China's enterprises learn to profit Barun Roy writes about China's gigantic reform exercise in its final stage China's self-proclaimed five-year task of reforming its debt-ridden state-owned enterprises (SOEs) is due to be completed by the end of this year, and latest official figures indicate that the programme is on track to achieve its goals. In a report to the deputies of the National People's Congress in January, Sheng Huaren, minister in charge of the State Economic and Trade Commission, claimed that more than half of China's 6,599 major SOEs that had been in the red until 1997 became profit-earners in 1999.
The combined net profits of China's SOEs are expected to reach $9.63 billion in 2000, making it the best year yet for this troubled sector. The total net profit of $9.2 billion that these enterprises earned in the first 11 months of 1999 suggests that this is not an impossible target. Sheng said the government was determined to complete the bailout as planned and would impose even harsher measures to control over-production in coal, steel, and sugar industries. The output of coal, he disclosed, would be capped at 900 million tons.
Reforming SOEs is a major Chinese economic priority and Premier Zhu Rongji is pushing it in preparation for China's eventual entry into the World Trade Organisation. He wants these firms to be competitive. In speeches before businessmen and investors, Zhu has more than once mentioned the possibility of turning state firms into shareholding concerns to boost their productivity. A resolution adopted on September 22, 1999 at the fourth plenum of the 15th Central Committee of the Communist Party of China has identified SOE reforms as an important and urgent task.
Significant reforms were implemented in 1998, when the administrative and corporate functions of SOEs were separated, the principle of survival of the fittest was accepted, and the social security system was improved. The government is now keen to encourage mergers between SOEs and collectively owned enterprises and to force hopeless ones into bankruptcy. Banks have been told that their reserves should be such that they can write off non-performing loans resulting from mergers and bankruptcies. SOEs that are currently debt-ridden but have the potential to turn around are permitted to arrange with state banks for debt-to-equity swaps to improve their asset-liability ratios. With government approval, unlisted SOEs can transfer their land-use rights or fixed assets to acquire working capital.
The government is particularly anxious to restructure and regroup state firms in the petroleum, chemical, nonferrous metal, and telecommunications sectors, and form a number of large corporate entities. Of course, this will involve layoffs, but the government is not worried. It considers layoffs as "a shift of labour" and believes its strengthened social security system can minimise their ill effects. Laid-off state firm workers usually find jobs in the tertiary industry, medium and small enterprises, and even private firms. In 1998, some 12 million workers were laid off in China and half of them found new jobs within six months.
The new urgency behind China's enterprise reform highlights the failures of its past attempts. As Ying Qian of Stanford University noted in a paper presented at a World Bank conference in April 1999, the managerial contract responsibility system, promoted in the 1980s, only had limited success. By the mid-1990s, more than one-third of China's SOEs were loss-making. On average, profits and taxes per unit of their net capital stock and working capital fell from 24.2 per cent in 1978 to 12.4 per cent in 1990 and 6.5 per cent in 1996. China must tackle this problem since SOEs constitute the backbone of its economy, are the government's main revenue source, and are ultimately responsible for the problems of its financial sector.
But, according to Qian, China's enterprise reform won't amount to much unless Party control over the selection and dismissal of managers is removed. Although administrative powers have now been separated, managers won't be able to perform fully as long as political bosses keep breathing down their necks.