by the Unirule Institute of Economics
The reported profits of state-owned enterprises and state-holding industrial enterprises (SOEs) totaled RMB 5,846.2 billion from 2001 to 2009, with the total profits of 2009 3.89 times higher than those of 2001. Total net profits amounted to RMB 4,051.7 billion, with the total figures for 2009 4.37 times those of 2001.
These profits, however, are mainly accounted for by a small number of monopoly enterprises. The total profits of central SOEs, SOEs which are administered by the central government, reached RMB 1341.5 billion in 2010, accounting for 67.5% of the total profits of SOEs. In fact, the profits of just ten companies accounted for 70% of all net profits made by central SOEs in 2009. These included China National Petroleum Corporation (CNPC); China Mobile; China Telecommunications Corporation (China Telecom); China United Network Communications Group Co., Ltd. (China Unicom); and China Petroleum & Chemical Corporation (Sinopec). Of these companies, CNPC and China Mobile made profits of RMB 128.56 billion and 148.47 billion respectively, more than one third of the total profits made by central SOEs.
The nominal performance of SOEs is not high enough. Indeed, from 2001 to 2009, the average return on equity of SOEs was 8.16%, while that of non-state owned industrial enterprises was 12.9%. In 2009，the return on equity of SOEs was 8.18%, while it was 15.59% for non-stated owned industrial enterprises.
Moreover, the recorded performance of SOEs is not a reflection of their real performance, but the result of numerous preferential policies and an unfair business environment. This unfairness is a result of fiscal subsidies from the central government, different financing costs, as well as subsidized land and resource rents.
If we calculate the rent on industrial land as 3% of the purchase price, SOEs should have paid a total rent of RMB 3931.2 billion from 2001 to 2009, accounting for 67.2% of their total nominal profits. If we include land for commercial and service use, SOEs should have paid RMB 1210.4 billion in land rent in 2008 alone.
SOEs are also subsidized via preferential financing costs on loans from state banks. On average, SOEs pay a real interest of 1.6% on loans, while the market interest rate is 4.68%. If we work out the interest that SOEs should have paid according to market rates, the total interest difference amounts to RMB 2296.7 billion from 2001 to 2008, accounting for 47% of the total nominal profits made by SOEs.
The resource tax on oil averages just RMB 26 per ton, together with a resource compensation fee of 1% of sales revenue. Thus, the government effectively takes less than 2% of the price of oil in China, far below the 12.5% which is imposed on joint ventures. Even if we factor in the special oil levy, it is still too low to fully reflect the interests of resource owners. From 2001 to 2009, SOEs underpaid RMB 243.7 billion in resource taxes. Combined with coal, natural gas and other resources, SOEs underpaid a total of RMB 497.7 billion.
From 1994 to 2006, state subsidies for the losses of SOEs totaled RMB 365.3 billion. According to incomplete data, from 2007 to 2009, SOEs received subsidies of approximately RMB 194.3 billion.
The real performance of SOEs can be estimated by deducting the costs and subsidies mentioned above those costs, which total RMB 7491.4 billion, from their nominal profits. According to our estimates, the average real return on equity of SOEs from 2001 to 2009 was -6.29%.
In 2008, the average wage of staff in SOEs was 17% higher than that of other organizations; their average compensation for their labor was 63% higher than that of private enterprises and 36% higher than that of non-state-owned enterprises. There are major differences between industries. In 2008, the average income per year of employees in monopolistic industries reached RMB 128,000, which is about seven times the national average. The industries with the highest pay featured the highest concentration of SOEs; conversely, industries with the lowest pay featured the lowest concentration of SOEs.
According to regulations for the housing provident fund system (a housing fund for government workers), staff and work units should pay no less than 5% of the staff’s average monthly salary for the previous year, and no more than 12% in principle. A large number of SOEs and government institutions, however, raise this ratio to 20%. China Netcom once accrued RMB 4.142 billion in total as a lump-sum cash housing allowance. SOEs also conduct residential building construction on land allocated for free by the state. In addition, some enterprises purchase commercial residential buildings and sell them to their own staff and workers at low prices.
From 2007 to 2009, the average tax burden of 992 SOEs was 10%, while that of private enterprises was as high as 24%.
Between 1994 and 2007, SOEs did not contributed any of their profits to the state. In 2009, only 6% of SOEs’ profits were contributed, while the rest was all distributed within the enterprises themselves. In 2010, this figure decreased to 2.2%. Moreover, the money contributed by central SOEs is mainly transferred within the central enterprise system and has not been used for the public’s benefit.
The phenomenon known as guo jin min tui “state advance and private retreat” is gaining speed in China. In terms of capital, the proportion of SOEs in electric power, steam, and hot water production and supply industries rose from 85.8% in 2005 to 88.2% in 2008. In terms of gross industrial output value, the proportion of SOEs in electric power, steam, and hot water production and supply industries increased from 90.5% in 2005 to 98.9% in 2008.
Industries with a high proportion of SOEs showed a trend towards monopolistic control. Using market power as an indicator to carry out a quantitative analysis of the degree of monopoly in different industries, it is clear that in the non-ferrous metal smelting and pressing industry, the tobacco industry, the oil processing industry, the coking industry, the nuclear fuel industry, and the electric machinery industry, as well as others, the degree of monopolistic control was higher in 2007 than it had been in 2002.
There is a constant exchange between the management staff of SOEs and government officials, creating a “revolving door” system of mixed loyalty. Calculations based on the resumes of 183 officials above vice-ministerial level in 19 government ministries and commissions, 56 people, or 30%, had previously worked in SOEs. In addition, a resume survey of the senior executives of 123 central SOEs shows that 115 senior administrators at the 47 enterprises that disclosed this information had a background working for the government; in other words, each enterprise has an average of 2.45 people with a government background.
SOEs enjoy a system of “in-house lobbying” in government organizations. SOEs executives enter the government for policies and resources; government officials enter SOEs in order pursue economic gains. The management of SOEs can simply lobby bureaucratic departments instead of lobbying the legislature. Because bureaucratic departments have the power to formulate regulations on the implementation of laws, issue instructions and departmental regulations, this effectively amounts to a system of “bureaucratic law-making.”
SOEs should have clearly defined boundaries. They are suitable for the production of public goods and quasi-public goods in situations when market mechanisms cannot be brought into full play. Products for which governments are the sole consumers or for which the production process should be stringently controlled, should be produced by SOEs, while other products should be supplied by the private sector. The condition for the existence of SOEs is that there is a separation between the supply of public goods and the financing of them.
SOEs are different from normal government institutions and normal enterprises. Their goals should not be to make profit, but to serve the public interest.
The essence of China’s SOE reforms has been the privatization of state-owned assets and even the pursuit of profits through state-owned assets. When state-owned assets begin to take on capitalist attributes, the government slowly becomes a representative for their corporate interests. The privatization of state-owned assets, especially at the beginning of China’s economic transformation, was not only inevitable, but it also promoted meaningful market reforms. However, along with the establishment of a market economy in China, the historical mission of privatizing state-owned assets is about to come to an end.
We should design a short-term reform plan for SOEs based on two major objectives. Firstly, breaking SOEs’ monopoly over bureaucratic interests and, secondly, regulating the conduct of SOEs. The significance of these reforms will be to promote economic agents to compete fairly, to promote social justice, and to improve economic efficiency.
SOE reform has two ultimate goals. The first is to transform SOEs into non-profit public enterprises, and the second is to establish a constitutional framework for state-owned assets.
To realize the ultimate goal of reform, SOEs have to gradually retreat from profit-making activities.
Chapter 1 Theory and process of SOE reform
1.The reform of SOEs: “decentralizing powers and giving up profits” as the main feature;
2.The reform of SOEs: “separating control from ownership” as the main feature;
3.The reform of SOEs: “establishing a modern enterprise system” as the main feature;
4.Policies’ impulse in process of the reform of state-owned enterprises;
Chapter 2 Classification of state-owned assets and state-owned enterprises
1.Classified by the nature of assets;
2.Classified by government management.
Chapter 3 The current performance of SOEs (1): Efficiency
1.Literature review of research into the efficiency of SOEs;
2.The basic approach of this report on efficiency;
3.The nominal performance of SOEs;
4.Back to reality: unpaid costs and state subsidies;
5.Discussion on the “enterprise as society” and “the burden of retired workers”;
6.The real performance of SOEs;
Chapter 4 Current performance of SOEs (2): Distribution
1.The influence of subsidies and costs that should have been paid on distribution from the perspective of national income;
2.The monetary and non-monetary incomes of the employees of SOEs;
3.Comparison of income of senior managers between SOEs and other types of enterprises;
4.Comparison of the tax payment between SOEs and other types of enterprises;
5.The profits payment and dividend distribution of SOEs;
Chapter 5 “State advance and private retreat” and its impact on market competition
1.Have SOEs advanced or retreated in recent years?;
2.Typical cases of the state’s advance;
3.Analysis of the phenomenon “state advance.”
Chapter 6 The macroeconomic impact of SOEs
1.The integration of state assets and “economic fragility”;
2.The impact of SOE performance on China’s real estate market;
3.The impact of current performance of SOEs: the case of the stock market;
4.The impact of current performance of SOEs: bulk stock;
Chapter 7 The performance of SOEs: the perspective of political economy
1.Historical origins of SOEs’ current problems;
2.Institutional status of SOEs in Early 1990s;
3.The interests of SOE managements in this distorted institutional background;
4.The “revolving door” of SOE managers and government officials;
5.“In-house lobbying” by SOE managements;
6.Constitutional defects of government departments in China: “Bureaucratic law-making.”
Chapter 8 The nature of SOES: an economic perspective
1.The nature of enterprises;
2.The nature of the state;
3.Nature of SOEs;
4.The boundaries of SOEs;
5.The constitutional relationship between SOEs and the government.
Chapter 9 The nature of SOEs: a legal perspective
1.SOEs as special public institutions;
2.The normative significance of the SOEs as special public institutions;
3.The strategic significance of reaffirming the public nature of SOEs to China’s SOE reform;
Chapter 10 Continued SOE reform
1.Reflection and comments on SOE reform;
2.Short-term SOE reform plans;
3.Ultimate goals of SOE reform.
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