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5 White Paper on the Business Environment in China
1.2 e Double-edged Sword of SOEs (in 2013)
SOEs Enjoy A Second Life tor rivals in their place’ and foreign rms can be blocked from
acquiring local rms.”
THE CHINESE GOVERNMENT’S preferential
treatment of and strategic mandate for state-owned Another is that “Corporate governance is very weak.
enterprises, or SOEs, has a curious history. According to Shareholders have no voice in corporate a airs and can not
some, it also has a grim outlook if substantive changes are access the courts. Lack of transparency means that corporate
not made. misgovernment is easy to hide.”3
In the mid-to-late1990s, former President “Jiang Zemin and Also at the Communist Party Congress, SASAC chief
then-Premier Zhu Rongji took a knife to China’s bloated and Wang Yong told reporters that “ e direction of the SOE
unpro table state sector, closing thousands of unproductive (state-owned enterprise) reform should be: SOEs must be
enterprises. at opened up space for private sector rms to more market-oriented and they must keep strengthening their
vitality and in uence.”3
ourish, underwriting the growth of the last decade [2000-
2010].”1 According to author and former AmCham China (Beijing)
chairman James McGregor, the group of “117 huge central
Since that time, however, “some of those gains have been SOEs,” of which many are monopolies, “have evolved over
reversed, as the government has thrown its weight behind the past decade so that the party controls these SOEs more
state champions. e number of state-owned enterprises as a than the government does.”4
share of the total has continued to fall, dropping to 5 percent
in 2011. But with SOEs still dominant in the commanding Mr. McGregor explains:
heights of the economy, their share of total output has re-
mained relatively buoyant at 26 percent.”1 e Central Organization Department of the party
According to a study performed by “Curtis Milhaupt, a appoints the top leaders and they outrank the bureau-
scholar of comparative corporate law at Columbia Law School,
and Li-Wen Lin, a graduate student in sociology at Columbia crats who are nominally supposed to be the SOEs’
University […] the network of SOEs in China “Is based on
‘vertically integrated groups’ of large state-owned and related regulators. e party is also able to use the SOEs for
companies. Each group has a ‘central holding company,’ the
State-Owned Assets Supervision and Administration Com- preserving political power as much as for building the
mission (SASAC), which is the majority shareholder in a
‘core company.’ at company, in turn, owns a majority of economy. at’s the heart of [what McGregor terms]
shares in the state-owned companies that comprise the group,
including a nance company that is a source of nance for the Authoritarian Capitalist system in China today.4
members.”2
Mr. McGregor, who has been in China for 25 years and has
Additionally, “the Chinese Communist Party (CCP) struc- witnessed the nation’s extensive changes since ‘opening up’,
ture exists parallel to the structure noted above. e Organi- posits that some o cials “saw the Russian oligarchs taking
zation Department of the Party is decisive in choosing top over state assets as private individuals—and the party decided
managers of the SOEs, and in turn some managers hold posi- it would be the oligarchy. And so in 2003 they formed the
tions in government and the CCP e authors emphasize that SASAC [State-owned Assets Supervision and Administration
more than a chain of command from top to bottom is implied Commission] to bring the state shares under central control.
by this structure: “ ese hierarchical structures are embedded
in dense networks –not only of other rms, but also of party en in 2006 there was a directive that took about two dozen
and government organs,” and exchange and collaborate on key industrial and technology sectors and made them fully
many matters of production and policy implementation.”2 state controlled or majority state controlled. Finally, you have
the global nancial crisis and the 600-billion-dollar stimulus
Milhaupt and Lin also observe several signi cant issues program. at money ushed into SOEs—and they were o
with China’s current model for the administration of SOEs. and running.”4
One such issue is that “SOEs are exempt from anti-trust Curiously, this has all happened as many observers—the
enforcement. Also, as the Economist noted in a recent overview, authors included—expected that the Chinese government
the government ‘enforces rules selectively, to keep private-sec- would continue to open markets and cultivate a more dynam-
ic and sustainable economy based on private enterprise. “[ e
24 Chinese economy] was headed toward a more free market
economy with more private companies. But the country has
strongly reversed course to building up state-owned enterprise
that is increasingly incompatible with global trade regimes
1.2 e Double-edged Sword of SOEs (in 2013)
SOEs Enjoy A Second Life tor rivals in their place’ and foreign rms can be blocked from
acquiring local rms.”
THE CHINESE GOVERNMENT’S preferential
treatment of and strategic mandate for state-owned Another is that “Corporate governance is very weak.
enterprises, or SOEs, has a curious history. According to Shareholders have no voice in corporate a airs and can not
some, it also has a grim outlook if substantive changes are access the courts. Lack of transparency means that corporate
not made. misgovernment is easy to hide.”3
In the mid-to-late1990s, former President “Jiang Zemin and Also at the Communist Party Congress, SASAC chief
then-Premier Zhu Rongji took a knife to China’s bloated and Wang Yong told reporters that “ e direction of the SOE
unpro table state sector, closing thousands of unproductive (state-owned enterprise) reform should be: SOEs must be
enterprises. at opened up space for private sector rms to more market-oriented and they must keep strengthening their
vitality and in uence.”3
ourish, underwriting the growth of the last decade [2000-
2010].”1 According to author and former AmCham China (Beijing)
chairman James McGregor, the group of “117 huge central
Since that time, however, “some of those gains have been SOEs,” of which many are monopolies, “have evolved over
reversed, as the government has thrown its weight behind the past decade so that the party controls these SOEs more
state champions. e number of state-owned enterprises as a than the government does.”4
share of the total has continued to fall, dropping to 5 percent
in 2011. But with SOEs still dominant in the commanding Mr. McGregor explains:
heights of the economy, their share of total output has re-
mained relatively buoyant at 26 percent.”1 e Central Organization Department of the party
According to a study performed by “Curtis Milhaupt, a appoints the top leaders and they outrank the bureau-
scholar of comparative corporate law at Columbia Law School,
and Li-Wen Lin, a graduate student in sociology at Columbia crats who are nominally supposed to be the SOEs’
University […] the network of SOEs in China “Is based on
‘vertically integrated groups’ of large state-owned and related regulators. e party is also able to use the SOEs for
companies. Each group has a ‘central holding company,’ the
State-Owned Assets Supervision and Administration Com- preserving political power as much as for building the
mission (SASAC), which is the majority shareholder in a
‘core company.’ at company, in turn, owns a majority of economy. at’s the heart of [what McGregor terms]
shares in the state-owned companies that comprise the group,
including a nance company that is a source of nance for the Authoritarian Capitalist system in China today.4
members.”2
Mr. McGregor, who has been in China for 25 years and has
Additionally, “the Chinese Communist Party (CCP) struc- witnessed the nation’s extensive changes since ‘opening up’,
ture exists parallel to the structure noted above. e Organi- posits that some o cials “saw the Russian oligarchs taking
zation Department of the Party is decisive in choosing top over state assets as private individuals—and the party decided
managers of the SOEs, and in turn some managers hold posi- it would be the oligarchy. And so in 2003 they formed the
tions in government and the CCP e authors emphasize that SASAC [State-owned Assets Supervision and Administration
more than a chain of command from top to bottom is implied Commission] to bring the state shares under central control.
by this structure: “ ese hierarchical structures are embedded
in dense networks –not only of other rms, but also of party en in 2006 there was a directive that took about two dozen
and government organs,” and exchange and collaborate on key industrial and technology sectors and made them fully
many matters of production and policy implementation.”2 state controlled or majority state controlled. Finally, you have
the global nancial crisis and the 600-billion-dollar stimulus
Milhaupt and Lin also observe several signi cant issues program. at money ushed into SOEs—and they were o
with China’s current model for the administration of SOEs. and running.”4
One such issue is that “SOEs are exempt from anti-trust Curiously, this has all happened as many observers—the
enforcement. Also, as the Economist noted in a recent overview, authors included—expected that the Chinese government
the government ‘enforces rules selectively, to keep private-sec- would continue to open markets and cultivate a more dynam-
ic and sustainable economy based on private enterprise. “[ e
24 Chinese economy] was headed toward a more free market
economy with more private companies. But the country has
strongly reversed course to building up state-owned enterprise
that is increasingly incompatible with global trade regimes
