Zhang Chenghui

Research Report No.019, 2002

In recent years, along with the expansion of the role of private enterprises in local economic development, local governments are giving more and more attention to the protection of the legitimate rights and interests of private enterprises. Some localities have made special laws in this aspect and regarded the effective protection of the legitimate rights and interests of private enterprises as an important measure to promote the development of private economy. Nonetheless, events of encroachment on the legitimate rights and interests of private enterprises remain common and serious, and must be brought to close attention of relevant departments.

I. Existing Problems

In particular, problems relating to the protection of the legitimate rights and interests of private enterprises mainly take the following forms:

1. Lack of protection to the right for investment business

Case study 1: Difficult management after purchase

Based on the investigation of relevant departments including the Federation of Industry and Commerce of Anhui Province, in September 1998, Haitian Group, a private enterprise in Ma An Shan City signed a contract with the Chemical Industry Bureau of the City. According to the contract, Haitian Group was to buy over Ma An Shan Rubber Plant, a bankrupt enterprise, with RMB16.2 million to finance the settlement of 1416 workers and staff, and set up Haixiang Company and resume production in December the same year. More than 700 workers and staff were retained by the plant, but most of them did not sign labour contracts because they were unwilling to work for a private owner. About 300 workers did not want to take up or did not turn up on their jobs. As the company failed to get them to work by sending out notices and making announcements, it stopped issuing wages for these workers and staff since June the next year, resulting in assault on the company leaders by a few workers and the serious blocking up No. 205 national highway. After the events, the company reissued the wages of the absent workers and staff according to the opinion of the coordination and guidance group of the city Party Committee and the City government. However, as the workers and staff did not change their "big pot" mindset, the confrontational mood did not subside, and the enterprise management and production remained difficult. In addition, the workers and staff appealed to the higher authorities time and again for their status and property rights. In April 2000, the Chemical Industry Bureau of the city informed Haitian Group in writing, asking Haitian Group to withdraw from Haixiang Company, thus terminating the purchasing contract unilaterally. As Haitian Group did not agree, the Chemical Industry Bureau, backed up by the city leaders, appealed to the court on the ground that Haitian Group did not settle the workers and staff well. Consequently, the court sealed up Haixiang Company on May 15. The case was still under examination when this report was written.

Analysis and comments:

Private enterprises’ purchasing of poorly managed enterprises is a win-win event. However, due to various constraining factors, private enterprises usually cannot engage in normal management on equal footing in the market. Some enterprises are already bankrupt and worthless, but once private enterprises want to purchase them, they are suddenly worth the value of gold. The workers and staff of state-owned enterprises can remain reasonable when being laid off, but once their enterprises are to be purchased by or merged with private enterprises, they become provocative and touchy, the enterprises find it difficult to deal with them. Faced with the conflicts and clashes, the government usually tries to maintain stability at the expenses of the rights and interests of private enterprises. It is indeed very difficult for private enterprises to survive in such an external environment.

2. Encroachment on enterprise survival right

Case Study 2: Government construction project strangled a private enterprise in Guiyang

Guiyang Xinghua Ferroalloy Plant is a private enterprise with foreign investment registered for incorporation in 1987. In the sixth year after the establishment and production of the plant, the sitting of the new Guiyang airport included the site of the plant into the clearance zone of Longdongbao Airport. In mid-November 1995, at the special meeting presided over by a vice mayor (concurrent deputy commander for the construction of the Longdongbao Airport) of Guiyang, three administrative conclusions were made. According to them, Xinghua Ferroalloy Plant must complete its move before March 1996; a special working group for the moving would be established to oversee the implementation; and as Xinghua Ferroalloy Plant enjoyed good economic results, the headquarters of the project agreed to compensate its move. In December the same year, the working group for the moving relayed the idea of the special meeting to Xinghua Ferroalloy Plant, showed Document No. 61 (1995) of Huaxi District Government of Guiyang City and demanded the plant to implement the document.

After receiving Document No. 61, Xinghua Ferroalloy Plant immediately stopped business activities and suspended the signing and implementation of purchasing contracts for 1996. It turned off the fire for production at the end of February 1996 and waited for the order to move the plant away. Meanwhile, the plant conducted asset assessment according to legal procedures, formulated the budget report for reorganizing production on the new site and sent the report to relevant departments. However, after the plant stopped production, nobody cared about its moving. The construction headquarters and the working group shuffled the responsibility among them, and the moving fees were never paid. Based on relevant information, the moving fees were embezzled by certain leaders for renovating buildings in the busy commercial areas of the city and for establishing business companies. In 1997, the plant reported to the provincial government of Guizhou and obtained written instructions from the provincial governor and vice-governor. However, the document traveled for more than a year on its way. Due to shuffling of responsibilities among relevant departments, the problem still remained. With useless administrative appeal, the plant made a lawsuit to the higher court of the province. However, it ended up with the plant losing the case.

Helplessly, the management of Xinghua Ferroalloy Plant switched on the fire and resumed production on January 2000. This was done after the plant consulted the civil aviation administration bureau and other organizations concerned and obtained no objection from them. However, the airport then claimed that the site of the plant was within the clearance zone of the airport and its production affected the safety of flights and constituted a hidden danger. In April 2000, the head of environmental protection bureau of Huaxi District Government of Guiyang City came to the plant with some other people and announced a hand-written emergency notice to force the plant to stop production. They switched off the electricity arbitrarily and put on a seal, leading to direct economic losses of over RMB 400,000 to the plant. More than one year has elapsed, the plant is still trapped in a situation in which it can neither resume production nor move away. There is no hope for the enterprise to survive.

Analysis and comments:

This case clearly indicates how insignificant the status of private enterprises is. First, the important decision to move the plant from its exiting site, which related to enterprise survival, was determined by a meeting of the project headquarters. The enterprise only learned about the demand for moving after the working group "relayed the idea of the special meeting" to it and was "demanded to implement according to the requirements contained in the document". Second, after the enterprise stopped production, the departments concerned did not try to solve its actual problems, but shuffled the responsibilities among them. Nobody bore the responsibility when the initial commitments were not honoured. Third, when the enterprise had to resume production to save itself four years after production stopped, a piece of hand-written paper of the chief of the district environmental protection bureau could force the enterprise to stop production and seal the plant. Imagine that if Xinghua Ferroalloy Plant is a state-owned or an enterprise with foreign investment, could it be treated in that way? Compared with these two types of enterprises, private enterprises apparently could not negotiate with government departments on their existing status, and their rights and interests are nothing in front of government documents. ...

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May 2002