Liu Shijin

Research Report No 212, 2000

I. An Important Precondition: There Exists Immense Space for Reducing State-Held Shares

Thanks to the efforts in theoretical, policy and practical exploration in recent years, major progress has been made on the basic issue of strategic reorganization of the state-owned economy. Two important issues were raised at the 4thPlenary Session of the 15th Central Committee of the Communist Party of China. One is that under the new system, the state needs to maintain its control over certain areas, namely those that are important to state security, the areas of natural monopoly, the areas that provide public goods and services, and the key enterprises in the pillar industries and high-tech industries. The other is that the state-held shares in enterprises should be reduced. This is in fact an issue of how the state-owned capital should quit in the course of the strategic reorganization of the state-owned economy. With the two issues given greater attention, the general orientation of the reorganization of the state-owned economy and the reduction of state-held sharesare clearly defined and meanwhile policy barriers are greatly reduced. Even so, there are still some cognitive and operational issues that need further exploration.

I.1In principle, the state-owned capital can quit from the areas of general competitiveness that do not belong to those over which the state needs to maintain control. It is true that we can find a few state-owned enterprises that operate fairly well and we have reason to believe that the state-owned capital in these enterprises does not have to quit (that will help the state-owned capital preserve and increase its value). But in light of“major principles”, it is perhaps a better choice for this kind of high-quality capital to quit and to replenish the social security funds when the state-owned capital is still limited in amount. In the areas where the state needs to maintain control, the so-called control can be in the form of exclusive state ownership and, in most cases, can be in the form of state share-holding, including absolute state share-holding, relative state share-holding or state stock participation. For some enterprises, we can even draw on foreign experience and introduce the “golden share” system, that is, the state has no direct investment in the enterprises but has the final veto power over them. It is a wise move to “control the same amount of other capital with as less state-owned capital as possible”. So in the areas where the state needs to maintain its control, reducing state-owned capital is still highly possible. In these areas, telecom, electricity, petroleum and petrochemical industries are actually those, whose high-quality capital can be “sold at better prices”.

I.2 One common-sense question that needs to be repeatedly emphasized is that the reduction and realization of part of the state-owned capital only changes the form of the existence of the state-owned capital and does not necessarily cause any loss to or “drain away” of such capital. As there exist defects in the link of transactions, it is indeed impossible to rule out the possibility of the state-owned capital being “drained away” in the course of stock reduction and realization. If so, the logic conclusion should be to rectify the existing defects rather than refusing to reduce and realize the state-held shares. One fundamental reality is that in market economy, trading and flowing of the state-owned capital is unavoidable. Conversely, refusing to reduce and realize the state-held shares can in no way guarantee that such capital will not “drain away”. Numerous facts prove that when the state-owned capital does not flow, the asset depreciation due to the operating losses of the state-owned enterprises was the primary form of the draining away of such capital. Of course, one may find that after stock reduction and realization, the state-owned capital has avoided such depreciation or even increased its value because of higher liquidity.

I.3 The state-owned capital after stock reduction and realization can be used for many purposes. At present and in a foreseeable future, one priority is to use these funds to replenish the social security funds. In view of the history of the state-owned enterprises, such an option is entirely logical. When the state-owned enterprises were created, the wages received by their employees were only a portion of the total due to them, which is used to buy consumer goods. The remainder which should have been spent by them on housing, pension, health care,etc. was actually used collectively by the state. Between the employees and the state (or the state-owned enterprises), there in fact existed a contractual relationship that the state should provide the employees with housing, pension, health care and other benefits. But the portion controlled by the state was in most cases invested in the establishment of new enterprises. As the performance of the state-owned enterprises has been deteriorating since China began reform and opening up and as there have existed shortcomings in the cash basis system of these enterprises, the state (or specific state-owned enterprises) has found it impossible to perform the original contract. This problem is typically demonstrated in the insufficiency of the social security funds. Therefore, replenishing the social security funds with earnings from the reduction and realization of part of the existing state-held shares can be logically interpreted as the state performing the contract in another way.

I.4 The question that requires further exploration is that the state should control its economic resources by way of running enterprises or controlling non-stock and high-liquidity forms of assets, such as bonds, funds, cash and others. One mainstream view in the past was that the state must directly run lots of enterprises if it was to maintain control over the economy. In the age of the planned economy, such a choice was inevitable, for it was truly difficult to find other ways to manage more resources, except for controlling the enterprises in a material form. In market economy, however, one fundamental change is that resources or assets can break the confinement of material form and take the form of value, which has different levels of liquidity. If we continue to determine the amount of state-controlled resources in light of the number of the state-owned or state-run enterprises, we would make wrong judgment. We can make a simple hypothetical comparison: one scenario is that the state (governments at all levels) is in control of financial revenue equivalent to 20% of GDP and at the same time possesses the assets of the state-owned enterprises equivalent to another 20% of GDP, and that these enterprises are poorly operating, mostly making losses and having very little liquidity; another scenario is that the state (governments at all levels) is in control of financial revenue equivalent to 40% of GDP and at the same time possesses a certain amount of bonds, funds and other forms of assets in addition to very few state-owned enterprises. Which scenario, then,enables the state to control more resources and has stronger control over the economy? The answer is self-explanatory.

II. Reduce State-held Shares in Various Ways to Support the Restructuring of Large Enterprises

One important progress in the reform of state-owned enterprises in recent years has been that great breakthroughs have been made in restructuring small and medium-sized state-owned enterprises. Despite the lack of systematic data in this respect, observations indicate that most of them in many regions have been restructured in different ways. Now, attention is focused on the large state-owned enterprises, each of which generally has assets worth of several hundred million, or more than one billion or several billion yuan. The joint stock holding system, purchase by private capital or other methods used to restructure small and medium-sized enterprises do not suit the large enterprises. This is because the non-state-owned capital in China at present is not big enough to be able to purchase them. Therefore, one important question is how to find investors with adequate financial strength to replace the state-owned capital which is to quit from the large enterprises. Another question that cannot be ignored is that many of these large state-owned enterprises operate at a high level of worldwide division of labor and face intense market competition. Restructuring these enterprises must solve not only the issue of entry by new large investors, but also the issues relating to their technology sources, market position and management upgrading. As a result, it is preferable that the new entering investors have a competitive industrial background. This is why the restructuring and reorganization of large state-owned enterprises is much complicated than that of the small and medium-sized ones.

In this circumstance, reducing state-held shares must focus on the large state-owned enterprises and at the same time should cater to their restructuring and reorganization. Reducing state-held shares does not simply mean to cut the proportion of the state-held shares in the large state-owned enterprises. Rather, it should enable the enterprises to form effective internal governance and organizational structure and help them build rational market position and competitive edge. As to the specific methods to reduce state-held shares, there can be many options.

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