Guo Lihong

The Interim Measures for the Control of the Financing of Social Security Fund through the Reduction of Shares Held by the State (hereinafter referred to as Measures for the Reduction of the Holding of Shares) were formally promulgated on June 12, 2001. On October 22, China Securities Regulatory Commission hastily suspended the implementation of Article 5 of the Measures for the Reduction of Holding of Shares. As this article is about operation, its suspension means the termination of the Measures altogether. In a period of over four months, the Measures intensified (not induced) the stock market vibration, leading to disproportionate gains and losses though the amount of social security fund brought about by the measurers could be neglected here.

When goods cannot be sold, it is not right to blame consumers for not appreciating them, but necessary to check the quality, marketing strategies and marketing methods first. Under the conditions of a buyer’s market, all enterprises understand this principle, which should not be overlooked by a government that tries to sell its goods, though the goods are somewhat special – they are not the commodities in general but the ownership of state assets.

This article will first discuss the principles and then deal with the practical matters. It will first analyze the system problems that lead to the failure of the Measures for the Reduction of Holding of Shares and then explore feasible ways of state equity reduction at the current stage.

I. A Combined Outbreak of Three Major Defects

A detailed look into the Measures for the Reduction of the Holding of Shares finds little positive aspects. Probably, only Article 6 is appropriate in term of words, which says "the reduction of state-held shares shall adopt market pricing method in principle," though it may give rise to various interpretations. However, it is just this Article 6 that actually received most heated criticism. The reasons vary according to different understandings of different people, which shall be analyzed later in this article.

Theoretically, the Measures for the Reduction of the Holding of Shares failed by particularly holding on to the three major fundamental defects of the state-owned economy, namely the ambiguous property ownership right, the mixing-up of administrative and asset management responsibilities and the absence of asset owners. With these defects, it is difficult for government assets to enter and exit the market.

1. Ambiguous property ownership right

Local governments should own local finance revenues, control local government invested enterprises, and dispose incomes from the reduced equity of local enterprises. These principles are enclosed in the concept of "individual-responsibility for finance revenues and expenditures and different levels of ownership of government assets". They are particularly reflected in the idea of "investor ownership and investor income ownership", and are generally acknowledged truths in all market economies where provincial, prefecture, county and city enterprises are not referred to as "state enterprises".

Despite local government ownership of local finance revenues, enterprises financed by local governments are not counted as property of local governments and the incomes from reduced shares of these enterprises should be handed over to the Central Government. Though these "principles" are not inventions of the Measures for the Reduction of the Holding of Shares, they were reiterated in Article 3 of the Measures as "possessed by the state, managed at different levels and operated with authorization". The capital linkage between investors and enterprises has disappeared, and has been replaced instead by "you invest and I own" administrative relations, which is a Chinese characteristic.

The arbitrary transfer of enterprise ownership rights among different levels of government is a historical defect of the state-owned assets, which is also the much talked ambiguous ownership right. Although the call for "clear ownership right" has been made for many years, it has only remained vocal. It has been a common phenomenon that the upper-level governments leave their problematic enterprises and industries to the lower-level governments and take over the profitable enterprises from the lower-level governments to reap ready incomes. In terms of investment system, this practice generates soft responsibility constraints in addition to soft budgetary and soft credit constraints. It further encourages blind decision-making and inefficient investment by the upper-level governments.

The government is afraid of asset depletion. Many measures of economic system reform have been postponed or distorted due to the "depletion-fear syndrome". No matter if there is any depletion under other situations, it is certain that immediately after the adoption of the Measures for the Reduction of the Holding of Shares, the property ownership right of local listed companies ran off to the Central Government. When one can own the incomes from selling property ownership right of non-listed companies rather than listed ones, it is self-evident how local governments, their holding companies, listed companies and securities firms regard the Measures for the Reduction of the Holding of Shares.

2. The mixed administrative and asset management responsibilities

The mixed administrative and asset management responsibilities splits the functions of the asset owners into various administrative departments and makes unified exercise of the functions impossible. The serious obstacle to the state-owned enterprise reform and enterprise ownership system reform created by this defect needs no more elaboration.

In order to centralize responsibilities, articles 4, 7, 8, 10, 11, 12, 13 and 14 of the Measures for the Reduction of the Holding of Shares all touched organizational buildup and operation. In general, it includes examination and approval by inter-ministerial joint conference, presided over constantly by the Ministry of Finance, actually operated by China Securities Regulatory Commission and supported financially by the Social Security Fund.

 However, such a division of responsibilities does not (also does not attempt to) remove the roots of the defect, which persist in equity reduction issues and give new tinges to the mixed government administration and asset management responsibilities.

(1) Reduction of the holding of assets should be regarded as strategic systems engineering.

The priority of establishing social security fund is to set up such a fund targeting on employees of the state-owned enterprises – the bottleneck of the state-owned enterprise reform and a key component of strategic restructuring of state-owned economy. To establish a social security system, it is far from sufficient to depend on public finance alone. It must rely on fund raising through the reduction of the holding of the state capital asset and market exit. These two basic ideas have long been the common understanding of the whole society. It is only necessary to point out that the establishment of the social security system is a major issue that affects the stability of the state-owned enterprises as well as the society, and due to long-time brewing, it has become an extremely urgent issue. Naturally, it is the focus of concern of the "administration". Although the "asset" is also an associated issue, it remains a secondary concern.

For the establishment of a social security fund, financing is the objective while reduction of the holding of shares is the means. However, such reduction means the exit of government assets, which is an issue of broader significance than financing social security. It is the key component of strategic restructuring of the state-owned economy. The entry and exit of state assets belong to the domain of "asset" rather than that of "administration". The exit of state assets in Singapore was named "asset unloading", which was implemented by Temarels Holding Co., Ltd. that held enterprise shares on behalf of the state. In Taiwan, the authorities set up the State-owned Enterprise Privatisation Task Group in 1985 to study on the exit of government assets. It also established the Public Enterprises Privatisation Promotion Group in 1989 to accelerate privatisation in particular. In order to restructure the economy, Israel started to accelerate privatisation process in 1997 through the Government Companies Authority, which was a department set up based on the Government Company Law to manage government companies.

In fact, the entry and exit of state-owned assets are a systems engineering project. Its fundamental objectives, industrial sequence, steps of reduction of the holding of shares, channels of exit and capital operation are all important and difficult issues. Even with the establishment of special departments, it still requires great effort to carry out their functions. ...

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May 2002