Loopholes in the SOE Transition

During the current transitional period in SOE restructuring, wrongdoers have been able to take advantage of contract holding to serve their own interests. They exploit state assets to engage in business, siphoning off whatever profits have been gained while dumping debts onto the enterprise. Exploiting the chances offered by asset reshuffling and debt-to-equity switches, some managers have illegally bought legal person’s shares for themselves with state money. Others take the opportunity to illegally share or intentionally undervalue state assets to make profits.

Lack in Effective Surveillance

In this particular stage of system transition, the state has allowed the enterprises to assume control and make their own decisions. However, the relevant surveillance system has not yet been built up. This offers some wrongdoers chances to expand their individual power without limit and subsequently lead to the abuse of power for profit.

Internal Divergent Practices

Paying no attention to financial management regulations, some working units keep their own secret “banks” to evade taxes. Since only one or two people control these secret “banks”, they become an easy target for money-related actions involving an abuse of power.

To prevent abuse of power, the Beijing Procuratorate has listed seven pieces of advice for SOEs to follow.

First, democratic management should be given full play. To achieve this a democratic operational mechanism must be established, workers’ representative conferences regularly held and representatives’ opinions fully appreciated.

Second, the financial management system must be improved, strictly adhering to the Accounting Law. Emphasis should be placed on both financial management and assets management in production and operation.

Third, ban the existence of secret banks.

Fourth, prevent asset loss in the process of contract holding, paying special attention to task contracts, assignment of accountants and auditors and bonus returns for contractors.

Fifth, practice a system of regular position flow in some key posts.

Sixth, various inspection departments and personnel within the SOEs should be assigned, be directly responsible to and supervised by the superior inspection department, instead of being controlled by the enterprise leadership.

Last, combined efforts of the Procuratorate and the SOEs are needed in order to build up a case transfer system.

(CIIC 12/21/2000)