Zhang Junkuo and Zhao Huaiyong

Research Report No 138, 2003

II. Main Existing Problems and Reasons

1. Main problems

Although we have made some progress in the readjustment of distribution and structure of state-owned economy, the progress as a whole is not satisfying. Compared with the requirement for state-owned economy to play the role of supporting, leading and driving national economy, serious and irrational situation still exists in distribution and structure of state-owned economy, and we also face the hard task of readjustment. Their obvious manifestations are as follows:

(1) The problems of unreasonable distribution of state-owned economy and the misplacement of the function of state-owned economy have not been solved fundamentally.

Firstly, state-owned assets are still distributed in ordinary competitive fields. According to China Financial Yearbook of 2002, the number of state-owned enterprises distributed in ordinary competitive industries reached 155,000 in 2001, accounting for 89.1 percent of all the state-owned enterprises (SOEs). The assets of SOEs in ordinary competitive industries account for 49.5 percent of total assets of all the SOEs. Facts have proven that state-owned economy does not have obvious competitive advantage in ordinary competitive fields. The large distribution of state-owned assets in these fields has seriously restricted the competitiveness and upgrading of overall quality of state-owned economy. Secondly, state-owned assets are still widely distributed in a large number of small and medium-sized enterprises (SMEs). The number of state-owned industrial and commercial SMEs stood at 164,000 in 2001, accounting for 94.2 percent of all the state-owned industrial and commercial enterprises, while the total assets of state-owned industrial and commercial SMEs reached RMB 5,720 billion, accounting for 34.3 percent of the total assets of all state-owned industrial and commercial enterprises. The average asset scale of state-owned industrial and commercial SMEs stood at RMB 34 million. Thirdly, in many fields where the state-owned economy and capital shall fully play their roles, there is limited investment of state-owned capital. For example, the investment of state-owned capital in infrastructure, basic research and basic education, is seriously insufficient. For another example, the current outbreak and spread of SARS epidemic also fully showed the scarcity of state-owned capital's investment in public health and in the building of an emergency response system.

(2) State-owned enterprises as a whole have low competitiveness, which restricts the upgrading of the quality of the whole national economy.

Because state-owned capital is still widely distributed in ordinary competitive industries and SMEs which does not have obvious competitive advantage, thus SOEs as a whole seem to have lower ability in adapting themselves to market competition and poorer economic performance in comparison with the non state-owed enterprises. In 2001, the assets profit rate of all industrial SOEs stood at 2.9 percent, 2 percentage points lower than that of non state-owned industrial enterprises whose annual sales exceed RMB5 million. The assets profit rate of SOEs in ordinary competitive industries stood at 0.5 percent, 1.2 percentage points lower than the average return on assets of all state-owned enterprises. In addition, net-loss SOEs amounted to 67,000 in competitive industries, accounting for 75.3 percent of all net-loss SOEs; while losses of these net-loss enterprises in competitive industries accounted for 73 percent of all SOEs' losses. This shows that considerable state-owned assets were irrational in distribution and still in the state of low efficiency or non-efficiency.

It is more noticeable that the low operation efficiency of state-owned economy is sure to restrict the upgrading the quality of the whole national economy as state-owned economy still occupies a large portion of social economic resources in China. According to rough estimate, at present, state-owned economy accounts for about 60 percent of the total social assets and 70-80 percent of the newly-increased working capital loans of the bank. However, the contribution of state-owned economy to China’s national economy cannot match its proportion in total assets due to ineffective use of these resources. For example, in 2002, industrial SOEs accounted for 62 percent of the total assets of all industrial SOEs and industrial enterprises whose annual sales exceeded the scale, while these SOEs only achieved 41 percent of gross industrial output value. If we take into consideration the fact that industrial enterprises whose annual sales are less than RMB 5 million have low ratios of fixed capital to variable capital, the comparative contribution rate of industrial SOEs may be even lower.

(3) State-owned economy is not able to effectively play its supporting and driving roles to the whole economy.

According to the resolution made at the fourth plenary session of the 15th Party Central Committee, the main function of state-owned economy is not to develop its own scale but to support, lead and drive the whole national economy. The reality in China is that state-owned capital is widely distributed in ordinary competitive fields where private capital is able to play its role well, and a large number of SMEs are of no significance. This contributed to poor performance and serious net-loss of many SOEs and difficulties for their survival, not to mention their role in supporting and driving the whole national economy.

(4) The lagging-behind of reform and poor performance of state-owned economy have become the root cause of numerous economic and social problems.

As the state-owned economy occupies a large proportion of social economic resources and as the distribution structure of state-owned capital is irrational, this not only results in poor performance of SOEs but also in-effective play of the role of supporting the whole national economy so that the whole economy’s virtuous cycle is restricted. We can attribute fundamental causes for many economic and social problems occurring at the present stage of China to the lagging-behind readjustment and reform of distribution of state-owned economy and lagging-behind reform of state-owned economy, such as urban laid-off employees, banks’ non-performance assets and imperfect social security system. Even some problems which seem to have little connection with state-owned economy are actually connected with the lagging-behind strategic readjustment of state-owned economy. For example, an important reason for the slow increase of farmers’ income is that urban industrial economy has poor performance, especially state-owned economy, which fails to produce enough surplus to subsidize the agricultural sector and enough job opportunities for farmers to shift into the non-agriculture sectors. For another example, the development of social undertakings needs more capital investment from the government. The outbreak of SARS epidemic fully showed that our country’s economic development is incoordinate with social development, i.e. comparatively rapid growth of GDP and the comparative lagging-behind of social undertakings which include culture, education and health. One of the important reasons for its occurrence is that state-owned capital is widely scattered in ordinary competitive fields with comparatively scarce investment in social undertakings.

...

If you need the full context, please leave a message on the website.