Yuan Dongming & Xiao Qingwen

Research Report No. 062, 2008

I. Work Has Not Been Completed in Separating and Reforming the Secondary Businesses of the Large and Medium-Sized State-Owned Enterprises

1. Tangible progress has been made in separating and reforming the secondary businesses of the large and medium-sized state-owned enterprises

Separating and reforming the secondary businesses of the large and medium-sized state-owned enterprises has been one of China's major policy measures to reform the state-owned enterprises. On November 18, 2002, eight ministries and commissions including the former State Economic and Trade Commission jointly issued the Implementation Method of Separating the Core and Secondary Businesses, Reforming the Secondary Businesses and Relocating Redundant Personnel of the Large and Medium-Sized State-Owned Enterprises (hereinafter the 859 Document). If this document is regarded as the demarcation line, the process of separating and reforming the secondary businesses can be divided into two phases. Before 2002, separating the core and secondary businesses was taken as a tool to improve the efficiency of the state-owned enterprises. The reform then focused on "efficiency improvement". It emphasized the separation of the core and secondary businesses and the efficiency improvement through staff reduction. In practical operations, the "freezing" and "isolating" approaches were used and the core and secondary businesses were not really separated in terms of personnel, assets, business operation, and finance. As a result, the secondary businesses were not actually separated though divided, or did not become independent though separated. After the end of 2002, the large and medium-sized state-owned enterprises began to operate their core businesses in a standard and market-based way. Under this precondition, they emphasized the liberalization of the secondary businesses, the separation of the core and secondary businesses, the restructuring of the secondary businesses and the relocation of the redundant personnel. The move then was designed to cut off the non-market-based links between the core and secondary businesses in the areas of ownership, finance, assets and personnel. And the ultimate goal was to turn the secondary businesses into the economic entities with diverse forms of ownership, and to establish a modern corporate system and a standard corporate governance structure, with the clearly-defined ownership being their basic feature.

After nearly two decades of reform efforts, the large and medium-sized state-owned enterprises have made tangible progress in separating their core and secondary businesses and in reforming their secondary businesses. By September 2006, a total of 1,252 large and medium-sized state-owned enterprises nationwide had separated their core and secondary businesses, restructured their secondary businesses and relocated their 2.096 million redundant personnel. In particular, 76 enterprises directly under the central government had seen their reform plans being approved, which involved the restructuring of 4,879 units and the relocation of 777,000 redundant personnel. So far, the east region has basically completed the process of separating the social functions from the provincially-owned enterprises. By January 2007, the central enterprises had handed over 1,528 institutions performing social functions, 86,000 personnel in active service, and retired 49,000 teachers (Speech made by Li Rongrong on January 25, 2007 at the National Working Conference on the Supervision and Management of State-Owned Assets).

The separation and reform of the secondary businesses of the large and medium-sized state-owned enterprises have relocated large numbers of redundant corporate personnel, vigorously pushed forward the internal restructuring of the state-owned enterprises and optimized the distribution and structure of the state-owned economy. These steps were of vital importance to refining and modernizing the core businesses of the state-owned enterprises, specializing and marketizing the secondary businesses and boosting the vitality, domination and influence of the state-owned economy. In recent years, the large and medium-sized state-owned enterprises have scored marked progress in both scale and efficiency. In addition to market and other factors, the progress is also attributable to the efforts of these enterprises to refine their core businesses.

2. The work still needs to be pushed forward of separating the core and secondary businesses and reforming the secondary businesses of large and medium-sized state-owned enterprises

Overall, the work is close to an end in separating the core and secondary businesses and reforming the secondary businesses of large and medium-sized state-owned enterprises. But in some areas, there still exist large amounts of assets of secondary businesses. At the same time, some enterprises that have preliminarily completed the separation of the core and secondary businesses still have to further reform their secondary businesses in light of the new development situation. Therefore, continued efforts are needed to vigorously push forward this work on the basis of their past reform experience and new ideas of reform are required.

First, the task to separate and reform the secondary businesses is still very heavy in the monopoly industries, such as power, oil, railway, military and tobacco industries. In some industries that have preliminarily completed their market-oriented reforms, the reform of the secondary businesses within the enterprises have become an important step to further push forward the reform of these industries. In the power industry, for example, the reform in 2002 has stripped off most its secondary businesses and formed four major secondary business groups. But the five major power-generating corporations and the two major power grids companies still have lots of secondary businesses to separate. In particular, the two power grid enterprises still have many units engaged in the "tertiary industry" and "diverse operations" as the power-generating companies do. Furthermore, they also have various units engaged in power design, manufacturing and construction. So, the reform task ahead for this industry is both heavy and difficult, and is one of the important tasks for the power restructuring during the 11th five-year plan period. Another example is the oil industry. The three major oil corporations have all carried out large-scale assets restructuring within themselves since 1998. By separating and reforming the secondary businesses, they have basically been stripped of social functions and many specialized companies have been formed. For example, the China National Offshore Oil Corporation (CNOOC) has established such specialized companies as the China Offshore Oil Company, the China Offshore Oilfield Service Company, the Offshore Oil Engineering Company the China Offshore Petrochemical Company, which have all been listed in China or abroad. But the China National Petroleum Corporation (CNPC) and the China Petroleum and Chemical Corporation (SINOPEC) still have a tedious task to reform their secondary businesses. Industrial reform and corporate orientation have become the key factors to further promote the reform of their secondary businesses.

Second, some enterprises that have completed the separation of the core and secondary businesses still have to push forward the reform of the secondary businesses. These enterprises are still plagued by the problems of being divided but not separated, or being separated but not independent. The residual enterprises that have inherited large amounts of secondary assets are still heavily dependent on the listed companies or joint-venture enterprises, which restrains the development of the core enterprises and the standard operation of their governance structure. These problems need to be solved by further reforming the secondary businesses.

Third, some secondary assets need to be reevaluated and re-oriented in light of the new situation. In the past when many large and medium-sized state-owned enterprises separated their core and secondary businesses, they often classified their research and design institutes as the secondary assets. This practice not only weakened the capacity of the core enterprises for innovation and sustainable development but also harmed the development of the whole industries. Besides, it also contradicts with the country's current strategy on independent innovation. Both the state and the enterprises should have new plans and reform ideas for these "secondary assets".

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