant state ownership[7] while allowing other SOEs, especially small ones, to purse diverse avenues of ownership restructuring, including outright privatization (Zhu Rongji 2011, 2:448-45i).[8] But it was not the initial intention of the CCP leadership to push the vast majority of small SOEs to the private sector. Indeed their preferred way out was to make public enterprises that still had adequate performance to absorb those with poor performance through mergers.[9] Nor was it an integral part of the CCP’s strategy to restructure the ownership of TVEs along the same line as SOEs, not to mention privatizing the vast majority of them. What transpired in the ensuing five to six years, however, turned out not to be what the CCP leadership had hoped for.

  • [1] Industrial SOE employment began to decline in 1993, whereas 1994 was the year when urban collective units attained the highest level of employment (CSY1998, 137).
  • [2] In a speech delivered in 1994, Vice Premier Zhu Rongji estimated that redundant personnelaccounted for up to two-thirds of the workforce of SOEs (Zhu Rongji 2011, 2:64).
  • [3] In Chinese government statistics, individuals removed from active duty in urban public enterpriseswere not classified as unemployed persons, as they had not severed organizational affiliations with theiremployers, which were obligated to give them a small subsistence allowance, find alternative placement,and contribute in their behalf the employers’ shares to newly established social security funds (for pensions, healthcare, and unemployment).
  • [4] In 1997 the total amount of current-year unpaid interest was 157 billion yuan, whereas the cumulative sum reached 557 billion yuan (Zhu Rongji 2011, 2:511). In contrast the total budget revenue of thegovernment in 1997 was 865 billion yuan (CSY2011, 75).
  • [5] Zhu Rongji (2011, 2:364) disclosed that the amount of extra money printed was 59 billion yuan in1991, 120 billion yuan in 1992, 153 billion yuan 1993, 140 billion in 1994, 59.6 billion in 1995, and 100 billion in 1996. Closely correlated with these numbers was the movement of the consumer price index inthese years, 103 in 1991, 106 in 1992, 115 in 1993, 124 in 1994, 117 in 1995, and 108 in 1996 (CSY 1998, 265).
  • [6] This notion was first proposed at a plenary meeting of the CCP’s Fourteenth Central PartyCommittee in September 1995, which set the tone for subsequent preparatory work leading to the formal policy change at the Fifteenth Party Congress in 1997.
  • [7] The top five hundred SOEs contributed some 85% of the profits and taxes from the state sector (ZhuRongji 2011, 2:500).
  • [8] One of the major steps taken by the central government was to convert the debts of poorly performing SOEs into equity capital held by four asset management companies (established by the centralgovernment in 1999) and to recover, through reorganization or liquidation, any remaining values of theassets taken over by these companies.
  • [9] As an incentive, the government allowed those taking over poorly performing SOEs to defer for upto five years the payment of the interest on the loans owed by the enterprises they took over.
 
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