Chen Xiaohong

Research Report No 004, 2004

I. The Restructuring of State-owned Enterprises: Definition, Basic Conditions and Problems

1. What is the restructuring of state-owned enterprises

There have been diverse definitions on the restructuring of state-owned enterprises: change of their forms, change of their equity structure and change of their basic systems.

The change of an enterprise’s form means to change its legal form that regulates its capital formation and its governance structure. For example, an enterprise regulated by the Enterprise Law is turned into a wholly-owned company to be regulated by the Company Law, and a limited liability company is turned into a joint-stock company.

The change of an enterprise’s equity structure means to introduce new shareholders or change the proportions of its stock rights. The change of the equity structure also means to have different types of shareholders to hold different types of stock rights. For example, an enterprise may have gold shareholders, preferential shareholders and so on. The change of an enterprise’s legal form sometimes also constitutes a precondition for the change of its equity.

In a broader sense, an enterprise’s restructuring also includes an extensive change of its internal systems, such as the operator incentive system and the labor wage system. Changes in these respects are not necessarily the basic factors for an enterprise’s restructuring in the narrow sense, but they often are the cause of, or the result of, or the condition for its restructuring. Therefore, these changes are closely linked to an enterprise’s restructuring, and constitute an important issue that deserves attention in the course of an enterprise’s restructuring, especially when the restructuring is designed mainly to seek incentive effects.

2. Basic conditions: the main driving factors and present conditions

The restructuring of state-owned enterprises began in the mid-1980s, but became the main topic for the reform of state-owned enterprises only after the 1990s. The factors driving the restructuring of state-owned enterprises cover many aspects, including political policies, regional conditions, capital market and enterprise operators.

The 16th National Congress of the CPC decided that the orientation of the reform of China’s economic system is to establish a socialist market economy. The basic principles of the central government on the restructuring of state-owned enterprises became increasingly clearer later and especially through the 3rd Plenary Session of the 14th CPC Central Committee, the 15th National Congress of the CPC, the Third Plenary Session of the 15th CPC Central Committee, the 16th National Congress of the CPC and the Third Plenary Session of the 16th CPC Central Committee. The political decisions of the central authorities laid a political foundation for the relevant government departments to work out the relevant policies and for different regions and enterprises to promote the restructuring of state-owned enterprises. The policies worked out by the relevant government departments after the 14th National Congress of the CPC gradually defined the operating framework for the restructuring of state-owned enterprises.

Different regions were faster in restructuring state-owned enterprises. There were two reasons. One was that in the 1990s, many regional state-owned enterprises found it difficult to operate and survive. The other was that different regions did not expect much government investment but their enterprises with greater potential could develop faster. In order to overcome difficulties and develop faster, the regional governments believed that the most important policy was to encourage the enterprises to restructure.

The development of capital market in China, especially the opening of the Shanghai and Shenzhen stock markets in the early 1990s, and the later overseas listing of Chinese enterprises all gave a strong push to the restructuring of state-owned enterprises.

Enterprises and especially their operators also constituted an important factor for the restructuring of state-owned enterprises. The fact that this factor could play its roles had to do with the demand that China’s state-owned enterprises must change their mechanisms as soon as possible. It also had to do with the fact that there was "insider control", that the operators of state-owned enterprises had for long assumed too heavy responsibilities and received too low pay, and that many new state-owned enterprises had received little state investment.

Great progress has already been made in restructuring state-owned enterprises over the past 10 years or so. The number of the state-owned enterprises declined, but their incomes and asset earnings increased. While there were about 300,000 state-owned enterprises in the early 1980s, there are only about 180,000 today (2001). The number of state-owned and state-held enterprises dropped from 65,000 in 1998 to 43,000 in 2002. About 80 percent of the small state-owned enterprises across the country have changed their systems (estimation by experts of the State-owned Assets Management Commission). Many state-owned enterprises have changed their systems and been listed on stock markets, and some large state-owned enterprises have been listed overseas. Restructuring has been going on hand in hand with asset optimization and reorganization. As a result, enterprises and asset structures both improved. Redirecting employees to other occupations has been proceeding steadily in conjunction with restructuring and reorganization.

3. There still remain some problems

The overall planning and basic policies for adjusting the distribution of the state-owned economy are still not clear enough. Some policies have been worked out for specific industries and regions. But the lack of basic scale and basic policies has made it difficult for restructuring and related merger and acquisition and reorganization to move forward when large state-owned enterprises are to be dealt with.

Some problems concerning the orientation and structure of state-owned enterprises are yet to be solved. Some of these problems concern legal regulations, such as whether the large state-owned enterprises registered under the Enterprise Law should be turned into incorporated enterprises, what is the basis for designing special state-owned enterprises and what are the unique characteristics of such legal regulations. The others are structural problems, such as whether the publicly listed companies held by large wholly state-owned companies and the related transactions and conflicts of interests can be properly solved when their structures are not changed and whether the restructuring such as a simple introduction of operator and employee shareholding in subsidiary companies can bring incompatible contradictions to the business of parent corporations.

There are also some problems with the procedures and specific policies for restructuring. In recent years, the restructuring of state-owned enterprises has been moving forward fairly fast. But some enterprises were sold or bought by themselves, audit and appraisal were not truthful, enterprises were undervalued for sale, and some enterprises were sold under the counter. There were complex reasons for these problems. One was the lack of understanding. For example, the complexity and uniqueness of restructuring were not fully understood and the restructuring of enterprises was promoted as political movements. The other was the lack of policy coordination. The state and the relevant departments had no systematic policies and they only resorted to scattered and specific policies for regulation. Thus their guiding role was limited. Furthermore, there were deeper factors involving political and economic interests. Recently, the State-owned Assets Management Commission promulgated the Proposals on the Regulation of the Restructuring of State-owned Enterprises, which solved many irregularities in the process of restructuring. But they need to be further clarified and improved.

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