Zhang Wenkui

In recent years, the state-owned enterprise reform has achieved significant progress. However, the reform is far from complete and we should adopt pertinent measures to further deepen this reform.

I. The "Separation of Government Functions from Enterprise Management" as well as the "Linking Ups" and the "Restructuring" Deriving from Government Institutional Reform

The government organizational reform which started in 1998 has canceled the specialized ministries, while enterprises originally affiliated directly to various ministries have also "separated government functions from enterprise management" by detaching themselves from the specialized ministries. The detachment promoted the "separation of government functions and enterprise management" to some degree. In the meantime, however, these enterprises had to be "linked up" to other government and Party organs, for after all, the state-owned or the state-controlled enterprises are the carriers of state assets, so it is impossible for them to break away entirely from government management.

1. The "linking ups" and the state asset management system

There are three types of "linking up". The first one includes large enterprises still controlled by the Central Government. They must "link up" with the Ministry of Finance in terms of assets, and with the newly established Central Enterprise Working Committee or the Organization Department of the CPC Central Committee in terms of personnel management. The second type includes enterprises handed over to the localities. They must "link up" with the local governments. The third group includes enterprises smaller or of relatively less importance. As designed by the government, they should face the "restructuring" consequence of the previous two types of enterprises and "link up" with them. In fact, the government has thus entrusted the first two types of enterprises to manage the third group, as well as to supervise and press them to maintain or increase the value of state-owned assets.

Obviously, it is "detachment" on the one hand and "linking up" on the other. To certain degree, it is similar to the distributing of enterprise management authority among specialized and comprehensive departments as well as among the central and the local governments over the past years. It means that we have not found a way to separate the government functions from enterprise management at all.

After the "detachment", the government is faced with the test on how to exercise effective control over the state-owned assets. On the one hand, the government tries to maintain and increase the value of the state-owned assets through authorization of management contracts. On the other hand, it supervises the enterprises and their managerial personnel through special inspectors (who have been changed to external inspectors) and its appointed accountants. Undoubtedly, the authorized management contracts increase the responsibilities of and the pressures on the enterprises and their managers, and the special inspectors and the appointed accountants fortify the supervision. However, the contracted state-owned asset management system cannot effectively solve the problem of remnant controlling power. In addition, it is difficult for the special inspectors and the appointed accountants to establish clear interface with enterprise decision-making procedures.

2. The "restructuring" and the enterprise incentive mechanism

In fact, the "restructuring" mentioned above is also a form of the state-owned asset management institution. However, it has generated significant impact on the original system of the enterprises. Since the reform and opening up, the remnant claiming and controlling powers of the state-owned enterprises have been in effect shared by managers and staff and workers of the enterprises. Actually, after 20 years’ reform and opening up, the state-owned enterprises are no longer the "purely state-owned enterprises", but "shared enterprises with state ownership". It is just the shared ownership that has provided the incentive mechanism. However, as the "restructuring" dismantles the stability of the controlling power and the distribution system of the third group of enterprises, it may damage a reliable incentive mechanism. Without introducing a new and effective incentive mechanism, the "restructured" state-owned enterprises will suffer from insufficient development drive, or their assets may be squandered or displaced.

II. The Enterprise System Reform Promoted by the "Dilution" and "Exit" of the State-owned Stock Equities

The so-called system reform is to reform the traditional state-owned enterprises and set up corporations with diversified equity ownership. In recent years, the system reform of the large and medium-sized state-owned enterprises has been implemented widely in China, while that of the small state-owned enterprises is already basically completed in most areas in China.

1. The basic types of diversified equity ownership

In terms of the identities of the new shareholders, the diverse equity ownership may include "external diversification of equity ownership" and "internal diversification of equity ownership". If the new shareholders mainly consist of internal staff and workers, including the managerial personnel, it belongs to "internal diversification of equity ownership". If the new shareholders are mainly composed of external legal and natural persons, it belongs to "external diversification of equity ownership". In terms of the total size of the equity and the total size of the state-owned equity, there are "diversification of equity ownership through dilution" and "diversification of equity ownership through exit". Capital expansion through listing and targeted stock floating is "diversification of equity ownership through dilution", which dilutes the state-owned shares in stock with the non-state-owned shares. Whereas, the selling and transfer of the state-owned shares belong to the "diversification of equity ownership through exit".

The state-owned enterprises controlled by the Central Government have mainly achieved their diversification of equity ownership through "external diversification" and "diversification through dilution". Whereas, most of the state-owned enterprises and the "restructured" enterprises controlled by local governments realized their equity diversification through the combination of "external diversification" and "internal diversification", and the combination of "diversification through dilution" and "diversification through exit". The specific ways include the following: transferring or selling the state-owned shares or the state-owned assets to managerial personnel and staff and workers of enterprises, private enterprises and external natural persons; capital expansion by selling stocks to managerial personnel and staff and workers; and establishing joint ventures. Through the system reform, many state-owned enterprises and "restructured" enterprises controlled by local governments have become non-state-owned enterprises.

2. The debate on the loss of state-owned asset has become a focus in system reform.

Notably, in the system reform, there is an absence of a state-owned share transfer and state-owned asset selling system that is transparent, competitive and acceptable to the creditors. This is apt to generate the debate on whether the transfer and the selling prices are reasonable, and whether there is an intention of debt evasion. If the prices are regarded as too low, the case may be ruled as "loss of the state-owned assets". In reality, such debates can hardly be settled satisfactorily. It is especially so when the transfer and the sale are made to the managerial personnel and staff and workers. As the state-owned enterprises have already become the "shared state-owned enterprises" since the reform and opening up, the managerial personnel and the staff and workers only wish to turn such "sharing" from implicit to explicit. Because the debate cannot be settled satisfactorily, the "loss of the state-owned assets" or the debt evasion intention usually becomes the obstacle to the "exit", "dilution" and system reform.

The debate on the loss of the state-owned assets is also related to the incompleteness of the social security system. The pension insurance of the state-owned enterprises has not been based on a funded system over a long time, and the staff and workers consider that they should be compensated through the preferential transfer prices of the state-owned shares and assets. It has become fashionable to use the state-owned assets to "repay" the social security debt, and there are many loopholes that merit special attention.

3. The emergence of spontaneous "unauthorized privatization"

The absence of a state-owned share transfer and selling system that is transparent, competitive and acceptable to the creditors makes "internal diversification of equity ownership" and "diversification of equity ownership through exit" extremely attractive to the state-owed enterprises. For they can at least make the "sharing" legitimate and clear, or may gain in actual state-asset losses. As large enterprises face more ideological risks by adopting "diversification of equity ownership through exit", their managerial personnel split the enterprises and adopt "internal diversification of equity ownership" and "diversification of equity ownership through exit" in the separated parts of their enterprises to avoid risks. Usually, the separated parts of the enterprises are the best and the most profitable assets of the enterprises. In addition, some managerial personnel have transferred the profits from large state-owned enterprises to their separated parts by means of internal transaction, and thus quickly drained the profits of the large state-owned enterprise.

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