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Marketization of state-owned enterprises means a process in which the allocation of resources previously conducted by means of government administration is now mainly determined by the market, and part of state-owned enterprises are transformed into non-state owned enterprises. It mainly consists of four aspects: (1) market-oriented reform in the management system of state property; (2) diversification of property of state-owned enterprises; (3) market-oriented behavior of state-owned enterprises; and (4) the formation of a mechanism for state-owned enterprises to exit from the market. The purpose of marketization is to turn state-owned enterprises into independent legal persons and entities in market competition that have autonomy in business operation and are responsible for their own losses all profits, bearing their own risks and self disciplined.
(I) Market-Oriented Reform in the Management System of State Property
Distinguishing the government and enterprises roles is of the key importance in turning state-owned enterprises into independent market entities, i.e., government is to step away from the operation of state-owned enterprises. In distinguishing the government and enterprise roles, the separation of government and assets is in its turn of the key importance, i.e., the double roles played by the government as the society administrator and at the same time as the owner of the assets must be separated.
In 1988, the central government set up the National State Property Administration (NSPA), which exercises the function of administering the owner-ship of state property. In the ten years of its operation, NSPA mainly devoted to the fundamental administration of the state property, including checking the stock and assets, defining the property rights, registering the property rights, valuation of the assets, calculating and analyzing the assets, and refining relevant rules and regulations. In this way NSPA pioneered a way for establishing a marketized state property administration system.
Nevertheless, NSPA was not authorized to act as the owner of the state property. The Central Government was still the only one representing the owner of the state property, and the functions of the owner were shared among a number of government departments. In order to reduce government intervention, the government then explored ways in realizing authorized operation by the large enterprise groups, that is, the company group was to be authorized by the government to hold the state property in the member enterprises established by the government by means of various forms of direct investment but not related to the company group property-wise, and re-organize the property rights of the member enterprises through authorization, so as to establish the parent-subsidiary property relation between the group company and the members. The parent companies (i.e., the group companies) of these large enterprise groups then became the government authorized investing organizations. Enterprise groups in petrochemical, metallurgy, space and aviation industries are such government authorized state asset managing organizations. This approach has ideally solved the issue of clarifying the property right within the enterprise. At the local level, more far-reaching approaches are adopted in Shanghai and Shenzhen, where a three-tiered administration system for state property was established, namely the Administrative Committee for State Property - the Operating Institution for (Operation Companies or Holding Companies for State Property) - state-owned enterprises, where the members of the Administrative Committee for State Property are the chief officials from various economic administrative departments of the government, and the Director's office is assumed by the Party Secretary and the Mayor. Under the Committee there is a State Asset Administration Office to run the functions of the Committee. In this three-tiered state asset administration system, the establishment of a state asset operational body avoids the necessity of the presence of government in enterprises in its double role of an administrator and an owner of the state property, but the government would participate in the decision making and management of the enterprise in the capacity as an ordinary investor, or in other words, the owner of the property, thus solving to a great extent the chronic problems of the "unavailability" of an owner in state-owned enterprises and of the "insufficiency" of confinement and incentive to the governing body by the owner. In this way, state-owned enterprises became market entities independent of the government to a certain degree.
(Ⅱ)Property Rights of state-owned Enterprises Diversified
1.Transforming into Joint Stock Limited Companies: Main Approaches for Diversification of Property Rights
Diversification of the property rights of State-owned enterprises was realized mainly by means of turning state-owned enterprises into companies with limited liability or limited shares with a diversified stock rights, and transforming into joint stock limited companies was an important aspect in establishing the independent market status of state-owned enterprises. In transforming into joint stock limited companies, one of the approaches was to introduce non-state owned capital into state-owned enterprises, and the pattern in which the former state-owned enterprise owned all or an overwhelming number of shares was changed to a certain degree. According to the sampling by the State Economic and Trade Commission, in 2001, as many as 64.18 percent of state-owned enterprises underwent transformation for diversified property rights, with the mean value of the state-owned stocks being 66.52 percent. Taking into account of the former state-owned enterprises that had went bankrupt, or had been merged into or infiltrated by non-state owned enterprises so that they had become non-state owned enterprises, the above two figures are likely to be above 75 percent and below 50 percent respectively. Among the 64.18 percent of enterprises that had conducted diversification of property rights, 38.75 percent of them preferred to realize such transformation by means of employee stock ownership, 31.25 percent preferred the promoter method, 28.75 percent of them selected the approach of holding each other's shares.
2.Transformation of State-Owned Medium and Small Enterprises and Diversification of Property Rights
By the end of 2001, 81.4 percent of the state-owned medium and small enterprises in China conducted ownership transformation. Among the state-owned medium and small enterprises that had transformed their ownership systems, 51 percent assumed the share-holding system and equity joint-venture system. By means of a variety of forms of transformation and restructuring, the overall economic efficiency of the state-owned medium and small enterprises turned for the better, and emerged from the situation of net loss in successive six years.
3.Transformation of Large Stat-Owned Enterprises and Diversification of Property Rights
Impressive progress was also made in the diversification of property rights of the large state-owned enterprises. Take the state-owned enterprise groups for example. In 2000, there were 1725 enterprise groups the parent companies of which were registered as state-owned enterprises. Among these groups, 1265 of the parent companies transformed into joint stock limited companies, accounting for 73.33 percent of the total. Among these 1265 enterprise groups, there were 507 parent companies turned into wholly non-state owned companies (other companies with limited liability or limited shares), accounting for 40.08 percent of the total. In 2001, enterprise groups with the parent companies registered as state-owned amounted to 1772, out of them 1269 of the parent companies transformed into joint stock limited companies. accounting for 71.69 percent of the total. Out of these 1269 enterprise groups, 468 parent companies were turned into wholly non-state owned companies, accounting for 36.88 percent of the total.
4. Diversification of Stock Rights of Listed Companies
In contrast to the companies not listed, the stock rights of the listed companies are obviously more diversified. Events in which controlling shareholders of state-owned listed companies were replaced by the non-state owned entities, or even in which state-owned stocks were entirely liquidated were reported repeatedly. In such cases, the state-owned listed companies were actually turned into non-state owned enterprises. Similarly, events in which state-owned stocks took over non-state owned enterprises with the number of shares surpassing that of the non-state owned shares took place occasionally as well. In 1992, there were only 53 listed companies, all of them state-owned holding companies. In 2000, there were a total of 1086 listed companies, 458 of them had no state shares or no shares subscribed by the State, accounting for 42.17 percent of the total; 50 of them had their state shares completely liquidated, accounting for 4.60 percent of the total; 628 companies had the State as the absolute or relative controlling shareholder, accounting for 57.83 percent of the total. In 2001, there were a total of 1159 listed companies (excluding one whose full data was not available), of which 415 companies had no State shares or no shares subscribed by the State, accounting for 35.81 percent; 55 of them had the State-owned shares entirely liquidated, accounting for 4.75 percent; 744 had the State as the absolute or relative controlling shareholder, accounting for 64.2 percent of the total. The proportion of State shares in the total shares of the listed companies dropped from 41.38 percent in 1992 to 38.9 percent in 2000 and rose to 46.2 percent in 2001. Among the listed companies, the proportion of non-state shares was on the rise in general: it was 58.6 percent in 1992, rose to 61.1 percent in 2000, and declined to 53.8 percent in 2001, indicating that the state-owned entities and non-state owned entities had a tendency of intensified mutual infiltration.
(Ⅲ)Market-Oriented Operation of State-owned Enterprises
In spite of the fact that some of state-owned enterprises have not yet conducted ownership transformation and that some of those having undergone transformation remain wholly state-owned, in market operation, particularly in operation, the marketization is already highly developed. The transformed state-owned enterprises are more standardized in their market-oriented operation.
1. Corporate Governance of State-Owned Enterprises
According to the sampling made by the State Economic and Trade Commission, 92.8 percent of the transformed state-owned enterprises believe their corporate governance was appropriate or quite appropriate as it was designed to fit the requirements of the market and the actual conditions of the enterprise.
(1) Selection of Managers by Market
With regard to the appointment of managers, 89.8 percent of the transformed state-owned enterprises had their managers appointed by non-government approaches or selected through market approaches (including appointment by BOD, election by general membership meeting etc). Selection of managers by market approach accounted for 76.4 percent of enterprises that have not conducted ownership transformation as well. The rate of selecting managers by market approaches for both transformed and un-transformed enterprises amounted to a total of 86.3 percent, while in 1993 this rate was a mere 3.4 percent, representing an average annual increase rate of 49.82 percent during 1993 to 2001.
(2) Autonomy in Decision-making
Before transformation, 71.3 percent of enterprises selected the collective mode of decision-making, 22.1 percent of them adopted the centralized decision-making method and 6.6 percent preferred the mode of shared power. After transformation, those selected collective mode of decision-making declined to 55.8 percent, those preferred centralized decision-making reduced to 18.6 percent and those adopted the mode of shared power rose to 24.8 percent. 87.8 percent of enterprises believed that, compared with the time before transformation, the decision-making after transformation was more scientific or considerably more scientific. 89.4 percent of enterprises selected their own decision-making mode independently, or, in other words, 89.4 percent of enterprises enjoyed autonomy in decision-making. The remaining 10.6 percent enterprises selected their decision-making mode under the government intervention or guidance. In 1993, 54.9 percent of enterprises had the autonomy in decision-making. From 1993 to 2001 there had been an average annual increase of 6.28 percent.
(3) Incentives Matching Performance
With regard to incentives to the Managers, 53.5 percent of the transformed state-owned enterprises gave incentives according their contributions and performance, and 21.7 percent of them offered them with yearly wages.
(4) Completeness of Financial and Accounting System
Concerning the General Principles of Enterprise Finance and the Accounting Standard for Enterprises, 91.6 percent of all state-owned enterprises (transformed or not transformed alike) of the sampling had put them into full implementation, or 13.5 percentage points higher than non-state owned enterprises, indicating a more standardized accounting system in state-owned enterprises.
(5) Correlation of Corporate Governance and Performance
Similar to non-state owned enterprises, a well-developed corporate governance is remarkably effective in improving the performance of enterprises. Analysis on the relationship between the corporate governance of the transformed enterprises and their profit and tax generating ability, quality of assets, capital liquidity, technological innovation as well as the renovation of equipment and efficiency in the use of human resources and equipment showed that they were highly proportional to each other. Because of a well developed corporate governance, in the past three years 77.3 percent of enterprises improved their ability in generating profits and taxable revenues, which were improved by over 20 percent in 46.7 percent of enterprises; 84.7 percent of enterprises witnessed certain degree or considerable improvement in the quality of their assets; 85.7 percent of enterprises had the capital liquidity accelerated; 76.2 percent of them improved the equipment renovation and technical levels; and 85.9 percent of them greatly reduced or reduced by a certain degree the idling or abusive use of human resources and equipment.
2. Operation of State-Owned Enterprises
In June 1992, the State Council passed the Regulations on the Transformation of Managerial Mechanism of Industries and Enterprises Owned by the Whole People, which granted autonomy in 14 aspects of great significance to state-owned enterprises, sending them off to the market-oriented business activities. By 2001, over 80 percent of state-owned enterprises were enjoying autonomy in the 14 aspects. For instance, 93.4 percent of the 1994 transformed enterprises had autonomy in investment, 74.5 percent had autonomy in providing credit guarantee services; 72.5 percent of them had the autonomy in import and export of goods for their own business and 53.9 percent of them were authorized in carrying out international contract business and labor service cooperation.
The marketization of state-owned enterprises' operation is embodied in the following aspects:
(1) subsidies by the State to state-owned deficit enterprises dropping very low
Subsidies from the national fiscal revenues to the losses of state-owned enterprises accounted for a smaller proportion of the GDP with each passing year, dropping from 5.66 percent in 1985 to 0.31 percent in 2001. Moreover, the absolute value of the subsidies for losses declined continuously as well, from 50.7 billion yuan in 1985 to 30.04 billion yuan in 2001. If calculated at the unchanged price of 1990, the absolute value of fiscal subsidies to the losses in state-owned enterprises would be dropping from 71.5 billion yuan in 1985 to 16.4 billion yuan 2001, an average annual decline of 8.82 percent. In addition, with the accelerated marketization of interest rates, state-owned specialized banks have turned into commercial banks wholly owned by the state which are responsible for their own profits and losses, thus the disguised subsidies in the form of low-interest bank loans provided by the government to state-owned enterprises are basically eliminated. The reduction and even elimination of subsidies forced state-owned enterprises to fight for survival in the market.
(2) Appropriation by the Government to State-Owned Enterprises Nearly Stopped
Funds required by state-owned enterprises for operation are mainly raised by themselves, from bank loans, by floating bonds or by listing on the stock exchange, and the appropriation by the government has almost come to an end. According to statistics, loans obtained by state-owned enterprises from commercial banks accounted for nearly 70 percent of all bank loans. The government no longer arranged loans from the state-owned commercial banks for enterprises. Instead, the loans were available through market negotiations between the banks and enterprises. Starting from 1993, joint stock limited companies or liabilities satisfying the conditions for floating enterprise bonds as stipulated in the Company Low were allowed to openly float bonds in the market, adding one more channel for enterprises to obtain funds. Such bond floating arrangements made by enterprises according to their own conditions and market requirements were basically market-oriented behavior. The proportion of fund raising through stock exchanges by enterprises accounted for 0.023 percent of the GDP in 1991, and 1.084 percent in 1993, 1.738 percent in 1997, 2.35 percent in 2000 and 1.305 percent in 2001 respectively, representing an upward slope in general.
(3) Market-related price formation mechanism of state-owned enterprises taking shape
State-owned enterprises are now pricing their products according to the actual costs and the market supply and demand. The market-related pricing mechanism has already taken shape, as various factors, commodities and services required for the operation of state-owned enterprises are basically selected and purchased from the market. Presently prices of most competitive factors, commodities and services are free of government intervention and are subject to market regulation. From 1978 to 2001, market determined prices of means of production rose from zero to 90.5 percent of the total, and that of farm and sideline products from 5.6 percent to 97.3 percent of the total. During the sampling, 90.8 percent of enterprises admitted that the inputs, costs and prices were entirely decided by themselves.
(4) Employment and Wage Rates Determined Through Free Negotiations Between the Employer and the Employee Among Most State-Owned Enterprises
According to sampling, in 2001, 98 percent of the employees in state-owned enterprises were on contractual employment terms. The barriers for the employees to shift between enterprises had been considerably reduced. Concerning the determination of wage rates for the employees, 53.5 percent of enterprises chose the method of remuneration linked with contribution and performance. Since job shifting had become easy, it was possible for the employee to refuse the wage rates determined by the enterprise and leave for other jobs. Therefore, wage rates of the employees in state-owned enterprises can be regarded as determined by free negotiations between the employees and the employer. According to sampling, 71.6 percent of the people accepted this view. Further, the implementation of the Interim Procedures for the Collective Negotiation of Wages issued by the Ministry of Labor and Social Security enhanced the important function of the Trade Union organizations in representing the employees in coordinating the relationship between the enterprise and the employees, safeguarding the lawful interests of the employees in general. The three relatively standardized insurance policies in state-owned enterprises are the statutory guaranty for the market-oriented decision-making by state-owned enterprises with regard to employment and wages. The payment for old-age pensions, medical care and unemployment insurances by state-owned enterprises accounts for the highest rate among all types of enterprises, and are most seriously implemented at the same time.
(Ⅳ)Market Exit of State-Owned Enterprises
One of the important aspects in the marketization of state-owned enterprises is the decision to exit according to their own performance and the changes in market supply and demand. Starting from 1993, the government has repeatedly issued circulars clarifying that the state-owned sector would take the absolute controlling or dominant position mainly in military industries, in providing important public goods and services, and in fields of natural monopoly; that the dominant position of a few key state-owned enterprises in fields representing the comprehensive national strength such as petrochemical, automobile, IT, machinery and equipment and high-and-new technology industries were to be guaranteed; and that in fields subject to common competition, the State would step out from its status as the controlling shareholder or even exit entirely. Such reform mainly covers the following three aspects:
1.Selling, Restructuring and Bankruptcy of State-Owned Deficit Enterprises
The selling, restructuring and bankruptcy of state-owned deficit enterprises are important aspects in deepening the transformation of state-owned enterprises. The year 2001 saw an unprecedented number of bankruptcies of state-owned enterprises with an annual total of 460, with 51.5 billion yuan in bad debts written off and 390,000 employees resettled. In 2001 the government allocated a reserve fund amounting to 50 billion yuan to be used in writing off bad debts with the banks for mergers and bankruptcies of enterprises. In 2002, the government ordered a total of 382 cases for merger or bankruptcy of enterprises, terminated 248 projects and wrote off 26.9 billion yuan in bad debts. In the several years to come, over 3000 large and medium sized state-owned enterprises that are in weak positions in the competitive fields will fade out. The selling, restructuring and bankruptcy of medium and small state-owned deficit enterprises will be accelerated. According to sampling, among state-owned deficit enterprises, those that were sold, restructured or declared bankruptcy accounted for 67.5 percent of the total, most of them were medium or small enterprises.
2. Reduction of State-owned Shares in State-owned Enterprises in Competitive Industries and Introducing Non-state Owned Capital
With regard to state-owned enterprises in fields subject to common competition, restructuring and ownership transformation were conducted by cutting down the state-owned shares, encouraging the participation of non-state owned enterprises, individuals and investors from outside the legislative boundaries of the People's Republic of China and allowing them to be the controlling shareholders. In 2001, of all state-owned enterprises listed on the stock exchange 15.4 percent turned into companies with the State as the ordinary subscriber or liquidated the shares owned by it entirely, and enterprises with the State as the ordinary shareholder was in essence non-state owned. After China joined the WTO, foreign businesses became much more active in taking over or purchasing state-owned enterprises by means of: (l), purchasing the entire property rights of the state-owned enterprise, so that it becomes a subsidiary; (2), purchasing over 51 percent of the state-owned enterprise's stock rights so that the purchaser becomes the controlling party; (3), in forming an equity joint-venture the foreign party expands the size of its capital by subscribing to more shares, so as to dilute the stock rights of the Chinese party, turning subscription to shares into expansion of shares. In order to encourage foreign businesses to take over and purchase state-owned enterprises, the Chinese government will abolish restrictions on proportions of stock rights allowed to other sectors, except in key industries or enterprises relating to national security or of vital economic importance where the State must be the controlling party.
3. Small State-owned Enterprises Turning into Non-state Owned Enterprises
The small state-owned enterprises are to be gradually turned into non-state owned enterprises by means of equity joint ventures, auctioning and transferring. According to sampling, by the end of 2001, nearly 80 percent of state-owned enterprises had completed ownership transformation, most of them turned into non-state owned enterprises.
(China.org.cn November 7, 2003)
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