To LBO'ers and PEN'ers:
Raymond W.K. Lau has published some of the finest independent Marxist articles attempting to make a rigorous class analysis of the class relations of domination in China as they have taken shape since 1978. It is refreshing to read Lau, if for no other reason than his lack of obligations to regurgitate a Chinese Communist Party line or the neo-liberal mantra of TINA.
Lau's "The 15th Congress of the Chinese Communist Party: Milestone in China's Privatization", published in the January 1999 edition of *Capital and Class*,, is an attempt to enagage a rigorous anaysis of class relations in China as they have emerged since 1978. His arguments are backed up with plenty of empirical data and a plethora of references, mostly citations from publicly accessible Chinese language media and some internal publications. His argument, in a nutshell, is that the 15th Party Congress (September, 1997) was instrumental in laying out the ideological foundation for the advancement of the SOE privatization agenda in China, whereby the regime in China has allowed private companies to take over small SOEs and "been desperate to woo private capital for capital injection into even the largest SOEs." These two trends now appear (according to Lau) irreversible and threaten the very capacity of the regime to retain control of SOEs in the future. This trend is especially risky in the Chinese case since total private financial worth is sufficient to buy out the state sector. I will first summarize Lau's article and in a future post lay out my agreements and disagreements with him.
Lau argues that, although through the 80's the SOE sector had experienced continued growth in productivity via measures to increase SOE autonomy and subjection to market discipline, privatization of SOEs in China was not widely regarded as the route to further reform of SOEs. However, between late 1993 and early 1994, the "Chinese regime had come to accept the inevitability of a shrinking state sector, not simply through faster non-state sector growth, but through policies newly adopted by itself. Such policies included private capital penetration into pillar industries whereby private equity participation occurred in large SOEs, which were transformed into corporations and allowing the outright privatization of small SOEs. "
Lau begins his analysis with a look at the development of the "shareholding system' in the 1990's. Reform of China's SOEs until 1995 took the form of the Contractual Management System (CMS). SOEs remitted specific portions of profits to the central budget with the right to retain the rest of profits. This system however only served to reinforce China's inefficient and redundant industrial structure by 'allowing every production branch at both central and local levels continued expanded reproduction in the extensive mode'.
In the 90's, this system came under increasing criticism by reformists in the Party who advocated a corporate system to replace the CMS. This would meet with opposition and would be introduced at plenums as 'modern enterprise system' the sole form of which would be the 'corporate system.' Shareholding and limited liability systems were also introduced, with some 100 central and 2,500 local SOEs selected for the former in a pilot scheme. The motive underlying this switch was to render enterprises accountable to shareholder within the firm, who were to be free of administrative interference. At the end of 1993 there were some 13,000 such companies, which number jumped to 25,800 by the end of 1994 and reached 414,000 by September of 1997.
The large majority of assets in these SOEs have been turned into state equity, which is not for sale. State/state funded units are also apportioned 'legal entity shares', which are tradable on two Beijing networks. Employee shares can be traded only among employees of the same company, while state shares are not tradable. Lau then seeks to show how such policies, though this policy ostensibly designed to prevent it, they actually have been unable to thwart private capital's incursions into SOEs.
Employee shares are in fact widely sold to the public and some 90 % of legal-entity share entities have found their way into private hands according to the Chinese*Securities Market Weekly*. The corporate transition has meanwhile attracted more corruption as state cadres receive shares for their administrative 'services'.
Capitalist rationality, however, has not been necessarily instituted in corporatized SOEs necessarily. Supervisory departments continue to exert influence key decisions. SOE boards are frequently appointed directly by supervisory departments instead of shareholders' meetings. Meanwhile, surveys of SOE firms revealed that large numbers were experiencing losses due to poor management and duplicative investment carried on unabated.
By December of 1994, Party priorities shifted to integrating reform with SOE industrial reorganization, with a focus on asset restructuring via mergers and bankruptcies, investment in technology in lieu of capital construction projects, and 'strengthening management.' This strategy resulted in the number of shareholding companies falling from 15,000 in 1994 to some 9,000 by early 1997. As well, the government also devised another strategy which called for taking a firmer hold of the largest part of the SOE sector, i.e. the 1,000 largest sized firms that comprise 85% of SOE net value. As long as the state focused its energies on managing well these firms, the logic went, the most significant portion of China's state sector could be revitalized, thereby reinvigorating the integrity of the state economy.
This policy meant that small SOEs' were now up for sale to the highest bidder, despite the Party's expressed intentions to the contrary. Local governments are starved for funds and the selling of public assets (in this case in the form of small SOE's) has proven to be one remedy. Profitable as well as unprofitable ones have been sold, *despite* warnings from the State Council. When companies are not bought outright by private individuals, they are transformed into Shareholder Based Cooperatives (SBC). Ostensibly, the legitimization mechanism undergirding the SBCs is the *cooperative* element, to be implemented by distribution of shares to workers and institutions such as Worker Representative Committees with seats on the boards. However, shares in most cases if workers are not in loss making enterprises that compel to buy shares in exchange for retaining posts, are generally apportioned such that managers end up with a decisively large share, or buy them from workers who lack cash (not at all an unusual scenario for workers who have not received pay for months or years even and faced with unpaid medical bills, etc..).
It is interesting that those who feel inclined to 'defend' the Party against 'western' propaganda will argue that problems with reform can be handled by the Party and that surely it has plans to deal with the problems faced by workers during this transitional epoch. Lau argues instead, quite convincingly, "Despite such unhealthy tendencies, SBC, with its supposedly co-operative feature, is obviously a useful ideological formula to disguise *de facto* privatization". What we have, in the case of small SOEs then is their outright selling off to private owners, to SOE managers and/or corrupt officials, and a decision to not establish new ones in the future.
In terms of the larger sized SOEs that have been transformed into SBCs, such outright privatization has not been the rule and indeed the greatest proportion of equity remains in state hands. This of course does stand as challenge to Lau's thesis that a significant change in Chinese SOE ownership/control and management relations is in process. However, he argues that:
"all SOEs, including corporatized ones, have been rigorously shedding surplus labour and cutting welfare benefits...(W)hether or not such practices become solely or mainly determined by the profit motive once private equity holds controlling stakes...(can be seen by) the case of privatized SOEs."
Typically, after an enterprise has been poorly managed, for reasons beyond local control (eg. sudden exposure to competition from more efficient privately owned enterprises) or for quite controllable reasons (eg. it is plundered by managers and 'corrupt' officials, enterprises are declared bankrupt by managers, with the consent and encouragement of officials in ministries whose job it is to oversee and design reform policies), workers are then laid off en masse and a plan to convert the SOE to SBC is designed. It is at this critical stage that workers are supposed to have a say in how that conversion is to take place via consultation between management and institutions whose ideological function is to protect workers' interests (i.e. Workers' Representative Committees (WRC) and Unions) during the transition. However, at just such a critical moment, in fact, neither institution proves capable of representing workers' interests (although again, official newspapers, especially those published in English, which overseas propagators of the party line take at face value, will report instances where WRCs and unions violate the law as 'isolated individual cases'..), since they are obligated to the Party, reform efforts, and, perhaps most significantly, the interests of the factory director and local officials, Lau writes:
"In SBC's, managers are theoretically out-voted by share-subscribing workers due to the principle of 'one shareholder, one vote', instead of 'one share one vote'. But not only does the principal-agent problem theoretically cast doubt on the controlling capacity of the former principle, {according to a party-official informant}, in practice managers usually have little problem manipulating it for their own purposes."
Concerning property rights, once SBC schemes are forced through, they generally are accorded the same rights as other fully privately owned enterprises. That is to say, transfer of ownership rights are not seriously threatened by the state once completed.
Lau then proceeds to analyze the sources of funds for privatization in China, namely the expansion of the private economy primitive accumulation by members of the nomenklatura. Lau, in a series of tables, demonstrates the rapid growth of 'getihu's, small individual businesses (which can constitute anything ranging from small restaurants, copying shops, repair shops, and 'barber/massage parlors,' whose numbers multiply exponentially every year, save very brief periods of rare crackdowns when preparing for important national celebrations, visits by national or foreign leaders and/or investors) and 'Private enterprises', which are enterprises employing more than 8 workers. These figures don't include the now overwhelming number of so called "Township-Village Enterprises (TVEs),' that are actually purely private businesses, but registered as TVEs as cooperatives. For non-believers, consider, from Lau's article the following:
"A 1994 official survey found 83% of all TVEs to be private in reality. In places such as Guangdong, 80% of all private enterprises 'wear the red cap.' Various estimates put the fake collective ratio at over 50% at the administrative village level and above..."
As Lau notes, this is from a *1994** survey...the privatized nature the TVE is only more blatant today. While in China, I happened upon a story in the November 26th, 1998 *Workers Daily* about how easy it is for *getihu's* to secure a TVE certificate in Hunan Province, for the low price of 65 Yuan, or 8 US dollars, a pittance. Stories such as these always contain an interesting line, namely, "Such cases are not few {cilizi bushao}", contradicting the Party line that officials are trained to provide researchers (designed to 'protect state secrets' that any reader of Chinese or careful researcher of English resources can find anyhow), that such cases are 'isolated'. Workers, whether critical or not of reforms, never repeat the latter mantra during interviews and laugh at your naivete if you suggest it to them.
Private enterprises on the one hand have multiplied exponentially as has their average registered capital (from 80,000 Yuan (10,000 $ US) to 400,000 Yuan (50,000 Yuan), which capital needs outlets for investment. While investment is forbidden in 13 areas, nonetheless, more and more private companies are taking over SOEs, larger ones included.
Private businesses (i.e. officially registered private enterprises employing more than 8 workers) throughout the 90's have done much better than the small getihu's and have grown not only economically, but as a political class. The concerns about 'left winds' blowing after the Tiananmen crackdowns and declarations of the death of Chinese market oriented policies have proven quite ill founded. Private business owners' economic expansion has not been accompanied by an increased anti-Party political mobilisation, as occurred in the late 1980's, which latched onto and openly supported the expression of dissatisfaction on the part of student protesters in 1989. Rather, for the moment, a comfortable partnership exists between state and private business owners. This is due in part to the reality, as Lau himself acknowledges that assets controlled and value produced by Private businesses still do not overtake those of the SOE sector. For example, in footnote 23, Lau informs us that, while in 1995 95 registered private enterprises owned assets of over 10 million Yuan and 37 owned more than 37 million Yuan, with Beijing's Tongchan corporate group at 4.23 billion Yuan; 41 had revenues exceeding 100 million Y, with Sichuan's Xiwang Corporate group # 1, at 1.66 billion Yuan, the Baoshan Iron and Steel Group, one of China's largest SOEs, had revenue of 48.8 billion Yuan.
The noenklatura has quite openly collaborated with private capital transforming public assets into mechanisms of private capital accumulation. The dual tracking price system was one of the means by which nomenklatura could sell SOE output to private entrepreneurs at higher prices. By the 90's, as dual track pricing was phased out, the choice form of official corruption was replaced by factor production rent-seeking, i.e. taking advantage of 'interest rate differentials between credit obtained from state banks and the market rate'. The notoriety of China's security forces involvement in smuggling operations only adds to the picture. One might also add the widespread classical transitional phenomenon of officials desperate to generate funds arbitrarily finding every which way to extract their share of surpluses generated by private businesses' in the form of illegal fees, fines, and taxes. Lau, in any event, is arguing that this corruption is a natural part of a moment of primitive accumulation in which state officials and private business owners collude to both increase the amount and redirect the upward extraction of surplus accumulation.
In the concluding section Lau argues that private enterprises have been invited to help revitalize key sections of the SOE sector by providing injections of private equity, via ideological rationalizations provided in the redefinition of the public economy, whereby the public economy qualifies as not only the state and collective parts, but 'state and collective components of the economy of mixed ownership." Now since the 15th Party Congress, the private sector has been conceptualized as and accorded the status of 'component' of the national economy, not merely a supplement. This, Lau argues, is merely an acknowledgment of the real weight of the private economy, and a political guarantee for private equity participation. Such guarantees are of no small import in light of problems China faces with controlling (illegal) capital flight.
Lau argues that private equity participation in SOEs has picked up dramatically since the 15th congress. By the time I left China a month and a half ago, it was widely taken for granted as a natural solution to the present crisis of the Chinese SOE. Lau argues that in China, unlike in Eastern Europe or Russia, that private business owners are in possession of enough capital to potentially buy out the SOE sector. He cites leftist sources in China and official internal reports that reveal a very concentrated structure of savings deposits accounts, with some 2% of all depositors accounting for 80% of all savings deposits in early 1994 and a *publicly* released official report that reveals that 3% of the population owns some 40% of household deposits, leaving little doubt of a 'heavy concentration of household net worth among a rich tiny minority...Together with overseas investors, they possess the funds for which the regime is desperate."
I'll end this 'summary' by quoting from Lau's concluding paragraph:
"To conclude, on an open ended note: the trends analyzed in this paper throw open a whole host of theoretical issues. We are witnessing a regime that increasingly seeks the 'collaboration' of private capital, and whose economic basis at the county level is being undermined by divestment of small SOEs; many members of the regime/nomenklatura at the grassroots level are becoming private entrepreneurs either directly or indirectly..while some are in the process of transformation into company executives...These developments make us ask: what kind of social formation is developing in China? In what ways is it different (either in kind or 'mode') from the previously existing one? What is the dialectic between the changes in the social formation and in the state?..."Simple' determinations will have to be specified to uncover deeper dynamics, which will take us to the realm of theoretical issues just raised. Nor is this merely a matter of theoretical challenge. In 1989, the bulk of the regime rallied behind Deng XiaoPing to put down the protests How would they act in a future political crisis?"