Home Political science Dancing with the devil : the political economy of privatization in China
The End Game: SASAC and the Remaining SOEs
The sharp decline of the public sector around the turn of the century was followed by a reorganization of the remaining public enterprises, especially SOEs. A major theme of this reorganization was the consolidation of control authority. Before 2003 SOEs were supervised by various industry- specific agencies at different levels of government (Lin and Zhu 2001). That arrangement was brought to an end with the establishment of the SASAC in 2003 as the sole government authority to oversee the operations of the vast majority of remaining nonfinancial SOEs. The SASAC at the national level oversees centrally owned nonfinancial SOEs, whereas local governments have formed their counterparts to supervise locally owned SOEs that survived massive privatization. At the national level nonfinancial SOEs were regrouped into 196 very large enterprise groups or holding companies in 2003. That number has since been reduced in subsequent rounds of consolidation. It went down to 169 in 2008 and further to 102 in August 2016. A similar trend has also been demonstrated at local levels (FYC, various years; SICA, various years).
Concurrent with the reorganization of SOEs was a retreat of SOEs from the vast majority of economic sectors and from dominance in many sectors where they still maintained a presence. Table 7.7 shows that the total number of industrial SOEs decreased by more than 85% during 1995-2008. During the same period the total number of four-digit industrial sectors with SOE presence declined from 604 to 440, whereas those with a presence of more than ten SOEs experienced a far more drastic drop—from 521 to 159. Also noteworthy is that the percentage of industrial sectors with a more than 50% share of SOE presence went down from 29% to 2.5%. Small SOEs experienced faster decline than larger ones; so did local SOEs relative to central SOEs, especially after the formation of the SASAC. This change was in line with the policy of “holding onto the large and letting go of the small,” noted earlier in this chapter. What, then, were the forces that shaped the landscape of public ownership in the postprivatization era?
An apparently important factor is the strategic calculation by the central leadership. In an interview with the Peoples Daily on March 13, 2005, SASAC commissioner Li Rongrong pointed out that the remapping of SOEs must focus on four considerations: importance for national security and vital economic interests, strength based on existing competitive advantage and/or potential for future industry leadership, development of international competitiveness, and gravitation toward central government ownership and control. Among the nonfinancial sectors he emphasized are weaponry, aviation and aerospace, telecommunications, petroleum and petrochemicals, power, and transportation. In 2004 the last four of these sectors accounted for nearly
Table 7.7 Selected statistics on industrial SOEs before and after ownership restructuring
Notes: (a) Data are for industrial SOEs with independent accounting status. (b) Figures in parentheses indicate the number of four-digit industrial sectors with no more than ten remaining SOEs. “Food P" “Building M," and (c) “Food M" stand for food processing, building materials, and food manufacturing respectively.
Sources: Data of 1995 industrial census, 1998 NBS annual industrial survey, 2004 economic census, 2008 economic census.
half (48.4%) of the equity capital and 39.7% of the total assets of nonfinancial SOEs (FYC2006, 429-431).
Conspicuously missing in Li Rongrong’s remarks, however, is the role of SOEs (and the remaining public sector at large) in job creation. As noted in chapter 1 and chapter 4, industrial SOEs ceased to add jobs in 1993, and the share of the public sector in the total workforce steadily declined throughout the 1980s and 1990s. The reorganization of SOEs after the tidal wave of privatization had subsided continued that trend. In 2001 the total number of employees in the remaining nonfinancial SOEs was 51.4 million. It went down to 39.8 million in 2004, one year after the formation of the SASAC, and further to 35.1 million in 2008 (FYC2006, 436; FYC2013, 473). Realities in the new economy appear to have forced the CCP leadership to accept the overwhelmingly dominant and increasingly indispensable role of the private sector in job provision, creation, and growth. In fact the strategy that Li Rongrong spelled out for the remaining SOEs is a highly capital-intensive one, primarily aimed at addressing policy concerns other than employment due to its inhibitively high cost.
One such concern is the generation and control of fiscal revenue. As I have discussed in chapter 4, throughout the 1980s and the better part of the 1990s SOEs and other public enterprises were used extensively as vehicles of revenue generation through a sales growth strategy. That strategy was a response to both the postreform political incentives and a long-standing feature of the fiscal system that relied heavily on indirect taxes. Over time the moral hazard it fostered undermined the financial and organizational health of many public enterprises and contributed to their ultimate demise. For government officials in charge of the remaining public sector, however, the basic structural conditions that influenced their decision-making before massive privatization have persisted. Despite the use of more diverse political performance assessment criteria during the Hu-Wen years (2002-2012) and greater relative importance of income taxes in government revenue, economic growth and fiscal resources have continued to be the focal concerns of leading officials, and indirect taxes have remained the main source of government revenue. But there has been a major shift in the strategic approach to the organization and management of SOEs following massive privatization.
With much smaller number of public enterprises remaining, organizational scale has become the focus of their supervising authorities. Table 7.7 shows that industrial SOEs experienced steady growth in terms of both equity and assets after massive privatization. The increase was drastic in the years following the formation of the SASAC. A likely contributing factor is organizational consolidation that combined smaller units into larger ones. Another factor is the injection of capital, in terms of both capital investment and bank lending, to create “national champions” in key industries (Lardy 2014). From 1999 to 2008 the equity capital held by the state in nonfinancial SOEs increased from 5.1 trillion yuan to 13.4 trillion yuan (FYC 2009, 506). During the same period, fixed-asset investment in all state-owned units increased from 1.6 trillion yuan to 4.9 trillion yuan (CSY 2000, table 6.4; CSY2009, table 5.3); and short- and long-term liabilities (which mainly consisted of bank loans) rose from 8.9 to 26.7 trillion yuan (FYC2006, 418; FYC 2009, 506). Although the pace of investment and lending growth among the remaining SOEs was slower relative to that in the fast-expanding private sector (Lardy 2014), the intensity of the capital infusion was likely to be very high given the much-reduced number of fund recipients.
Still another contributing factor is the use of corporatization as a way to boost the scale of state-controlled companies with nonstate capital. As mentioned at the beginning of this chapter, at the Fifteenth Party Congress in 1997 the CCP leadership abandoned its long-standing definition of public ownership as public sole proprietorship and allowed for a “dilution” of public ownership through shareholding arrangements dominated by the state. What followed was an increase of companies with controlling stakes held by the state. In 1999 these “state controlled” companies made up 16% of industrial SOEs (CIESY2001, 4); the percentage went up to 28% in 2003 and 48% in 2008 (CIESY2004, 4; CIESY2009, 7, 52). They also accounted for a significant number of the companies listed on the Shanghai and Shenzhen stock exchanges, as well as a large number of the Chinese companies listed on stock exchanges in Hong Kong, Singapore, New York, and London. In 1998 minority stakes (held by noncontrolling owners) accounted for 3.5% of the equity capital of nonfinancial SOEs; the percentage went up to 17% in 2003 and further to 19.4% in 2008 (FYC2004, 372; FYC2009, 506).
Closely coupled with the strategy to grow the size of the remaining SOEs is an effort to use regulatory power to reinforce the dominant or monopolistic positions of SOEs in key economic sectors, especially those at the national level. The railway system and the tobacco industry, for example, are exclusive territories for SOEs. Various entry barriers have also been erected and/or maintained for not only the sectors that Li Rongrong emphasized but a host of other sectors, especially at local levels (see the discussion below). With the regulatory protection and concentrated resource support, the overall financial performance of the remaining SOEs experienced some improvement. The percentage of profitable nonfinancial SOEs rose from 31.3% in 1998 to 48% in 2004 and further to 56.8% in 2008, and the return on total assets went up from 2.1% to 4.5% and 4.6% respectively (FYC2006, 419; FYC2013, 256).
Underneath these generally positive changes, however, are some unsettling issues concerning the strength of the reorganized SOEs. More than 40% of the nonfinancial SOEs were either unprofitable or in the red. Profitability also skewed toward a small number of sectors, such as petroleum and petrochemicals, tobacco, and electricity, that benefited from rising demand from consumers and producers and from the government’s pricing policies. During 2001-2008 the combined share of these three industries in the total taxes paid by nonfinancial SOEs was 42.8%. A deeper problem, as Lardy (2014) has pointed out, is that many remaining SOEs faced difficulties in covering the cost of (borrowed) capital because of low return on assets and high leverage. The pressure was particularly strong for local SOEs, which accounted for 45% of the assets of nonfinancial SOEs in 2008 and over 80% of the number of establishment. Their debt-equity ratio was 212% in 1998 and averaged at 222% per year in the following decade. During the same period the average return on assets for local SOEs was 3.5%, which was lower than the average for SOEs under the SASAC (5.7%) and nonfinancial SOEs controlled by other central government authorities (4.7%) (FYC2006, 418; 2009, 506).
Why, then, were many SOEs with lackluster financial performance retained? A likely consideration behind this phenomenon is that, other than the strategic importance assigned to them by various government authorities, the remaining SOEs continued to be useful and convenient tools of fiscal revenue generation, control, and manipulation as a result of several enabling conditions. The significantly increased unit scale of the remaining SOEs through organizational consolidation and capital infusion helped compensate for the substantial reduction in the number of organizational units during massive privatization. In contrast to the dispersed organizational pattern in the 1980s and 1990s, concentrated scale expansion provided an alternative avenue for sales growth, which continued to be important for revenue generation given the persistence of the importance of indirect taxes. Sales growth in the new economy could also benefit from rising demand from producers and consumers for the resources, products, and services in the sectors dominated or monopolized by the remaining SOEs in upstream or exclusive sectors. It is interesting to note that the overall fiscal strength of the downsized state sector did not deteriorate but actually made some gains after massive privatization. In 1998 the share of nonfinancial SOEs in total tax revenue was 30.6%. During 2001-2008 it averaged 39.9% (FYC1999, 449, 482; FYC2006, 432, 434; FYC2009, 520, 522).
For local SOEs, which accounted for the vast majority of the remaining state sector and had poorer rates of return and higher leverage, their persistence in some sectors might have been mainly driven by fiscal considerations too. Table 7.9 shows that after massive privatization, power (mainly electricity distribution) and water supply became the sectors with the largest presence of industrial SOEs. This is not surprising in that they are both “natural monopolies” based on scale economy and have strategic importance for socioeconomic stability. Yet there also remained a sizable cluster of overwhelmingly local SOEs (representing over 95% of the remaining SOEs therein) in food processing and building materials. These sectors are by no means strategically important as defined by central leaders. Many of them were unprofitable
too (e.g., accounting for 60% and 53% of the sector totals respectively in 2004). A probable reason for their retention is that they were locality-specific monopolies rendered by historical patterns of industrial location, local regulatory policies, and transportation cost.
A close examination of the data reveals that of the 477 food-processing SOEs remaining in 2008, 154 were slaughterhouses and 151 were milling plants; of the 490 building material enterprises remaining, 374 were producers of cement and related products. In over 85%-90% of the cases, these enterprises were the sole businesses in their county-level locales. All of them were established before the start of massive privatization in 1997, and there had been no local peers before that. It is possible that many of the supervising authorities of these enterprises used regulatory power to block entry by potential competitors after massive privatization so that they could continue to monopolize local business and thereby lock in a stream of revenue. The main customers of these enterprises were farmers and constructors. Although the local governments concerned might not be able to effectively prevent them from going elsewhere to address their needs, transportation cost considerations could have led them to refrain from doing so.
Another industry with a significant number of remaining SOEs is coal, which has been the source of supply for some two-thirds to seven-tenths of the energy consumption in China. As shown in table 7.9, coal had the third largest number of remaining industrial SOEs in 2008, though this was not the case in earlier years. During the massive privatization around the turn of the century, many locally owned small coal mines were closed down or sold to private operators because of financial problems. But then coal prices steadily rose, partly because of the booming demand for energy in the new economy following massive privatization and China’s accession to the WTO in 2001, and partly because of the rise of oil prices nearly through the end of the decade. This change not only led to a withholding of the efforts to further privatize the coal sector but drove some local governments to claw back lost territories.
In Shanxi, which is the country’s largest coal-producing province and depends on the coal sector for more than half of local government revenue, a major decision was made by the provincial government in 2009 to buy back over one thousand small private coal mines on the ground of improving safety and to integrate them into seven large coal-producing SOEs. As noted in chapter 1, that move, along with a few concurrent incidents of SOEs taking over private companies, triggered the debate about whether a new trend of deprivatization was in the making (chapter 1). The reorganization of the coal industry in Shanxi has taken longer to complete than planned, with mixed results in terms of the financial and fiscal gains anticipated by the local governments. There is no sign of further or similar moves of deprivatization in the coal sector and other economic sectors, both in the province and nation- ally. It is beyond the scope of this book to examine the repercussions for Shanxi province and for the relative significance of public ownership in the economy at large. What this event does seem to corroborate, though, is that revenue concerns have played an important role in shaping the decisions and actions of political actors in regard to the boundaries of the remaining public sector.
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