Political and Economic Analysis of State-Owned Enterprise Reform

Huiming Zhang

• Publisher: Routledge
• Year: 2021
• Print ISBN:
  9781032028392
• eBook ISBN:
  9781000405507
• Topic: Economics
• Subtopic: Business General
• Index: Economics

In revisiting the forty year history of reforms to China's state-owned enterprises (SOE), the book assesses the experiences of this process of reform and scrutinizes how this has helped advance the country's economy overall.
The author finds that China's SOE reform not only commits to institutional innovation within the corporation in terms of operating mechanisms, management structure, legal organization and the economic system of the enterprise; but that it is also underpinned by a series of policies that highlight an increasing market orientation. The measures have given rise to a benign interaction between enterprise reform and market development, while switching the SOE's role from appendages of government organs under a planned economic system to more autonomous entities that integrate public ownership and the market economy. In this regard, SOE reform's success in constructing a modern enterprise system serves as the micro-foundation and core of an improved socialist market economic system.
The book will appeal to academics and students interested in political economy and the Chinese economy, with particular reference to SOE reform and the recent economic transition in China.

1 Introduction

Let innovation of theories and change of concepts take the first step, which is known as the characteristic of China’s economic structural reform. Guided by the Marxist thinking of “emancipating the mind and seeking truth from facts”, the Chinese Communist Party (CPC) broke free from the rigid theoretical constraints to review the national socialist movement and probe into the fundamental defects of the traditional highly-concentrated planned economy. After confirming how economic structural arrangement decides and influences resource allocation and the importance of vital and efficient enterprise operation, the CPC endorses the economic structural reform. By affirming the “position” of the reform of state-owned enterprises (SOEs) in the overall economic structural reform, the CPC endeavors to enhance enterprise vitality and makes it the “core” of the reform to put in motion other changes that concern the economic structural construction, which underscores the structural characteristics of the Chinese economy with enterprises as micro-foundation.

1.1 “Emancipating the mind” opens the way for economic restructuring and “affirms the place” of enterprise reform

The Third Plenary Session of the 11th CPC Central Committee, which was convened in Beijing from December 18 to 22, 1978, marked a major turning point in the transition from “traditional socialism” to “socialism with Chinese characteristics”, and an end to the long dominance of leftist dogmatism. The CPC established a correct guiding framework and reaffirmed its commitment to Marxist ideological, political and organizational guidelines. A new chapter in the history of the CPC and the state was opened since then.

At that time, China just came out of the ten-year-long disastrous Cultural Revolution. To fully prepare for this plenary session, the earlier Central Work Conference had lasted for 36 days. Guided by the new thinking of “emancipating the mind”, the participants aired their opinions fully and freely at the conference. They looked back at the country’s socialist construction in the past 30 years to accumulate experiences and draw lessons therefrom. The inter-Party democracy and the fine work style of seeking truth from facts, following the mass line, and criticism and self-criticism were revived and carried forward. The discussions in the session “centered on the issue of shifting the Party’s focus to socialist modernization”. And the Communiqué of this session states that “in line with existing realities and new practices, we should adopt a host of new and major economic measures to reform the economic governance system and means of operation. And on the basis of self-reliance, we should actively develop economic cooperation featuring equality and mutual benefits with other countries in the world and strive to adopt world-class technologies and advanced equipment. More efforts are ought to be made to improve the work in science and education for realizing modernization”,¹ which is boiled down to the guideline of “reform and opening up”. By sticking to this guideline since 40 years ago, China has gradually become a focus of world attention for its robust economic and social development.

In the Communiqué of the Third Plenary Session of the 11th CPC Central Committee, the part about economic restructuring tasks points out that “Now a serious shortcoming of our economic governance system is that powers are too concentrated. Leaders should boldly delegate powers so that localities and industrial and agricultural enterprises will have more autonomy in operation and management under the guidance of the national unified plan. Efforts should be made to downsize economic administrative agencies at all levels and transfer most of their powers and functions to specialized companies or joint companies. We should resolutely follow the law of economy, attach importance to the law of value, and combine ideological and political work with economic means, and fully mobilize the production enthusiasm of cadres and laborers. Under the unitary leadership of the Party, we should carefully resolve the phenomena such as indiscrimination between party and government or between government and enterprise, having party replacing government or having government replacing enterprise; implement a responsible person system by post grades and division of labor; solidify the authority and responsibility of the governance institution and personnel; reduce official documents and meetings, improve the work efficiency, and implement the systems of assessment, reward and punishment, as well as promotion and demotion. Only by taking these measures can we give full play to the initiative, proactivity and creativity of the Central Government, local governments, enterprises and individual laborers, so that all sectors of the socialist economy can develop vigorously and vibrantly”.²

The Communiqué revolves around the centralization and decentralization (between central and local governments, and also between government and enterprises) of structural arrangement in economic operation; how to consciously follow the law of economy; how to properly deal with the party-government relationship and the government-enterprise relationship; how to define the work responsibilities and implement the systems of assessment, reward and punishment while making full use of the autonomy of the subjects of enterprise operation, for the purpose of fully mobilizing the enthusiasm of management personnel. In a word, the reform measures should fully release the vitality of economic operation and development.

After 40 years of reform, now when we review the afore-said Communiqué, we still feel grateful to its far-sightedness that it not only incisively points out the drawbacks in China’s economic structure but also comes up with ideas and methods to solve the problems. Apparently, this is the result of “emancipating the mind”. After shackling off the ideological straitjackets, the whole Party started an all-round and in-depth reflection on the socialist construction practices and articulately set out the tasks to reform the traditional system. It is precisely because of “emancipating the mind” that Chinese people gained new insights into the reality of the outside world and broke free from the imprisonment of old thoughts and rigid mindsets. They started thinking and comprehending problems proactively and probing into the difficulties in the course of development in a down-to-earth manner, with an aim to revive our socialist cause and carry on the socialist principles and requirements in an even better fashion. It can be seen how important it is to break away from the ideological constraints and old thoughts. It is no exaggeration to say that “emancipating the mind” is the source of the driving force for reform and opening up.

The Decision on Some Major Issues Concerning Comprehensively Deepening the Reform, which was adopted by the Third Plenary Session of the 18th CPC Central Committee, notes that “There will never be an end to practice, to emancipation of the mind, and to reform and opening up”.³ “There will never be an end” reminds us not to be contented with the status quo. Practice keeps moving forward in the process of constantly discovering and solving problems. In an ever-changing environment, existing knowledge and experiences will encounter challenges, and we shall be courageous enough to conquer these challenges through reform. The 40 years of reform is a process where existing theories are updated or replaced to expand the space for action; consequently, we are able to keep making progress, solving problems, and addressing economic and social contradictions. The special significance of ideological and theoretical innovation for the progress of social practice could be no more evident. This enlightens us that existing economic theories must be constantly tested and updated in the reform practice.

By emphasizing the role of “emancipating the mind” in advancing the reform and opening up, we intend to motivate people to understand its philosophical implications in methodology, that is, to proceed from reality when doing everything, rather than from available theoretical propositions; and to be “problem-oriented”, rather than sticking to existing theoretical conclusions. In the process of reform, ideological emancipation has led to continuous changes in the economic governance system, which has greatly liberated productive forces. The prosperity of factor markets and the refinement of division of labor have diversified the development of production organizations and modes of transaction. The opening up measures have introduced the market economy into China, and at the same time, promoted the Chinese economy to be closely integrated with the tide of globalization. That’s why China has seen its economical operation increasingly influenced by the international environment.

After solving the existing difficulties, we have to go on tackling new problems and challenges. How can we keep a sober mind to meet and cope with the challenges? The answer is to take root in the soil of practice, let ideological emancipation open the way for practice, keep shackling off the constraints of traditional ideas and theories, and work hard on theoretical innovation. It is right here that we are fully aware of the special importance of economic theory research and innovation in guiding practice.

Let’s return to SOE reform – the theme of this book. After reviewing a portfolio of measures for economic restructuring at different stages of the reform and opening up, we can find that enterprise reform has always been a “dazzling scenery” in this process and has been valued as the central link of the entire economic structural reform.

The reform has been pushed forward by stages. Given the ingrained drawbacks of the highly centralized planned economy, the Chinese government started the reform by focusing on vitalizing enterprise operation and taking it as a breakthrough point. By following an “incremental reform” strategy, the government launched pilot reform programs from time to time to explore the ways of reform. Based on the experiences drawn from these pilot programs, the reform has been advanced steadily and progressively.

Such an important feature of the reform is defined and especially elucidated in the Decision on Reform of the Economic Structure, which was adopted at the Third Plenary Session of the 12th CPC Central Committee in October 1984. In this Decision which consists of ten chapters, the third chapter (Enhancing Enterprise Vitality is the Central Link of the Economic Structural Reform) stresses that “Enhancing the vitality of enterprises, especially the large and medium-sized enterprises owned by the whole people, is the central link of the entire economic structural reform that is mainly carried out in cities”.⁴ More than that, this Decision points out that the key to enterprise reform lies in handling the relationships between government and enterprises and between enterprises and employees. Enterprise reform is a central goal and task of the entire economic structural reform. Such a statement echoes the economic structure’s basic function: to allocate production factors scientifically and rationally for developing productive forces. And enterprises happen to be the “organizational platform” or “organizational carrier” for resource allocation and productive forces by consolidating all kinds of production factors.

Regarding the complex economic relationships formed on the basis of the economic structure, they involve several pairs of economic categories such as government and enterprises, planned economy and market economy, macroeconomics and microeconomics, central government and local governments, citizens and society, as well as their functional coupling in economic operation. Among them, how to deal with the government-enterprise relationship directly determines whether the enterprises engaged in reproduction activities are dynamic. In turn, it determines the efficiency of reproduction input and output. Of course, other economic categories are also able to restrict enterprise behaviors. But we have identified the key to properly dealing with multiple economic relationships: take enterprise vitality as the “center link” of the reform to get rid of the drawbacks in the old economic structure. In the process of constantly deepening the reform, we have learned to make the socialist market economic structure the target and content of the reform and come up with a more straightforward proposition that “modern enterprises are the micro-foundation of the socialist market economic structure”.

In this sense, the Decision on Reform of the Economic Structure makes a scientific positioning of enterprise reform in the reform blueprint by holding onto the “center link” of the economic structural construction and function, which is vital for the reform to keep going deeper in the future and worth being especially emphasized here. Comrade Deng Xiaoping once commented on this Decision. He described it as “a first draft of political economy and a political economy that combines the basic principles of Marxism with Chinese socialist practice”.⁵ Here, we still like to reiterate the special role of “emancipating the mind” in refreshing the theoretical concepts, activate and enhance people’s ability to discover problems, analyze problems, and resolve problems. It also impresses us that the proposition of “emancipating the mind never ends up” accords with the Marxist methodology of “seeking truth from facts”.

1.2 Overview of the SOE reform process from multiple perspectives

Over the past 40 years, China’s economic structural reform has been unfolded by revolving around enterprise reform. We can summarize the 40 years’ reform practice from different perspectives, and one of the most intuitive perspectives is to summarize and extract the characteristics of the reform in consecutive stages in chronological order. The 40-year enterprise reform process can be split into three major stages: The first stage (1978–1992) is characterized by “decentralization of power and transfer of profits” and adjustment of interest settlement relationship and settlement method between government and enterprises. At the second stage (1992–2012), the efforts were mainly made for exploring the innovation of enterprise system, implementing corporation system reform of SOEs, establishing and improving the corporate governance mechanism. In the third stage (from 2013 to date), usually known as the new stage, the government has been “actively developing mixed ownership” and comprehensively innovating the ways for realizing public ownership.

Today, the continuously advancing and deepening enterprise reform remains at this new stage. By splitting the enterprise reform process into three major stages, we can make it clear how China’s economic structural reform keeps going deeper, how enterprise reform cooperates with other aspects of economic structural reform, and how the reform benefits are released to improve economic operation and expedite economic growth? Through an all-around analysis, we will have a more profound understanding of the entire economic structure and the proposition that the enterprise system is the micro-foundation of the economic structure.

1.2.1 Start the reform by taking adjustment of interest relationships as the key to stimulate enterprises vitality

After “reform and opening up” was specified as China’s development policy at the Third Plenary Session of the 11th CPC Central Committee at the end of 1978, the government placed focus on resolving the outstanding problems in the national economic structure at that time and intensified efforts in adjusting the unreasonable arrangements. For example, since the extremely low prices of farm produce had dampened the production enthusiasm of farmers, the pricing system of agricultural and sideline products was reformed to stabilize the agricultural production expectations and consolidate the foundation of the national economy, as well as pave the way for the economic restructuring in urban areas.

At the same time, given that enterprises lacked vitality under the centralized planned economy, the government attempted to loosen control of enterprises by introducing such pilot programs as allowing enterprises to retain a certain percentage of the profits that they have created and use them discretionarily, including rewarding their employees. This has changed the existing centralized governance model of “unified collection and allocation of funds by the state”, and mobilized the enthusiasm of enterprises to act as a microeconomic unit. In this way, several malpractices are likely to be eradicated, such as the government mandatory plan for enterprises, “unified collection and allocation of funds by the state”, “getting an equal share regardless of the work done”, “enterprises and government are messing together, and employers are obliged to provide for all of their employees”.

By retaining certain profits, enterprises have become a rival to the government in the game, forcing the government to be fully capable of fiscal concentration. As early as 1980, a small number of enterprises began to implement the pilot program of “profit-to-tax”. After accumulating some experiences in this regard, the “profit-to-tax” practice (co-existence of profits and taxes) was promoted in an all-round manner in 1983 and put into the second phase in 1984, for the purpose of bolstering up economic development and income growth based on improved enterprise vitality and bringing about higher returns to both government and enterprises. The original practice of “turning over profits to the state” was replaced by “paying tax according to regulations”, making SOEs show up as taxpayers, which has highlighted the status of enterprises as independent legal persons. Consequently, some basic theories, such as the rules on the ownership of SOEs and the forms of ownership realization, shall be redefined and reinterpreted, and some supporting changes in other areas of the economic structure, including pricing, employment, finance and banking, shall be initiated.

The reform itself cannot be advanced in a multi-targeted way. In order to stimulate enterprise vitality, certain “reform cost” has to be paid; that is, government transfers a certain percentage of profits to enterprises and tolerates insignificant growth in fiscal revenue. In this way, the adjustment of the government-enterprise interest relationship has yielded substantial results, and both the efficiency of the national economy and the scale of output have increased. More than that, in order to keep advancing the reform in other areas of the economic restructuring, the Central Government must have new means for fiscal concentration, which has presented additional difficulties and challenges in coordinating the interest distribution between government and ent...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Contents
• List of figures
• List of tables
• Foreword
• 1 Introduction
• 2 SOE reform in the process of economic transition and market development
• 3 Transformation of enterprise system: From “wholly owned” and “state-owned” to “mixed ownership”
• 4 A new state-owned assets management system is required: From “management of assets” to “management of capital”
• 5 Relationship between “classified reform” and industrial fields and market structure
• 6 Reform setting out again: From “classification” to “stratification”
• 7 The role of entrepreneurs in corporate governance
• 8 Governance structure optimization of state-funded enterprises
• 9 The significance of SOE reform on the modernization of national governance
• 10 SOE reform enriches and perfects the connotation of the basic economic system
• Epilogue
• Afterword
• Bibliography
• Index